MNC arms pay a GST of Rs. 1,600 crore for Services from Offshore Companies

The Indian subsidiaries of up to 80-90 multinational corporations (MNCs) collectively paid roughly Rs 1,600 crore in Goods and Services Tax (GST) on services obtained from offshore connected firms, according to an official familiar with the situation.

MNCs have paid taxes in the previous few months for transactions that occurred between FY18 and FY22.

“DGGI has served GST liability notices to several MNCs in the previous few months post the Supreme Court’s ruling in Northern Operating System’s (NOS) case, which was delivered last year,” said a government official.

“So far, the companies have paid the tax liability that they owed (approximately Rs. 1,600 crore), but not the penalty. The total penalty sum is close to Rs. 1,300-1,400 crore,” according to the official.

The Supreme Court declared in May 2022 that the secondment of personnel to group firms situated in India resulted in the supply of a taxable service, and that the amount of wage cost refunded to the group companies would be liable to tax.

“Following the NOS judgement, the tax authorities issued notices to various companies where there were inbound secondments. While the judgement relates to the service tax regime, the Supreme Court’s views are equally important for determining the applicability of GST in the context of secondments from abroad group corporations during the GST regime. The Supreme Court made various comments based on the specific agreements and proceeded to determine the issue of choosing substance over form,” added the Expert.

According to GST officials, the salaries or allowances paid by foreign corporations and thereafter reimbursed by their Indian subsidiaries are taxable under the GST regime.

“Many businesses have chosen to pay tax without interest at the moment and plan to contest if a demand is raised with respect to interest and penalty,” he went on to say.

The tax official referenced earlier, MNCs that have paid taxes include Maruti Suzuki, Hyundai, and Aramco India, among others. Until Wednesday afternoon, the corporations had not responded to e-mails submitted to them in this respect.

Maruti Suzuki informed the exchanges in September that GST authorities had issued a show cause notice to the company for an amount worth Rs. 139 crore for the period July 2017 to August 2022, proposing to demand interest and impose penalties, in addition to appropriating tax already paid under reverse charge basis on certain services. Maruti Suzuki has stated that it will file a response to the notification with the Adjudicating Authority.

According to another expert, “the Supreme Court ruling had an immediate impact, resulting in GST liability on a reverse charge basis on Indian companies that used the services of foreign expatriates from overseas group companies. Though the GST would be allowed as an input tax credit against the output service tax liability, it will block working capital in the case of export entities because exporters typically rely on GST refunds to recoup the cost as opposed to domestic suppliers who are generally allowed an immediate set-off.”