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Exemption of services by Indian to Foreign establishment in GST

Bimal Jain , Last updated: 20 August 2018  

With the monsoon, came pouring reliefs from rate reductions to simplified returns in the ‘MSME-focused’ 28th GST Council meeting concluded on July 21, 2018, first to be held in second year of GST. Several prolonged decisions such as simplification of returns filing and exempting tax on sanitary napkins were finally taken in the meeting along with slashing of GST rates on several general-use items such as while goods consisting of TV (upto 27 inch), washing machine, refrigerators etc., paints, wall putty, scents, cosmetics, marble, stones etc. Seemingly, in the days to come, the 28% GST rate slab would be reserved only for sin goods and luxury items. New rates came into effect from July 27, 2018.

Small and medium enterprises with a turnover of upto Rs 5 crores were rewarded further as hereafter they will need to file only quarterly return even though they have to deposit GST every month with the treasury, a move that is expected to benefit 93% of registered GST taxpayers. Hitherto this relaxation was available only when the turnover was up to Rs 1.5 crore.

Amongst slew of other recommendations, an important exemption from GST has been provided to Indian entities/branches/project offices/liaison offices of foreign companies supplying services to them. This is indeed a remarkable exemption which will provide relief to many multinational companies.

This article deciphers this GST exemption viz-a-viz its impact on common credit reversal and .mis-match with import of similar services

Why exemption was required?

In terms of Para 2 of Schedule I to the CGST Act, 2017 (“CGST Act”), supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business, is chargeable to GST even if no consideration is flowing between them. Definition of related persons given under Explanation to Section 15 of the CGST Act is wide enough to cover two persons wherein one directly or indirectly controls the other and also if both these persons are directly or indirectly controlled by a third person. Further, explanation I to Section 8 of the IGST Act, 2017 (“IGST Act”) treats establishment of a person in India and his any other establishment outside India as establishments of distinct persons. Thus, supply between them were chargeable to GST irrespective of any consideration.

Moreover, Section 2(6) of the IGST Act, while defining export of services and enumerating requisite conditions to qualify as export of services in GST and hence zero-rated, debars the transaction where the supplier of service and the recipient of service are merely establishments of a distinct person in accordance with Explanation 1 in Section 8 of the IGST Act.

In nutshell, .supply of services by an Indian establishment of a person to its foreign counterpart were not treated as export of services and hence GST was chargeable on the same

The diameters of this provision were extended further to debate as to whether Indian entities/branches/project offices/liaison offices of foreign companies providing assistance in back end support, procuring orders, customer liaison etc., can also be regarded as supplying services to their foreign companies. Nightmares were following as to their taxability, valuation etc. Further, charging GST to foreign counterparts shall mean nothing than a mere cost to them.

Much needed GST exemption for Indian offices of foreign companies:

The GST Council has receptively understood the pain of Industry and thus vide Notification No. 15/2018 – Integrated Tax (Rate) dated 26.07.2018, “services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation I in section 8 of the IGST Act” are exempted from GST, provided the place of supply is outside India in accordance with section 13 of IGST Act.

Thus, Indian entities/branches/project offices/liaison offices of foreign companies will now be relived from paying GST when place of supply falls outside the taxable territory of India as these transactions are exempted from 27th July, 2018.

Exemption Vs. Zero-rated:

Without hindering the joys of Industry felling delighted with the proposed exemption, it is important to understand that benefit has not been granted in the form of exports by recommending elimination of the restricting clause (v) of Section 2(6) of the IGST Act, defining ‘export of services’. Meaning thereby that such services will not be zero-rated in GST, rather are made exempt from GST. In other words, by granting an exemption to these services, not only the benefit of direct input tax credit shall be denied, but the requirement of reversal of common credit will also be invoked.

No similar exemption on import of said services:

The benefit of exemption is not extended on import of services made by such establishments in India from related persons outside India. In terms of Para 4 of Schedule I, import of services by a taxable person from a related person or from any of his other establishments outside India, in the course or furtherance of business is exigible to GST even when there is no consideration. Adding to woes, the CGST Amendment Bill, 2018 suggests extending the scope of taxability to even unregistered recipients by proposing to omit the word ‘taxable’ therein. Thus, entities which are not registered under GST (say, they are only making exempted supplies) but are otherwise engaged in business activities shall be taxed on import of services received from a related person or from any of their establishments outside India.

Our Comments:

This exemption will definitely provide respite to Industries like banking, IT, ITes operating through branches and project offices in India. It would have been wise if the benefit of export was proposed to be extended to establishments of persons in India and outside India to bring them at par with import of services.

As presently, in case of import of services i.e. an Indian branch/ HO has to pay tax on import of services from foreign counterpart under reverse charge but are denied the benefit of export, which is now proposed to be exempted. This disparity exists since Service tax era. An effort in this regard would have been more luring and encouraging.

Further, the mist is not completely clear, and issue still revolves around those transactions which does not involve consideration. Whether same shall be treated as supply of services in terms of Para 2 of Schedule I at first place? If yes, then corresponding issues of determining value of exempt supply and reversal of common credit will entail.

It may not be out of place here to highlight recent ruling of the Hon’ble Authority for Advance Ruling, Rajasthan in the application filed by Habufa Meubelen B.V. (India Liaison Office), wherein it was held that mere reimbursement of salary and other expenses by foreign HO to liaison office (applicant) established in India is not liable to GST. It was concluded that HO and liaison office cannot be treated as separate persons, and since there cannot be any flow of services between them inasmuch as one cannot provide service to self, reimbursement of expenses cannot be treated as a consideration towards any service. Suitable clarification in this regard is also required.

DISCLAIMER: The views expressed are strictly of the author and A2Z Taxcorp LLP. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.

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Bimal Jain
Category GST   Report

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