Indian corporates are currently navigating a complex landscape of GST compliance, particularly concerning self-invoicing and the reverse charge mechanism (RCM) for services received from foreign entities. The government has been issuing circulars to address these concerns, but the pace of these developments has been somewhat gradual.
Recently, Infosys secured partial relief from demands raised by the Directorate General of GST Intelligence (DGGI) over free services rendered by its related foreign subsidiaries. This development hints at possible relief for other companies facing similar issues, particularly those receiving invoices from abroad.
Key Compliance Challenges
According to experts, the invoices issued by foreign parties may not significantly impact GST liability. Instead, the self-invoice raised by the Indian counterpart is the critical document for GST compliance, as outlined in Section 31(3)(f) of the Central Goods and Services Tax (CGST) Act. This provision means that the value stated in the self-invoice becomes the basis for any GST demand, providing hope for corporates facing unexpected liabilities.
“There are several other companies facing similar issues. In such cases, it is pertinent to note that the invoice of the foreign party would not be of much consequence. The self-invoice raised by the Indian counterpart would be the GST invoice under Section 31(3)(f) of the CGST Act. Hence, the value as per such self-invoice should be considered for a GST demand,” said a tax expert.
Judicial Clarifications
The Supreme Court’s ruling in the Northern Operating Systems case established that service tax on RCM applies to salaries provided to expatriates by related Indian companies, treating it as a service rendered by foreign holding or subsidiary companies. This principle has been extended under GST, where even services provided without consideration by foreign entities to related Indian companies are considered a supply. As a result, the Indian companies involved are liable to pay GST under the RCM.
Recent Circular and Remaining Ambiguities
Clearing some confusion, Circular No. 199/11/2023-GST, issued on July 17, 2023, clarified that in cases where branches of the same company operate across states - such as a Maharashtra branch providing services to a Haryana branch - if the Haryana branch is eligible for full Input Tax Credit (ITC) and no invoice is raised by the Maharashtra branch, the supply value would be treated as NIL, and no GST would apply. However, questions remain about the treatment of invoices issued by foreign subsidiaries.
There are also ambiguities in the interpretation of Explanation I under Section 8 of the IGST Act 2017, which relates to the definition of distinct persons. “The dispute has risen predominantly due to the definition of the import of services in the IGST Act. The revenue relies on explanations in Section 8, which provide that a branch and an Indian entity will be treated as distinct persons,” another expert noted.
Looking Forward
As the government continues to issue clarifications and circulars, Indian corporates must stay vigilant and adapt to the evolving GST compliance landscape. The recent developments and partial relief granted to companies like Infosys may pave the way for more streamlined and predictable compliance mechanisms in the future.
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