The GST compliance and accounting treatment for the transaction of reimbursement of research and development expenses by a foreign holding company to an Indian subsidiary company may depend on the following factors:
The nature and purpose of the research and development activities and whether they are considered as supply of services or not under GST law.
The contractual terms and conditions between the holding company and the subsidiary company and whether the subsidiary company is acting as a pure agent or not for the holding company.
The place of supply of the research and development services and whether they are subject to GST in India or not.
The value of supply of the research and development services and whether it includes the reimbursement of expenses or not.
Based on the information I found on the web, here are some possible scenarios and their GST and accounting implications:
Scenario 1: The research and development activities are undertaken by the subsidiary company on its own account and not on behalf of the holding company. The reimbursement of expenses is a separate transaction and not part of the consideration for the supply of services. The place of supply of the services is outside India as per Section 13(2) of the IGST Act, 2017. The supply of services is not liable to GST in India as per Section 13(13) of the IGST Act, 2017. The reimbursement of expenses is also not liable to GST in India as it is not a supply of goods or services or both as per Section 7(1) of the CGST Act, 2017. The accounting treatment for the subsidiary company is to recognize the revenue from the supply of services at the agreed amount and the expenses incurred for the research and development activities at the actual amount. The reimbursement of expenses is recorded as a receivable from the holding company and settled accordingly.
Scenario 2: The research and development activities are undertaken by the subsidiary company on behalf of the holding company as a pure agent. The reimbursement of expenses is not a separate transaction but part of the consideration for the supply of services. The place of supply of the services is the location of the supplier i.e. the subsidiary company in India as per Section 13(8)(b) of the IGST Act, 2017. The supply of services is liable to GST in India at the applicable rate. The reimbursement of expenses is also liable to GST in India as it is included in the value of supply of services as per Section 15(2)(b) of the CGST Act, 2017. The accounting treatment for the subsidiary company is to recognize the revenue from the supply of services at the total amount including the reimbursement of expenses and the expenses incurred for the research and development activities at the actual amount. The GST payable on the supply of services is recorded as a liability and the GST receivable on the reimbursement of expenses is recorded as an asset. The net GST amount is paid to the government and the net amount after deducting the GST is received from the holding company.
Scenario 3: The research and development activities are undertaken by the subsidiary company on behalf of the holding company but not as a pure agent. The reimbursement of expenses is a separate transaction and not part of the consideration for the supply of services. The place of supply of the services is the location of the supplier i.e. the subsidiary company in India as per Section 13(8)(b) of the IGST Act, 2017. The supply of services is liable to GST in India at the applicable rate. The reimbursement of expenses is also liable to GST in India as it is a supply of goods or services or both as per Section 7(1) of the CGST Act, 2017. The accounting treatment for the subsidiary company is to recognize the revenue from the supply of services at the agreed amount and the expenses incurred for the research and development activities at the actual amount. The GST payable on the supply of services is recorded as a liability and the GST receivable on the reimbursement of expenses is recorded as an asset. The net GST amount is paid to the government and the net amount after deducting the GST is received from the holding company.
These are some of the possible scenarios and their GST and accounting implications. However, the actual GST and accounting treatment may vary depending on the specific facts and circumstances of each case. Therefore, it is advisable to consult a professional tax advisor or accountant before making any GST or accounting decisions
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