GST Reverse Charge on Imported Intercompany Services: Timing, Credit and Common Audit Points

Management fees, royalty, IT and shared-service charges from a foreign group company attract GST in India, and the liability usually falls on the Indian recipient. This note walks through the mechanics, the timing and the common mistakes.

The basic rule

An import of service is a supply of service where the supplier is located outside India, the recipient is located in India and the place of supply is in India. Under the IGST Act, 2017 and the reverse charge notifications, GST on services supplied by a person in a non-taxable territory to a business recipient in India is payable by the Indian recipient under the reverse charge mechanism (RCM). The foreign parent does not charge Indian GST on its invoice, and the Indian company self-assesses it, pays it in cash and, where eligible, takes it back as input tax credit.

Related-party imports without consideration

Schedule I to the CGST Act treats the import of services from a related person, or from an establishment outside India, as a supply even where it is made without consideration, if it is in the course or furtherance of business. A subsidiary that receives free support from its parent may therefore still have a deemed supply and valuation question. Valuation under the CGST Rules for related parties looks at open market value, and the facts should be documented.

Time of supply for payments to associated enterprises

For services from an associated enterprise located outside India, the time of supply is the earlier of the date of entry in the recipient's books of account or the date of payment. For other suppliers, the time of supply is the date of payment or the date immediately following 60 days from the invoice date, whichever is earlier. An Indian company that books provisions for parent charges at year end may therefore have a GST liability on the provision date, and not only on payment.

Input tax credit and exporters

• Credit of RCM tax is available if the service is used or intended to be used in the course of business, and if it is not in the blocked list in Section 17(5).
• The Indian company must pay the tax first, in cash, before it can claim credit, and the credit appears in the return for the month of payment.
• An exporter of services, for example a captive service provider, may claim a refund of unutilised credit, and the reverse charge input falls within the credit pool, subject to the refund rules.
• Where the business makes exempt supplies, credit must be reversed in proportion.

Common mistakes

1. Treating the parent's invoice as complete because it shows no GST, and not paying the reverse charge.
2. Not accounting for the RCM liability on provisions and accruals.
3. Treating cost reimbursements and recharges as outside GST, when the substance is a supply of service.
4. Classifying employee secondment as salary reimbursement. The Supreme Court's decision in Northern Operating Systems (2022), given under service tax, treated secondment by an overseas group company as a supply of manpower services, and the GST position should be assessed on the same basis.
5. Forgetting to report the RCM liability in the GST returns and the annual return, which invites notices.

Interaction with transfer pricing and customs

The value of the intercompany service for GST should align with the value in the transfer pricing documentation. Royalty or licence fees linked to imported goods may also form part of the customs assessable value, so the same payment can attract both GST on the service and customs duty on the goods, and the two assessments should be reconciled.

Conclusion

RCM on imported intercompany services is a recurring audit point because the foreign invoice does not prompt payment. Put every group charge through a monthly RCM checklist, match it to the agreement and the transfer pricing file, and test the timing of supply on provisions. GST rates, notifications and circulars change often, so verify the current position.

Sources: IGST Act, 2017 (Sections 5, 13); CGST Act, 2017 (Section 17(5), Schedule I); CGST Rules; Notification No. 10/2017-Integrated Tax (Rate); Commissioner of Service Tax v. Northern Operating Systems Pvt. Ltd. (SC, 2022).

The author is a Partner at A2 Consultants, Hyderabad, advising foreign companies on FDI, FEMA, international tax and company structuring in India