How plethora of GST notices are spoiling the ease of doing business

While there are issues relating to mismatch in input and output returns, input tax credit availed of on exempted items, there are broader legal interpretational issues in GST notices as well

The Central Board of Indirect Taxes and Customs (CBIC) recently provided some sort of breather to the companies facing notices from the goods and services tax (GST) authorities on expats salaries but this is not the only area troubling India Inc under this indirect tax regime. 

Companies faced these notices since those could be sent for 2017-18 only till September 30 unless extended in cases like fraud, willful suppression of facts etc. Similarly, these notices for 2018-19 could be sent till the end of the current month.

The cases relate to mismatches in input tax and output tax returns, reversal of input tax credit relating to exempt items as well as matters relating to broader legal interpretation of GST.

While it is difficult to put an exact number of these notices in recent months, Pratik Jain, leader of indirect tax at PwC India, says the GST authorities have issued thousands of notices as the statutory timeline for FY '18 was approaching in September.

"Many of these notices appear to have been issued without going through the facts and figures in detail. The industry is faced with multiple notices in various states and hopes that most of them would be dropped in due course," he hopes.

However, even if a small percentage of these notices culminate into tax demands (which have already started), the appeal process would entail substantial cash flow issues, given the requirement of pre-deposit of 10 per cent at the first level itself and the fact that GST Tribunals are yet to be set up, Jain fears.

For FY19, the last date for issuing show cause notices is December 31, 2023 and one can expect the trend of notices to continue, he apprehends.

While there are issues relating to mismatch in input and output returns, input tax credit availed on exempted items, etc, there are broader legal interpretational issues in these GST notices as well.

Abhishek Jain, indirect tax head and partner, KPMG, says the GST law envisages some nuanced taxability provisions which could be subject to varied interpretations, and hence, there has been significant litigation on such matters under GST. An explicit clarification by the government on some of these issues coupled with an amnesty scheme could help contain such litigation and foster certainty for businesses, he feels.

The prominent matters in GST notices sent recently to companies related to: 

1) Salary to overseas employee on deputation in India:

The issue turned controversial after the GST authorities started sending notices to companies such as BMW India, Mitsubishi Electric India, Metal One Corporation, Alstom Transport India, United Breweries and Kanematsu India, taking a cue from the Supreme Court order in a case related to Northern Operating Systems (NOS). The court had held last year that the secondment (deputation) of employees from a foreign group to an Indian entity constitutes “manpower supply service” and is liable for service tax under the reverse charge mechanism.

The companies that got notices for GST on reimbursement made to parent companies by Indian subsidiaries for salaries of overseas employees on deputation moved to High Courts and got interim relief against any coercive measures by the authorities.

To calm down the matter, CBIC issued a circular last week, asking its field officers not to treat every case of expat salary by Indian subsidiaries of multinationals like NOS and not apply the SC verdict mechanically.

Rajat Mohan, senior partner at AMRG & Associates, however, said the CBIC has refrained from providing specific illustrative cases where tax imposition would not apply.

Also, the NOS case does not apply to salaries paid by Indian subsidiaries to these employees in Indian rupees, and it remains a grey area. This issue turned more confusing after the Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (Cestat) recently pronounced a split verdict on the issue. While the judicial member held in the Nissan Motors India case that the Indian salary and other allowances paid directly by the company to these kinds of employees in rupees could not be taxed, the technical member ruled that such payments were to be included in the taxable value.

The clarity would emerge after the matter goes to the third member and he settles the issue.

2) Notices to online gaming companies:

After months of deliberations by the group of ministers (GoM), the GST Council in August this year imposed 28 per cent tax on bets placed by participants on e-games, but provided relief to companies by restricting it to entry levels. However, the industry is unhappy as they are averse to paying GST on bets. The industry is willing to pay GST on platform fees, which they say is their income from offering these services.

Earlier, companies such as Gameskraft Technology Private Ltd (GTPL) paid GST at 18 per cent to the tune of over Rs 800 crore on the platform fee only for 2017-18 and 2021-22. Other companies, including MyTeam11 and Probo, did the same. However, these companies received notices from GST authorities, which asked them to pay 28 per cent tax on the face value of bets. For GTPL, it amounted to Rs 21,000 crore for the said period. Other companies cited above, too, received GST notices, according to industry sources. However, these notices are not only on entry-level bets but also on overall bets.

Recently, the Supreme Court refused to give interim relief to companies by declining to stay notices in this matter while posting the hearing to January eight. The legal dispute has now gone beyond challenging the show cause notices and now primarily relates to the constitutional validity of the GST on bets.

3) Notices for corporate guarantees:

Though the GST Council has clarified this issue, there is a fear that the issue will be litigated again. Earlier, the Director General of Goods and Services Tax Intelligence (DGGI) had issued tax demand notices to several local corporate houses over corporate guarantees given on behalf of their subsidiaries and to multinationals for giving such guarantees for their Indian units. The notices were sent to automakers, fast-moving consumer goods companies, electronic goods firms, etc.
 

