Indian subsidiaries of foreign groups routinely receive services from their parent and other overseas group entities: management support, IT services, software, secondees and brand use. Under GST, these are generally imports of services on which the Indian company pays tax under reverse charge. The concept is simple, but the same five issues recur in GST audits and notices.
1. Missing the reverse charge altogether
The most common error is booking the parent’s invoice only as an expense or a payable, without recognising the reverse charge liability. This usually comes to light when the auditor reconciles foreign payments with GST returns. The fix is to build the reverse charge entry into the accounts payable process for every foreign invoice.
2. Related-party services without an invoice
Some groups provide services or allocate costs without issuing an invoice, or settle through year-end journal entries. Supplies between related persons can be treated as taxable even without consideration in specified situations, and valuation rules apply. A clear intercompany agreement and periodic invoicing avoids disputes about whether, and when, a supply took place.
3. Timing of liability
For reverse charge on imported services, the time of supply is generally linked to the date of payment or the date of the invoice entry in the books, subject to the specific rules. Delayed recognition leads to interest, even where the tax is fully creditable.
4. Input tax credit restrictions
The reverse charge GST is available as input tax credit only if the services are used for taxable outward supplies. If the subsidiary has exempt supplies, or the services relate to blocked categories, credit may be restricted. Export-oriented subsidiaries, such as GCCs, need to align this with their refund claims.
5. Secondment arrangements
Where overseas employees are seconded to India and their salary is paid by the parent and recharged, the tax authorities have in several cases treated the arrangement as a supply of manpower services by the parent, attracting reverse charge GST. Whether this applies depends on who is the real employer, which depends on the facts. Secondment agreements should be reviewed with this in mind.
A practical control framework
- maintain a register of all intercompany agreements and the GST treatment of each service;
- recognise reverse charge liability monthly, at the time of booking or payment as applicable;
- reconcile foreign remittances, withholding tax and reverse charge every quarter;
- document the basis for any position that a cost recharge is not a supply.
Conclusion
Reverse charge on intercompany services is rarely a large cash cost, because the tax is usually creditable. It becomes expensive when it is missed and then surfaces with interest and penalties. A simple monthly process tied to the intercompany agreements avoids almost all of these issues.
N. Sudheer, M.Com., FCS, LL.B. is a Partner at A2 Consultants, Hyderabad, advising foreign companies on GST, international tax and corporate compliance in India. Views are personal.
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