Various companies in India have branches outside India. In general practice, these companies provide services to their branches outside India. However, the implementation of GST has created a cause of concern for such companies. This had certainly increased the pain of the industry and was later also recognized by the Government and an exemption notification was issued to provide relief to such companies. In the coming paras, impact of GST on transactions with such overseas branches is analyzed:-
Section 25(4) & 25(5) of CGST Act, 2017 provides the definition of ‘Distinct Person’. Further, IGST Act, 2017 also provides the definition of ‘Distinct Person’ in respect of inter-state transactions.
According to Explanation-1 to Section 8 of the IGST Act, 2017:-
“For the purpose of this Act, where a person has,
- An establishment in India and any other establishment outside India;
- An establishment in a State or UT and any other establishment outside that State or UT; or
- An establishment in a State or UT and any other establishment registered within that State or UT;
Then such establishments shall be treated as establishment of distinct persons.”
Explanation-2 to Section 8:-
A person carrying on a business through a branch or agency or a representational office in any territory shall be treated as having an establishment in that territory.
Reading the above explanation, it is clear that head office of a company in India and its overseas branch will be treated as a distinct person for the purpose of GST.
Section- 2(6) of IGST Act, 2017 lays down the definition of “export of service”. The definition is reproduced as below:-
“Export of services” means the supply of any service when-
- The supplier of service is located in India;
- The recipient of service is located outside India;
- The place of supply of service is outside India;
- The payment of such service has been received by the supplier of service in convertible foreign exchange or in Indian rupees wherever permitted by RBI; and
- 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.
Supply of services to foreign branch will not qualify as export:-
- Explanation-1 to Section-8 of IGST Act, 2017 makes it clear that if a person has establishment in India and establishment outside India, these will be treated as establishments of distinct persons. Thus, the head office in India and overseas branch would be treated as distinct person for the purpose of GST.
- Further, any services provided by head office in India to overseas branch will not be treated as ‘export of services’ by virtue of section-2(6) of IGST Act, 2017.
Supply of services by HO to overseas branch between 01-07-2017 to 25-07-2018:
- We have already discussed above that where an entity has a foreign branch, it will be treated as a distinct person and any services provided by such entity to its overseas branch will not be considered as ‘export of services’.
- Therefore, in this case, the entity will be required to pay IGST on such supply of services to foreign branch at the rates as applicable from time to time. The GST will be payable irrespective of the fact that there is consideration for such supply of services or not. This would add to the cost for the company.
- However, the entity will be eligible to take ITC for input goods & input services utilized for providing such services to overseas branch.
- Valuation of such services shall be at open market value based upon Rule-28 of CGST Rules.
Supply of services by HO to overseas branch after 25-07-2018:
- After representations of the industry and looking to the hardships faced by them, GST council made recommendations for relaxations in the above provision. An important exemption from GST is provided to Indian entities having overseas branches/ project offices/liaison offices vide Notification No. 15/2018 Integrated Tax (Rate) dated 26-07-2018.
- As per Notification No. 15/2018 dated 26-07-2018:-
“Services supplied by an establishment of a person in India to any establishment of that person outside India, which are treated as establishments of distinct persons in accordance with Explanation-1 of Section-8 of IGST Act, 2017 would be exempted from GST provided that the place of supply of the service is outside India in accordance with section 13 of IGST Act, 2017.”
Hence, by virtue of this notification, any services provided by head office to its overseas branch/office would be exempted from tax if the place of supply is outside India.
It should be kept in mind that such supply of services to foreign branch is neither export nor zero rated supplies rather exempted supply. Therefore, in terms of section 17(2) of CGST Act, 2017, the entity would be required to reverse ITC attributable to such exempt supply and any other common ITC in proportion to the total turnover.
Section 17(2) of the CGST Act, 2017 is reproduced below:-
“Where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies and partly for effecting exempt supplies, the amount of credit shall be restricted to so much of the input tax so attributable to the said taxable supplies including zero-rated supplies.”
For example:-
X Limited based in India is making supply of services to its branch in U.K. which could be valued at Rs. 5, 00,000 in open market. The Company derives other taxable turnover of Rs. 20, 00,000. ITC attributable to supply to foreign branch is Rs. 25,000. Other common ITC is Rs. 100,000.
Solution:-
- Supply of services to foreign branch Rs. 5, 00,000 is exempted supply so no GST payable on such outward supply.
- ITC in relation to such exempt supply will have to be reversed Rs. 25,000.
- Further common ITC to be reversed = 1, 00,000 x 5 lakh/25 lakh = Rs. 20,000.
Thus, despite the fact that supplies of services to foreign branch has been exempted by the Government, the entity will have to bear the cost in the form of ITC reversal Rs. 45,000 (25,000+20,000).
Import of services from foreign offices/branches by H.O.:
- The Rate Notification No. 15/2018 is applicable only in the case of supply of services by establishment of a person in India to an establishment of that person outside India.
- No similar exemption is given by the aforesaid notification in case supply of services are made by establishment outside India i.e. foreign office or branch to establishment in India i.e. Head Office.
- Thus, import of services from the overseas branch is specifically covered by para-4 of Schedule I of CGST Act, 2017 which states that import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business shall be subject to GST even where there is no consideration.
- The above provisions have created an ambiguity in the taxability of off-shore transactions with distinct persons. At one side, supply of services by a overseas office/branch to H.O. in India is specifically treated as “Import” liable to tax under reverse charge. On the other side, supply of services by head office to overseas branch/office is not treated as “export” rather exemption is allowed with ITC reversal.
Maintaining liaison office/ branch office in India is not supply of service:-
Where liaison office in India does not render any consultancy or other services directly/indirectly, with or without consideration and liaison office does not have significant commitment powers, except those which are required for normal functioning of office, on behalf of the head office, then reimbursement of expenses and salary paid by head office to liaison office, established in India, is not liable to GST and head office is not required to get itself registered under GST. [Habufa Meubelen B.V. (2018) 95 Taxmann 120] [Takko Holding GMBH (2018) 98 Taxmann.com 334]
