Applicability of Reverse Charge of GST on Foreign Expats’ Salary

Foreign parent companies often send their employees to provide specialized services to their Indian subsidiaries. Such employees are often regarded as foreign expats and the terms of their employment and secondment are governed by the agreement entered into between the foreign parent and Indian subsidiary.

Recently, the GST department issued notices to several Indian companies that entered into such a secondment arrangement with their parent entities, demanding GST under the reverse charge mechanism. What is the applicability of reverse charge of GST on foreign expat salary and why the nature of the arrangement becomes important here? Let’s find out!

Salary Payments to Foreign Expats

Here’s how the employment arrangements for foreign expats are entered into between the Indian and foreign entity:

• The Indian entities enter into a contract or agreement with their foreign parent entity seeking back office support or IT services.
• The foreign expats operate from the foreign territory itself and are assigned to the Indian entity based on the requirement.
• The expats usually work as per the requirements and guidelines of the Indian entity.
• In most cases, the foreign expats are paid remuneration by the foreign entity to ensure continuity of social security benefits in their country. The foreign entity is then reimbursed by the Indian entity.
• However, in certain cases, the Indian entity may directly reimburse the foreign expats. It depends on the nature of the arrangement between the Indian and foreign entity.

Applicability of GST on Expats’ Salary – GST Department’s Contention

As per the GST department, the services obtained by the Indian entity from the foreign entity are in the nature of Manpower Supply Services. Further, as the service provider is located outside India (parent foreign entity), the service recipient is in India (the Indian entity) and the place of supply of service is in India, therefore, this is regarded as import of services. As per the GST law, these services are therefore subject to GST under the Reverse Charge Mechanism.

[Under the Reverse Charge Mechanism, the service recipient is required to pay GST instead of the service provider]

The Supreme Court’s Contention

The matter rested before the Supreme Court in the case of M/s C.C., C.E. & S.T., Bangalore (Adjudication) Vs Northern Operating Systems Pvt. Ltd. The apex court made the following observations:

• Control is not the only determinative factor to be considered in order to determine who is the real employer of the foreign expats.
• Secondment is part of the agreement or policy of the foreign entity and the employees are loaned to the Indian entity on a temporary basis. After the completion of the project, the foreign expats are repatriated to the foreign company. Further, in the present case, the agreement did not state that the foreign expats would be treated as Indian entity’s employees after the secondment period.
• The foreign entity deploys the employees on secondment to the Indian entity even though the Indian entity has control over the performance of the foreign expats.
• The salaries to the foreign expats are continued to be paid by the foreign entity as per the policy of such entity. Also, the foreign entity continues to remain the employer of the foreign expats and not the Indian entity.

Implication of GST on Expats’ Salary

Whether these services shall be treated as Supply of Manpower Services or not depends on the case to case basis. However, considering the applicability of GST on expats’ salary becomes important while drafting the agreement between the foreign parent entity and the Indian entity. GST in case of Reverse Charge Mechanism shall be paid from the Electronic Cash Ledger and not the Electronic Credit Ledger. Later on, the GST paid can be claimed as credit by the taxpayer. Therefore, GST liability under RCM can lead to huge cash outflow for such companies. In order to know the applicability of GST, the following factors become important in this regard:

• What are the terms of the contract or agreement between an Indian and a foreign entity?
• Whether the remuneration paid as per the policy of the Indian entity or foreign entity?
• Who is making payments to the foreign expats?
• What will happen to the foreign expats after the period of secondment is over?
• Whether the foreign expats are assigned to Indian entities on a periodical basis or assignment basis?
• Whether any employment contract is being entered into between the foreign expats and the Indian entity?

Following were the important considerations relating to the applicability of GST on expats’ salary. Companies need to enter agreement such that complications due to Reverse Charge Mechanism in case of secondment of foreign expats by foreign companies to their Indian counterparts does not arise. In case you need any assistance, feel free to contact the ASC Group.

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