Later, the Council clarified that the parent company’s corporate guarantee to its subsidiary for a bank loan will attract 18 per cent GST. At the same time, there will be no such tax if a director provides a personal guarantee for a loan from a bank or any financial institution to his own company.

The taxable value of the supply of corporate guarantee provided between related parties (parent company and subsidiary) will be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.

Abhishek Rastogi, founder of Rastogi Chambers, says the one per cent value leads to a much higher consideration than the amount mutually agreed between the parties. He feels the issue will go to the writ court due to manifest arbitrariness of the artificial value.

4) Notices to insurance companies:

The authorities have issued notices to various insurance companies, including HDFC Life and ICICI Prudential, for availing of input tax credit on specific input services related to marketing and sales promotion, which insurance intermediaries provided. These intermediaries include both individual agents and corporate agents. Insurance companies pay commissions to insurance intermediaries for their services, and predetermined amounts or percentages are specified for these commissions based on the insurance policy being offered in the market.

While individual agents fall under the Reverse Charge Mechanism (RCM) liability, corporate agents are considered insurance intermediaries. While the commission paid to individual agents falls within the specified amount prescribed by insurance companies, corporate agents receive commissions for their services and dispute arises whether the commissions paid to them exceed the stipulated amount.

The authorities alleged that insurance companies had made excess payments for marketing, sales promotion, and other business auxiliary services, as per the invoices raised by these intermediaries. As such, the credit for these excess payments is not available to insurance companies, the authorities alleged. The authorities said that insurance companies have not received the input services mentioned in the invoices raised by intermediaries. Since input services are intangible, proving their receipt becomes a crucial factor in satisfying the conditions. This dispute raises the question of whether insurance companies can avail services beyond the selling of insurance policies, such as marketing and sales promotion activities.

Grant Thornton Bharat partner Krishan Arora says the GST departmental allegations with respect to the denial of input tax credit for insurance companies require deeper and more detailed deliberations before any conclusion of treating them as fictitious or ineligible can be made.

"There has to be a strong backing of fact-finding, documentary evidence and legislative intent to substantiate such allegations by tax authorities keeping in mind the whole objective of ease of doing business, transparency in compliance and disclosures as taxpayers are large listed entities of repute," he says. 

5) Notices to food delivery platforms:
 

Notices have also been issued to online food delivery platforms such as Zomato and Swiggy. The authorities believed that food delivery is a service, and hence, these companies are liable to pay GST. The platforms charge some money from customers in the name of delivery fees. According to them, the delivery charge is the cost borne by the delivery partners who go to deliver food from door to door. Companies simply collect that cost from customers and pass it on to delivery partners.

Sandeep Sehgal, partner tax at AKM Global, says that in this case, the aggregators would be treating the delivery fee as a collection in a fiduciary capacity on behalf of delivery partners and hence would not be subjecting it to GST.

"The recent notices have been issued with the intention of seeking clarity by the GST department on this aspect. However, any demand of GST on this amount would affect the companies retrospectively and increase the cost for the consumers moving forward," he says. 

6) Queries on shares of foreign parent company allotted to Indian subsidiary's staff:

The authorities have been raising inquiries with Indian subsidiaries whose employees have been allotted shares of a foreign parent or holding company under schemes like employee stock option plan (ESOP) and employee share purchase plan (ESPP).

Mainly Indian subsidiaries in the technology sector, where ESOP is a popular employee incentive scheme, are facing this issue in the GST audit. GST authorities in Karnataka were the first to raise this issue and officials in other states followed.

GST authorities believe that the overseas entity, whose shares are allotted to the employees of the subsidiary company, is not the employer. The obligation of providing shares under the employment contract rests with the Indian subsidiary but, in turn, is fulfilled by the overseas entity. As such, it is an import of service by the Indian subsidiary, which is subject to 18 per cent GST.

On the overall issue of notices being sent by the GST authorities, Saurabh Agarwal, tax partner at EY, opines that CBIC should release a circular or instruction or press release, establishing a standardized approach for issuance of show cause notices and orders.

"Simultaneously, the government should actively work towards minimizing litigation and fostering an environment conducive to the ease of doing business by rolling out an amnesty scheme as GST legislation was a big reform and there have been teething issues during the last five years for all stakeholders," he says. 

GST notices sent to companies relate to conflicting interpretation of GST laws by companies and the authorities such as:

i) Salaries paid to overseas expats on deputation to India by subsidiaries of MNCs

ii) GST on online gaming companies

iii) Corporate guarantees offered by companies to subsidiaries

iv) Input tax credit on services of corporate agents availed by insurance companies

v) GST on delivery charges by food aggregators such as Zomato and Swiggy

vi) Queries on ESOPs of parent or holding companies offered by Indian subsidiaries