MNCs Sent Tax Notices Over Expat Employees’ Allowances

By Consultants Review Team Wednesday, 18 October 2023

Multinational corporations (MNCs) operating in India are facing tax requests from goods and services tax (GST) authorities, affecting around 1,000 international subsidiaries. The current tax demands concern an 18% tax on salaries and allowances provided to international expats by their overseas parent corporations.

The demands, which range from 1 crore to 150 crore, are for payments made by foreign parent businesses to expats working in MNC subsidiaries in India between FY18 and FY22, according to sources.

The problem was discovered during audits of MNC local subsidiaries in a variety of industries, including cell phones, automobiles, software, FMCG, consumer durables, and cosmetics. Although tax requests for FY18 transactions were time-barred as of September 30, demands for subsequent years (FY19, FY20, FY21, and FY22) are still being served.

According to the report, GST authorities consider expat salaries or allowances reimbursed by Indian corporations to foreign entities to be a "supply of manpower," making them taxable under the GST framework. This method has been used to keep expats' social security benefits in their native country.

Salaries directly paid by Indian companies to expat employees without reimbursement, on the other hand, will not attract GST because expats will be considered as employees of the Indian company alone, it added.

The latest increase in tax demands follows a Supreme Court decision in the Northern Operating System (NOS) case in May 2022. According to the verdict, the secondment (deputation) of personnel from a foreign group to an Indian corporation is considered "manpower supply service" and is subject to service tax under the reverse charge mechanism.

While the decision concerned service tax (pre-GST), its consequences extend to the GST era due to the industry's continuous practise of deputing foreign expats and overseas wage payments. 

On this topic, the industry is divided, with some paying GST and disputing interest, while others choose to litigate, noting variances in their situations from the NOS judgement.

According to Abhishek Jain, indirect tax head and partner at KPMG, multiple show-cause notices have been issued following the Supreme Court order, requiring GST on expats seconded, particularly in multinational corporations with staff deputed to Indian operations.

Players in the industry await precise government guidelines on expat employment as well as clarity on personnel supply scenarios. They emphasised the importance of evaluating GST exposure on expat arrangements, taking into account contract terms, compensation, duties, responsibilities, and control over staff. 


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