GST on secondment of expats – Instruction No 05/2023-GST dated 13 December 2023

Posted On - 14 December, 2023 • By - Deni Shah

GST on secondment of expats – Instruction No 05/2023-GST dated 13 December 2023

Applicability of Goods and Services Tax (‘GST’) on secondment/ deputation/ loaning of employees/ expats is a burning issue in India, resulting in issuance of show cause notices to several multinational companies operating in India.  The heightened investigation by the GST authorities in India is pursuant to the Supreme Court judgment in the case of Northern Operating Systems Pvt Ltd (‘Judgment’) which was pronounced in May 2022.  Although this judgment pertains to the service tax regime (pre-GST), the implications squarely apply to the existing GST regime.  The Supreme Court held that service tax is payable (under the reverse charge mechanism) on transactions involving secondment of employees where salaries of seconded employees were reimbursed to the overseas parent.  It is basis this judgment that the tax authorities have been issuing show cause notices to various Indian subsidiaries of foreign companies having secondment arrangements.

It is a well settled principle that a judgment cannot be applied uniformly if the facts are different.  Despite this principle, notices have been issued without appreciating the facts of each case by solely relying on the Judgment.  Given the widespread impact, implication and involvement of large multinational organizations, multiple representations were filed before the Ministry of Finance to seek clarification and also to highlight the fact that ‘extended period of limitation’ is being invoked mechanically by the GST authorities.

Taking note of these representations, the GST Policy Wing of Central Board of Indirect Taxes and Customs, Ministry of Finance has issued Instruction No 05/2023-GST dated 13 December 2023 (‘Instructions’).  Instructions are meant to provide guidance and are binding on the GST authorities.  From a taxpayer’s perspective, Instructions have a persuasive value while the investigation is being conducted and during adjudication of show cause notices.

The Instructions provide the following observations/ guidance/ instructions for the GST authorities for investigating/ adjudicating the matter on taxability of secondment transactions:

  1. The Supreme Court has emphasized a nuanced examination based on the unique characteristics of each specific arrangement, rather than relying on any singular test.

  2. There can be multiple types of secondment arrangement and in each such arrangement, the tax implications may be different depending on the specific nature of the contract and the terms/ conditions attached to such contract.

  3. The Judgment should not be mechanically applied in all cases.

  4. Investigation in each case requires careful consideration of its distinct factual matrix, including the terms of contract between overseas company and the Indian entity.

  5. ‘Extended period of limitation’ cannot be involved merely on account of non-payment of GST.

  6. Only if the investigation indicates a material element of fraud, willful misstatement or suppression of facts, the ‘extended period of limitation’ can be invoked.

  7. Also, evidence of such fraud, willful misstatement or suppression of facts should be made a part of the show cause notice.

Recap of the Judgment

The Supreme Court proceeded to determine who the ‘real’ employer was – whether the Foreign Company (‘F Co’) or the Indian subsidiary (‘I Co’) and therefore whether the entire arrangement was of:

  • an employer- employee relationship between I Co and employees; or

  • a contract of services (of loaning employees) between F Co and I Co

The Supreme Court while deciding in favor of the revenue authorities, observed the following (based on various agreements between F Co, I Co and employees):

  1. There is no singular determinative test and such arrangements should be examined based on a multitude of factors.

  2.  ‘Substance over Form’ is relevant.

  3. F Co had a lien on employment of such employees working with I Co.

  4. I Co had no powers to terminate the employment of such employees or even make changes to the terms of employment.

  5. Additional allowances were given by F Co as an incentive to the employees to work with I Co.

Apart from the above, an important factor that the Supreme Court took into consideration was (which may not be the case for all taxpayers):

  • I Co was required to render certain back office and information technology support services to F Co and its clients.

  • I Co required skilled personnel to render such services and also to enable F Co secure more contracts.

  • The employees were therefore sent to I Co for the use of their skills to enable I Co render services for the benefit of F Co.

Way forward

Taking cue from the Instructions and the specific fact pattern of the Judgment, taxpayers should deep dive into their arrangement/ contract and determine if the Judgment squarely applies to them.

Arrangements/ structures may be different for each entity and thus possible to be distinguished.  An illustrative list of factors that should be identified/ considered are:

  • Lien on employment

  • Terms of secondment

  • Treatment on completion of secondment

  • Right to terminate employment

  • Reasons for secondment

  • Services rendered between F Co and I Co

  • Legal vs economic employer status of I Co

  • Any other parameter based on the actual arrangement.

The Instructions are welcome and a positive step by the GST Policy Wing of the Ministry of Finance.  If the Instructions are indeed followed judiciously, it could help closure of various show cause notices and avoid any protracted litigation.  It is equally necessary that appropriate submissions are prepared and filed, distinguishing the Judgment on facts.  In all likelihood, a strong case can be argued before the adjudicating authorities especially after these Instructions.

To read the Instructions, please click here.

Author: Deni Shah

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.