GST: Submission requesting for review of tax position on secondment arrangements

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GST: Submission requesting for review of tax position on secondment arrangements

Tejasvi

@tejasvi

September 6, 2022

Public Policy

450

Background

The term 'secondment' refers to temporary movement/ transfer of an employee of an organisation from one department to another or from one group company to another, for the achievement of specific goals of the management. It is a common practice for multinational companies to share talent pool across borders and tax jurisdictions.

In India, there has been a lot of debate and discussion on taxability of reimbursements from both direct tax as well as indirect taxes perspective. Under the erstwhile service tax regime, one of the key issues was whether there is a provision of ‘manpower services’ by overseas entity to the Indian entity despite existence of employer-employee relationship between the Indian entity and the seconded employee. The appellate forums have rendered judgments on this issue and have recognised such secondment arrangements to be in the nature of employer-employee relationship and not supply of ‘manpower services’.

However, the Supreme Court of India recently rendered a judgement in favour of the revenue in case of M/s Northern Operating Systems Private Limited (NOS Ruling) regarding applicability of service tax in respect of secondment / deputation agreements. It has held that reimbursement of salary and other expenses incurred by Indian company pursuant to a secondment agreement for seconding employees of foreign company to the Indian company, will qualify as “manpower supply services”.

The NOS Ruling is significant because it overturns the earlier settled legal precedent on whether reimbursements for seconded employees are taxable. The NOS ruling also disregards the revenue neutrality aspect and has jeopardised the positions taken by companies that have no litigation on the subject currently as well as others who believed that favourable rulings would come to their aid and followed when the matters are listed before various Appellate forums.

Although the NOS Ruling relates to service tax regime, majority of the relevant period has already become time barred and hence no fresh proceeding may be brought up based on this judgement. However, there will be a significant impact on current pending legal matters and taxpayers will be subject to service tax, interest, and penalty. Further, the legal provisions and the principles that have been upheld are equally applicable under GST. This could result in re-opening of a pandora's box of potentially endless service tax/ GST disputes pertaining to secondment or deputation of employees, whether from outside India to India or even within India.

Cross-border arrangements are considered as building blocks of an economy. This judgement is a major setback from the standpoint of ease of doing business for companies who have taken a no-tax position on such arrangements for many years based on the orders of the lower courts. This decision makes the position in India divergent from the global position where it is widely acknowledged that no GST/ VAT is applicable on salary costs paid to a seconded employee.

Recommendations

In this regard, we have made a submission to GST officials requesting them to review the tax position on secondment arrangements.

For pre-GST era, we have requested the officials to provide one-time waiver of taxes for past-periods under S.11C of Central Excise Act, 1944. Alternatively, government should clarify that back taxes would be available as credit or refunded. In addition to the above, clarification should be issued that no interest and penalty would be payable as there have been numerous precedents in favour of the taxpayer that have held that there is no service tax due in respect of secondment arrangements.

For period commencing from July 2017, we have requested the officials to issue a removal of difficulty order under S. 172 of CGST Act to provide one-time waiver of interest and penalty. Alternatively, the Order should provide that taxpayers remitting GST on secondment arrangements from July 2017 onwards would be eligible to avail ITC, subject to satisfaction of ITC eligibility conditions and raising of invoice in terms of S.31(3)(f) of CGST Act as already clarified vide issue of press release dated 03 July 2019.

We hope you will find the update useful. For more information, kindly write to tejasvi@nasscom.in.

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Tejasvi