Tax on expat salaries: Japan firm's India unit gets interim relief on GST

The GST authorities had issued a show cause notice to Kanematsu India, demanding over Rs 2.6 crore on reimbursement of expat employees salaries made by the company to the Japanese parent

In yet another case related to Goods and Services Tax (GST) notices on salaries paid to expats by subsidiaries of multinational companies (MNCs), a High Court has provided interim relief to a firm and restrained the authorities from taking coercive measures.

The Punjab and Haryana High Court gave the relief to Kanematsu India, a subsidiary of Japanese company Kanematsu Corporation. GST authorities had issued a show-cause notice to Kanematsu India, demanding more than Rs 2.6 crore on reimbursement of expat employees’ salaries made by the company to the Japanese parent. The company had raised several jurisdictional- and limitation-related preliminary objections in response to intimation by GST authorities. These objections were not addressed in the show-cause notice,  the court observed.

It asked the authorities to decide on the jurisdictional objection the company had raised – among others – during the adjudication of the notice and also restrained any coercive steps in case an adverse order is passed.

Sandeep Sehgal, partner tax at AKM Global, said the relief to Kanematsu India allows taxpayers to justify or present their cases, offering some respite to those involved in transactions related to expatriate salary reimbursement to their associated or group companies overseas. “The relief is particularly significant in the context of the Supreme Court judgement in the Northern Operating System case, establishing GST under reverse charge for such payments to group companies,” he said. GST notices followed a Supreme Court judgment in May 2022 in the Northern Operating System (NOS) case. 

The Supreme Court said 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.

Many companies, including BMW India, approached courts against GST notices after the Punjab and Haryana High Court stayed the operation of a notice to Mitsubishi Electric India.

Earlier, the High Court had granted interim relief to BMW India over a similar notice. MNCs operating in India are facing GST demands pertaining to an 18 per cent tax on salaries and allowances paid to foreign expats.

Various High Courts have granted relief to Metal One Corporation, Alstom Transport India, United Breweries Ltd, and Mitsubishi Electric India.

GST authorities consider expat salaries or allowances reimbursed by Indian companies to foreign entities as a “supply of manpower,” making them taxable under the GST regime.

However, salaries directly paid by Indian companies to expat employees without reimbursement won't attract GST. Such expats are perceived as employees of the Indian company alone.

TAX TUSSLE

• MNCs operating in India are facing GST demands pertaining to an 18% tax on salaries and allowances paid to foreign expats
• Various High Courts have granted relief to BMW India, Metal One Corporation, Alstom Transport India, United Breweries Ltd, and Mitsubishi Electric India
• GST authorities consider expat salaries or allowances reimbursed by Indian companies to foreign entities as a “supply of manpower,” making them taxable under the GST regime
• However, salaries directly paid by Indian companies to expat employees without reimbursement won’t attract GST. Such expats are perceived as employees of the Indian company alone