MNCs sent tax notices over expat employees' allowances from foreign parent companies
Oct 18, 2023
Multinational corporations (MNCs) operating in India are facing tax demands from goods and services tax (GST) authorities, affecting approximately 1,000 foreign subsidiaries, Business Standard reported quoting sources. The tax demands, issued in recent weeks, pertain to an 18 percent tax on salaries and allowances paid to foreign expats by their overseas parent companies, it added.
The demands, ranging from ₹1 crore to ₹150 crore, cover the period between FY18 and FY22 for payments by foreign parent companies to expats working in Indian subsidiaries of MNCs, sources told the paper.
What has happened?
The issue surfaced during audits of local arms of MNCs in various sectors, including smartphones, automobiles, software, FMCG, consumer durables, and cosmetics. Although tax demands for transactions made in FY18 were time-barred as of September 30, demands for subsequent years (FY19, FY20, FY21, and FY22) are being served.
Companies have been given a 30-day window to respond to these tax demands.
Tax eligibility
GST authorities consider expat salaries or allowances, reimbursed by Indian companies to foreign entities, as a "supply of manpower," making them taxable under the GST regime, the report states. This practice has been followed to maintain expats' social security benefits in their home country.
However, salaries directly paid by Indian companies to expat employees without reimbursement won't attract GST, as expats are then perceived as employees of the Indian company alone, it added.
The recent surge in tax demands follows a Supreme Court judgment in May 2022 in the Northern Operating System (NOS) case. The ruling stated that the secondment (deputation) of employees from a foreign group to an Indian entity constitutes "manpower supply service" and is liable for service tax under the reverse charge mechanism.
While the decision was related to service tax (pre-GST era), its implications extend to the GST era due to the continued industry practice of deputing foreign expats and overseas salary payments.
Industry, experts opinion
The industry is divided on this issue, with some paying GST and contesting interest, while others opt to litigate, citing differences in their cases from the NOS judgment.
Abhishek Jain, indirect tax head & partner at KPMG told BS that numerous show-cause notices have been issued post the SC ruling, demanding GST on expats seconded, especially in foreign companies with employees deputed to Indian subsidiaries.
Industry players anticipate detailed government guidelines on expat employment and clarity on manpower supply scenarios. The need for evaluating GST exposure on expat arrangements is emphasized, considering contract terms, compensation, roles, responsibilities, and control over employees, they said.
Industry experts recommend a thorough assessment of contracts in light of the Supreme Court decision, with some firms already re-evaluating their expat contracts.
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