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GST: Submission on denial of GST refunds on account of treatment of overseas group entity as ‘establishment of distinct person’

Issue: 

In order to qualify as ‘export of service’ under Section 2(6) of Integrated Goods & Services tax Act, 2017 (IGST Act), one of the conditions is that “the supplier of service and the recipient of service are not merely establishments of a distinct person in accordance with Explanation 1 in section 8.” Further, Explanation 1 to Section 8 of the IGST Act, states that “where a person has an establishment in India and any other establishment outside India, then such establishments shall be treated as establishments of distinct persons”.

In this regard, Central Board of Indirect Taxes and Customs (CBIC) had, vide issue of FAQs (3rd Edition) dated 15 December 2018, clarified that “if the Indian arm is set up as a wholly owned Indian subsidiary company incorporated under the Indian laws, the foreign company and the Indian subsidiary would not be governed by the provisions of distinct person or related person as both are separate legal entities”. Therefore, where the service provider and the service recipient are separate legal entities incorporated under the laws of respective countries, the entities would not be construed as mere establishments of a distinct person.

However, based on feedback from industry while dealing with field officers, it has been highlighted that the jurisdictional State GST officers are rejecting refund claims of the exporters on the ground that the services are provided to foreign group companies, treating them as ‘establishments of the same entity’ and therefore, does not constitute ‘export’ under GST law. As a result, taxpayers are facing hardships due to such erroneous view which requires immediate clarification.

In light of the above, we have made a representation to GST Policy Wing requesting the government to issue appropriate instructions to field officer directing that in case of provision of services by a service provider in India to a service recipient outside India where both the parties are separate legal entities, such service provider and service recipient will not be treated as ‘establishments of distinct persons’. Accordingly, export position should not be denied for such services rendered between the said entities.

We will keep you posted on further developments in this regard.

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