Understanding the CBIC Circular on Related Party Import of Services and Its Impact on GST
The Central Board of Indirect Taxation and Customs (CBIC) recently issued a circular dated June 26, directing field authorities to consider its guidelines when evaluating issues related to the import of services by local firms from related parties. This development has significant implications, particularly for companies in the information technology (IT) and IT-enabled services (ITeS) sector, such as Infosys and other software businesses.
The circular clarifies that the cost of services rendered by a foreign affiliate will be considered as zero if a linked domestic firm has not received an invoice for such services. Consequently, no Goods and Services Tax (GST) would be applied to these services. This directive aims to provide clarity on the valuation of supply of import of services by a related person, ensuring the full availability of input tax credit for the recipient.
In light of this circular, the Directorate General of GST Intelligence (DGGI) served Bengaluru-based Infosys with a substantial pre-show cause notice for “non-payment of Integrated GST on import of services” from its foreign branches. This move has prompted field officers to re-examine not only the Infosys case but also those of other companies in the IT and ITeS sector.
The impact of this directive extends to more than half a dozen IT services companies, primarily located in Delhi-NCR, Hyderabad, and Bengaluru, which are facing potential preliminary notices similar to those received by Infosys. These notices have arisen due to a disputed interpretation regarding expenses for services provided by overseas branches and their classification as payments for services delivered by the Indian parent company’s offshore offices.
It is essential to note that the recent communication from CBIC aimed to clarify and emphasize the circular, ensuring that all related cases will be governed by its provisions. Despite this, industry associations such as Nasscom have expressed concerns, emphasizing a potential misunderstanding of the operating model within the IT and ITeS sector.
The circular’s impact also extends to the mechanism of reverse charge for services rendered outside India. Typically, the locally registered entity is required to pay GST under the reverse charge mechanism, necessitating the issuance of a self-invoice and the remittance of taxes. This recent development is poised to have a substantial impact on the interpretation of such transactions and on the potential litigation that could ensue.
Bipin Sapra, a partner at EY, highlighted the proactive efforts of the government in issuing clarifications to reduce litigations, particularly in revenue-neutral situations. He emphasized the significance of the recent clarification, particularly in relation to the valuation of imported services from related persons, urging field formations to leverage these guidelines to avoid interpretative disputes.
In conclusion, the CBIC circular on the valuation of imported services from related parties has brought significant focus to the GST implications for the IT and ITeS sector. While it aims to provide clarity and reduce disputes, its impact on industry operations and the potential for widespread litigation underscore the need for careful consideration and proactive compliance measures by affected companies and field authorities.
This article provides an overview of the recent CBIC circular and its implications for the GST treatment of imported services, particularly in the context of companies operating in the IT and ITeS sector.
