GST Authorities issued Tax Notices to MNCs on Expat Salaries

The Goods and Services Tax (GST) officials sent tax notices to the Indian arms of approximately 1,000 multinational corporations (MNCs) for payments of 18 % tax on salaries and allowances paid to foreign expatriates (expats) by their overseas parent companies.

According to authorities, this issue caught everyone’s attention during audits of the local arms of MNCs across various sectors, including smartphones, automobiles, software, FMCG, consumer durables, and cosmetics.

The range of the tax is from Rs. 1 crore to Rs. 150 crore for the period between Financial Year 2018-22.

Maruti Suzuki will pay Rs. 100 crore and FMCG giant Hindustan Unilever (HUL) will pay Rs. 144 crore on account of salaries paid to employees from overseas parent companies.

The tax issue emerged after a Supreme Court verdict in May 2022, which held that salaries paid by Indian organizations for expats seconded by the foreign parent company to the Indian entity are liable to service tax under reverse charge basis as the payment will be considered ‘supply of manpower’ services provided by the foreign parent company to the Indian entity. Following the verdict, the GST department has issued tax notices to several MNCs, making tax demands.

GST authorities insist that the expats’ salary or allowance paid either fully or partially by the foreign company and later reimbursed by the Indian company to the foreign company is akin to ‘supply of manpower’ and hence taxable under the GST regime.

A senior GST official said in his statement that if salaries are directly paid by the Indian company to the employees and not reimbursed, they won’t attract GST, as in that case expats are perceived as employees of the Indian company only.

Under Section 192 of the Income Tax Act, their salaries are subject to TDS provisions and PF provisions in similar ways as applicable to any Indian employee engaged by the same company.