Ever so often, indirect tax laws in India throw up some interesting questions on the taxation of certain transactions. Central excise laws debated the concept of manufacture for a very long time.

Service tax laws were faced with having to decide whether the sale of a SIM card is a sale of goods or a rendering of a service. These laws had to decide whether service tax has to be paid on the base rent of a property. After six and a half years, GST laws are getting their share of such challenging questions. Levy of GST on the compensation paid to expats of multinational corporations who depute some of their employees to India is currently a hotly discussed topic in different forums across India.

The genesis of this topic could probably be traced to the decision of the Appellate Authority for Advance Ruling, Karnataka in the case of Columbia Asia Hospitals. The AAAR ruled that the assistance provided by the head office staff to their other units in support functions such as HR and finance would be a taxable service. This decision promoted the department to issue notices and ask questions on whether entities are cross-charging and paying GST on such functions.

Post this decision, it was only natural to expect someone to ask a question whether GST has to be paid on amounts paid to expats who visit India on deputation.

Different decisions

An entity called Norther Operating Services approached the Supreme Court of India with this question. The Supreme Court observed that there was no single determinative test, but that what was applicable was a conglomerate of all applicable tests. The totality of facts in a given case would ultimately point to whether the contract to be construed is a contract of service or a contract for service. Finally, the view that seemed to emerge was that the transaction was taxable.

After the Supreme Court’s decision, the GST department issued notices to almost 1,000 entities who had expats on deputation so that they could extract their pound of flesh.

The Central Board of Indirect Taxes and Customs was forced to issue a Circular to their officers to exercise some restraint in collecting taxes on these transactions. Some of these entities approached their jurisdictional High Courts/Tribunals seeking relief from the tax.

BMW obtained relief from the Punjab and Haryana High Court. Nissan India approached CESTAT (Customs, Excise and Service Tax Appellate Tribunal), Chennai and obtained a split verdict – a member ruled that the Indian component paid was exempt while the consideration received from abroad was taxable as a manpower supply service.

Employer-Employee?

When things reach a stalemate such as the present one on levy of GST on expat salaries, the government often amends the law and levies a tax on the transaction. This is unlikely to happen in the Interim Budget keeping in mind the elections; it could happen in the main Budget. As is the wont of GST laws, it is possible that they could tax the transaction on an arbitrary valuation such as 50 per cent of the expat salaries.

However, since this tax is payable on the basis of reverse charge, entities can take input tax credit resulting in no additional revenue. Another option before CBIC is to take a completely contrarian view and state that this transaction is not taxable at all since the underlying relationship is that between an employer and an employee which is exempt.

This is highly unlikely but as far as GST laws are concerned, one always lives on hope.

The writer is a chartered accountant

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