GST: Representation on taxability of import of free of cost software from related party

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GST: Representation on taxability of import of free of cost software from related party

Tejasvi

@tejasvi

May 24, 2022

Public Policy

359

Background

Entry 4 to Schedule I of the Central Goods and Service Tax Act, 2017 (CGST Act) provides that import of services by a person from a related person outside India shall be considered as supply even when made without consideration.
By virtue of this deeming provision, supply/access to services from overseas entities/ affiliates on free of cost basis is being regarded as chargeable to GST in the hands of the recipient in India under the reverse charge mechanism.
A number of enquiries have been initiated by GST authorities on companies in the last year seeking details of cross-border FOC supply of software between related parties. In fact, the issue was also highlighted by the Chairman, Central Board of Indirect Taxes and Customs (CBIC) in his communication dated April 27, 2020 which mentions an important case involving non-payment of IGST on free-of-cost import of software.

Issue

Typically, access to software provided by overseas affiliates to Indian companies are for the limited purpose of enabling provision of services back to the overseas affiliate and not for any other purposes. Indian companies access the software only for provision of service under the contract with the affiliate and not for any "commercial exploitation" with third party customers. In any case, in most cases, GST paid on deemed supplies is eligible as input tax credit after making payment of GST under reverse charge mechanism. Agreements entered between the parties clearly specify that the Indian affiliate would need to provide services using the software/ tools that would be given by the overseas affiliate.
The software/ interfaces/ tools are generally accessed on internal websites/ web-links of overseas entity. In most occasions, the said technology is not downloaded onto servers in India, but are remotely accessed. This also reiterates the fact that usage of such software technology is for the limited purposes of providing IT services to overseas affiliate. Moreover, access to the said software technology is also limited during the validity of the agreement and would cease upon termination of the agreement.
Software provided by overseas affiliate, which is used for providing services back to the overseas affiliate, cannot be considered as an independent “supply” under GST law. Such supplies do not get covered under Entry 4 of Schedule I of CGST Act as the software usage is not a separate import of service but for limited purposes to facilitate provision of main service.
It is also irrelevant whether the software provided by the overseas affiliate is a downloadable/ remotely accessible proprietary software or third party software. In either case, the software is merely to enable provision of services to the overseas group company itself and not for other commercial purposes.

Recommendation:

In this regard, we have made a submission to Ministry of Finance (MoF) on May 2, 2022 requesting them to clarify that access/ use provided to software by overseas affiliated to Indian companies to facilitate provision of service does not get covered under Entry 4 of Schedule I of CGST Act, as it fails to satisfy the conditions for qualifying as a “supply”

The Government should also consider amending CGST Act retrospectively or issue a Circular to clarify that the deeming fiction would be applicable only to taxpayers who are not eligible to avail full input tax credit.

This will help in plugging avoidable cash outflows across sectors and also avoid the pile up of litigation that is an outcome of the investigation arm i.e. DGGI going after companies that have not discharged/ complied with the provision. This recommendation is revenue neutral for the government and has the potential to provide huge liquidity to companies.

We hope you will find the update useful. We will keep you posted on further developments in this regard.

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Tejasvi

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