GST Update: Circular issued to clarify that services provided by subsidiaries to overseas affiliates qualify as exports

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GST Update: Circular issued to clarify that services provided by subsidiaries to overseas affiliates qualify as exports

Tejasvi

@tejasvi

September 21, 2021

Public Policy

545

The Central Board of Indirect Taxes and Customs (CBIC), in line with the recommendation of GST Council in its 45^th meeting held on Friday i.e. 17 September 2021, has finally issued a Circular yesterday clarifying the scope of export of service.

It has been clarified that a company incorporated in India and a body corporate incorporated by or under the laws of a country outside India, which is also referred to as foreign company under Companies Act, are separate persons under Central Goods and Services Tax Act, 2017 (CGST Act), and thus are separate legal entities. Accordingly, these two separate persons would not be considered as “merely establishments of a distinct person in accordance with Explanation 1 in section 8”. This will ensure that the Global Capability Centres (GCCs) do not face any GST issues in their exports to their parent/ group cos. across the world.

To summarise -

Scenario	Supplier of service	Service receiver	Clarification
1	Subsidiary/ sister concern/ group concern, etc. of a foreign company incorporated in India under the Companies Act, 2013	Establishments of the said foreign company located outside India (incorporated outside India)	Would not be barred by the condition (v) of the sub-section (6) of the section 2 of the IGST Act 2017 (not a mere establishment of distinct persons) and and would qualify as ‘export of services’
2	A company incorporated in India	Related establishments outside India which are incorporated under the laws outside India

To recap, the CBIC had in fact clarified in question number 32 of its FAQs (3rd edition) dated 15 December 2018 (https://www.cbic.gov.in/resources//htdocs-cbec/gst/Final-GST-FAQ-31218.pdf;jsessionid=F7E95EE7D4A278D7BB0BA61466CB52C0) 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”.

However, despite this, disputes continued at the ground level and there has been a trend of increased litigation on this subject in the last few months. The biggest impact of this has been a potential demand of 18% on the entire topline of the companies. We have seen this interpretation being adopted for several large IT/ Tech companies.

The clarification will ensure availability of export status to services provided by Indian IT companies to their foreign group entities. This will also help in resolving refund issues and clearing litigations pending before the appellate and judicial authorities.

NASSCOM has been working on this issue very closely with industry’s support and it is good have this issue sorted.

Copy of the Circular is attached for your reference.

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Tejasvi