GST authorities have rejected refunds on these grounds across states, including Haryana, Maharashtra, Tamil Nadu and Karnataka. The denial of refunds running into hundreds of crores of rupees to these outfits can derail their business model and may impact India’s attractiveness as the world’s back-office hub, especially with the emergence of low-cost sites in the Philippines and East Europe.
“Rejection orders are based on the premise that the services are provided by the local entity to its overseas affiliate company, which is the ‘same entity’ and therefore, the said services do not qualify as exports,” said an industry official privy to the development. Industry has approached the government for expeditious resolution of the issue. Individual companies will approach appellate bodies to seek relief.
Typically, tax paid on inputs that are used for exports is refunded. According to a clarification provided by the Central Board of Indirect Taxes and Customs in the form of frequently asked questions, where the Indian arm is set up as a liaison office or a branch, they would be treated as establishments of the same entity and hence, supplies between them will not qualify as export of services. “However, if the Indian arm is set up as a wholly owned subsidiary company incorporated under the Indian laws, the foreign company and the Indian subsidiary would not be governed by the provisions of distinct person or related person as both are separate legal entities,” it said.
Experts said the law is very clear on this aspect and this principle was followed even under the previous service tax regime. “It is essential to clarify without any ambiguity that global delivery centres operating in India for foreign customers are not liable for GST on services provided by them and are fully entitled to claim input tax refunds,” said MS Mani, a partner at Deloitte India. “From the law, it’s very clear that services provided to a separate legal entity would qualify as export of services.
Only services by one office to another of the same legal entity doesn’t qualify as export. It’s unfortunate that such fundamental issues are still being raised even after more than two years of GST implementation,” said Pratik Jain, national leader, indirect taxes, at PwC. Bipin Sapra, a partner at EY, agreed. “There is no ambiguity in law that a subsidiary of an overseas company can supply services to their overseas parent and qualify as export. Any challenge to this will be increasing the cost of delivery of such services from India,” he said.
The issue appears to have been raised largely by state tax authorities. “Hope the government takes urgent notice of this and comes up with a clarification so that the issue can be put to rest. This also means that state authorities need comprehensive training on taxation of service sectors, which was earlier administered by central government authorities,” Jain added.