The current Goods & Services Tax (GST) framework is treating internal transactions between head offices and branches of information technology(IT) companies as taxable events, leading to artificial tax liability being created, industry body Nasscom has said. Despite being internal allocations within the same company, and not supplies between different entities, these tax burdens are piling up procedural difficulties for IT companies, it has said in a recent statement.
Currently, an Indian IT company signs a master agreement with a foreign client after which offshore work is performed from India. Meanwhile, onsite work is delivered either through an overseas branch of the same company or through a foreign subsidiary.
Nasscom has pointed out the tax outcome now differs under the GST Rules. "When delivery is through a subsidiary, exports are zero rated and input tax credit flows through to refund. When delivery is through an overseas branch, the internal head office to branch step is treated as an exempt supply and the branch to head office support is deemed an import on which the Indian head office books reverse charge," the statement said.
Way ahead
In a paper submitted to the Finance Ministry in September, Nasscom has recommended amending the definition of export of services by deleting the clause that excludes internal establishments, while keeping all other export conditions.
The other legislative pathway suggested is to create a limited carve-out in Schedule I so that cross-border intra-entity flows linked to export delivery are not treated as supplies. However, Nasscom has suggested guardrails for both approaches.
"Contracts must be with foreign customers. Foreign-exchange realisation must be evidenced under Foreign Exchange Management Act, 1999. Reverse charge must continue for services actually consumed in India. Targeted scrutiny can focus on exceptions without adding steps for routine exporters," it said.
Until legislative steps are taken, Nasscom has sought interim administrative steps to improve certainty. "A consolidated circular can bring guidance into one place and confirm that Nil valuation and refund eligibility apply where export contracts and foreign-exchange realisation are documented."
Currently, an Indian IT company signs a master agreement with a foreign client after which offshore work is performed from India. Meanwhile, onsite work is delivered either through an overseas branch of the same company or through a foreign subsidiary.
Nasscom has pointed out the tax outcome now differs under the GST Rules. "When delivery is through a subsidiary, exports are zero rated and input tax credit flows through to refund. When delivery is through an overseas branch, the internal head office to branch step is treated as an exempt supply and the branch to head office support is deemed an import on which the Indian head office books reverse charge," the statement said.
Way ahead
In a paper submitted to the Finance Ministry in September, Nasscom has recommended amending the definition of export of services by deleting the clause that excludes internal establishments, while keeping all other export conditions.
The other legislative pathway suggested is to create a limited carve-out in Schedule I so that cross-border intra-entity flows linked to export delivery are not treated as supplies. However, Nasscom has suggested guardrails for both approaches.
"Contracts must be with foreign customers. Foreign-exchange realisation must be evidenced under Foreign Exchange Management Act, 1999. Reverse charge must continue for services actually consumed in India. Targeted scrutiny can focus on exceptions without adding steps for routine exporters," it said.
Until legislative steps are taken, Nasscom has sought interim administrative steps to improve certainty. "A consolidated circular can bring guidance into one place and confirm that Nil valuation and refund eligibility apply where export contracts and foreign-exchange realisation are documented."
