Different scenarios to analyze taxability of GST manpower supply services under GST laws
Overview of GST Manpower Supply Services and Employee Secondment GST
Presently, the treatment of GST manpower supply services for employee secondment is a grey area under GST Laws. In May 2022, the Supreme Court of India in the NOS Supreme Court GST ruling (CC, CE & ST, Bangalore (Adj.) etc. Vs. Northern Operating System Private Limited (NOS), Civil Appeal No. 2289-2293 of 2021, dated 19.05.2022) ruled that the secondment of employees between group companies qualifies as a taxable service under the category of manpower supply services.
This judgement clarified that secondment agreements can be considered taxable under Indian tax laws. Companies having secondment arrangements had to re-evaluate their tax obligations both under service tax and the GST regime. There is no clarity on whether reimbursements will be considered as a taxable service or not.
Show Cause Notices and Reverse Charge Mechanism GST
Basis the aforementioned judgement, various companies received show cause notices under the GST regimes as to why they will not be held liable for payment of GST under the reverse charge mechanism (RCM) for the import of manpower services from their parent/holding overseas companies. The value of supply shall be the amount of remuneration paid to the seconded employees.
However, in absence of clarity on interpretation various High Courts have stayed such proceedings.
CBIC Instruction No. 5/2023-GST on Employee Secondment GST
The Central Board of Indirect Tax and Customs (CBIC) issued Instruction No. 5/2023-GST dated December 13, 2023, referencing the NOS Supreme Court GST ruling. The CBIC examined the judgement and clarified:
- Secondment of employees by overseas group companies to Indian entities constitutes GST manpower supply services in certain scenarios.
- Multiple types of arrangements may exist for secondment, each with potentially different tax implications.
- Supreme Court rulings should not be applied mechanically; each case requires careful analysis of contracts, arrangements, and terms to determine taxability of foreign employee services under GST.
- Field formations should not mechanically invoke Section 74(1) CGST for extended time limits.
CBIC Clarification on Multiple Scenarios of Employee Secondment
This instruction released by CBIC clarified that there may be a multiple type of arrangements or scenarios in relation to the secondment of employees of overseas group companies in the Indian entity. In each scenario, tax implications may be different depending upon the specific nature of the contract and other terms and conditions attached to it. Therefore, the decision of the Supreme Court should not be applied mechanically in all cases.
Investigation in each case requires a careful consideration of its distinct factual matrix including the terms of the contract between the overseas company and Indian entity to determine taxability or its extent under GST and applicability of the principles laid down by the Hon’ble Supreme Court judgement in NOS case.
It has also been represented by the industry that in many cases involving secondment, the field formations are mechanically invoking extended periods of limitation under section 74(1) of the CGST Act, 2017. Hence, this instruction also clarifies the applicability of section 74(1) of the CGST Act, 2017.
Applicability of Section 74(1) CGST
Section 74(1) of the CGST Act, 2017 states that where it appears to the proper officer that any tax has not been paid, short paid, or erroneously refunded, or where input tax credit has been wrongly availed or utilized by reason of fraud, willful misstatement, or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax. The notice requires the taxpayer to show cause as to why they should not pay the amount specified along with interest under section 50 and a penalty equivalent to the tax specified.
Conditions for Invoking Section 74(1) CGST
It is evident that Section 74(1) CGST can only be invoked in cases where there is fraud, willful misstatement, or suppression of fact by the taxpayer. This section cannot be invoked merely for non-payment of GST without evidence of fraud or misstatement.
Therefore, only in cases where an investigation indicates material evidence of fraud or willful misstatement by the taxpayer, the provisions of Section 74(1) CGST may be invoked for issuing a show cause notice. Such evidence must be included as part of the notice.
Conclusion of CBIC Instruction on Employee Secondment GST
The CBIC instruction emphasizes:
- Supreme Court NOS case should not be applied mechanically.
- GST applicability depends on specific factual situations and contractual terms for each secondment.
- Automatic use of Section 74(1) CGST for extended assessment periods is discouraged.
- Detailed examination is required before issuing show cause notices.
Scenarios for Taxability of GST Manpower Supply Services
Below are the scenarios to understand the taxability under GST as per the industry perspective
Dispatch of employees by overseas companies to their subsidiaries in India is a very common practice. In certain cases, these employees are dispatched via. secondment and dispatch agreements between the overseas entity and the Indian entity and in other cases there are only employment contracts between dispatched personnel and the Indian entity. Further, sometimes the salary paid by the overseas entity is recovered by the Indian Company via. debit notes and in a few cases no reimbursement is being made by the Indian Company to the overseas entity.
Existing Employment Contract between Foreign Company and Seconded Employees
- Foreign parent company pays salary and manages benefits while employee is dispatched to Indian subsidiary.
- Only a view can be taken that the service is imported by the Indian company.
- Facts must be analyzed independently to determine if it is employee secondment GST or simple service provision by overseas entity.
Employment Agreement between Indian Subsidiary and Seconded Employees
Only an employment agreement exists between Indian subsidiary and seconded employees, no foreign entity involvement. View may be taken that it is a standard employment arrangement. Factors to consider:
- Any consideration charged by foreign entity
- Overseas entity paying salary/allowances
- Debit notes for reimbursement by Indian company
Secondment and Dispatch Agreements with Employment Agreements
Two types of agreements may exist:
- Secondment and dispatch agreement: between Indian and overseas entity (triparty including dispatched personnel)
- Employment agreement: between Indian company and dispatched personnel
Analyze whether any reimbursement is claimed by foreign company and whether overseas entity derives income from Indian company.
In these cases, it is worth analyzing, whether any reimbursement is being claimed by the foreign company from the Indian Company. Further, it is also to be seen that any income is derived by the overseas entity from the Indian Company for this arrangement.
Factors to Analyze for GST Manpower Supply Services
Just to conclude, to analyze GST implications on these arrangements, it is important to check the following:
- Terms of arrangement between the Indian and foreign Company and the dispatched personnel.
- If a foreign company is deriving any benefit from the Indian company in these arrangements.
- If reimbursement is being made by the Indian Company to the foreign company for the payment made overseas.
- Which entity is managing the payroll of the dispatched personnel.
- Is there any global policy of secondment in the overseas entity; and
- Is there any global policy of repatriation in the overseas entity.
