Foreign companies having liaison offices in India will not have to cough up goods and services tax (GST) on reimbursements of charges or expenses. A ruling by the Rajasthan Authority for Advance Rulings (AAR) has held that payment of salaries of employees and other working expenses are not services and not liable to tax.
The industry had earlier represented to the government and GST Council on the tax being levied on such payments.
Tax experts said this ruling has brought some cheer for the industry, but it needs to be incorporated in the law. Otherwise this issue will continue to be litigated, they said.
The Rajasthan AAR has in response to an application from Dutch furniture manufacturer Habufa Meubelen BV held that it is a mere liaison office that does not have any other source of income and is solely dependent on head office for expenses.
It observed that the head office and liaison office, in this case, cannot be treated as separate persons and, accordingly, there cannot be any flow of services between them as one cannot provide service to self.
Also, there is no consideration for any service, being charged by the liaison office. The company had sought a ruling on whether reimbursements of salaries, rent, security, electricity by the parent will face GST.
Similar issue had arisen under the erstwhile service tax regime. However, the definition of ‘service’ under the service tax law covered only those services which were provided by one person to another.
A liaison office being part of the head office was never treated as another person and hence any supplies made by them to the head office were excluded from the ambit of service tax.
But, authorities, despite a Supreme Court judgement, continued to issue notices, experts said. “Industry has always taken a plea that mere reimbursements of expenses do not entail provision of any service, and hence should not be liable to tax,” said Harpreet Singh, partner at KPMG India. “On the contrary the tax authorities have alleged that reimbursement of expenses by head office for branch office / liaison office is in the nature of business support services liable to tax,” he said.
Contrary to the previous service tax regime, definition of ‘supply’ under GST law is very wide and does not restrict the taxability to the transactions made by one person to another.
Experts said it is important that the AAR ruling is incorporated in the law to minimise the disputes by the tax authorities in future, and also extend it to branch office of a foreign company.
“This AAR ruling only addresses the issue of reimbursements to liaison office, which is only permitted to carry out few specified activities. Hence, it may not be applicable to branches and project offices,” said Pratik Jain, leader, indirect tax, at PwC.
Source: Economic Times