GST and seconded employees – Conundrum of control, supervision, and costs
Part II – A Practical Application
In the first part of our article, we have discussed the GST implications on the activity of secondment of employees from the perspective of the GST Act, the erstwhile service tax laws, the civil laws, and the Income Tax Act. Drawing from such legal principles, in this part, we will discuss the GST implications in different business models.
For ease of reference, the different business models are listed below;
- Cost sharing: - Sharing of cost between group companies for achievement of some common object. For example, Google US is developing HR software jointly with Google India for usage by both Google entities, and during such development, the employees of Google US are visiting Google India.
- Revenue sharing arrangements: - In this case, the foreign company and the Indian company may jointly work together to provide supplies to a third entity. For example, the foreign company and the Indian company together build infrastructure for the Indian Government, and during such arrangement, employees of the foreign company visit the offices of the Indian company.
- Employees coming to India for governance functions: - For example, group CFO visiting India from the USA for preparation of a consolidated financial statement or for strategizing relevant decisions etc.
- Employees coming to India to provide other services: - In this case, the foreign company is sending their employees to India to provide some services. Say, training of the employees of the Indian company by the trainers who are employees of the foreign company.
- Secondment with salary reimbursements: - In this model, the seconded employees are paid salary in their bank accounts outside India and the Indian company reimburses the salary to its foreign counterpart.
- Secondment without salary reimbursements and dual employment: - In this model, the seconded employees are paid salary in their bank accounts in India. Further, the seconded employee maintains dual employment i.e., one with the foreign counterpart and one with the Indian company.
- Secondment without salary reimbursements and single employment: - In this model, the seconded employees give up their employment with the foreign company and join the Indian company as their employees wherein the salary is paid in their Indian bank accounts by the Indian company.
In the above business models, the taxability can be deduced in the following manner;
- Cost sharing: - It is interesting to note that if two distinct legal entities come together to perform an activity for their common benefits then, it may not always be necessary that there is a service flowing from one entity to another entity.
Like, in our example, if the employees of Google US are coming to Google India for the development of software that would be jointly owned by both entities, it may not be construed that Google US is supplying any sort of service to Google India. Thus, GST liability may not arise in this case at all.
In this regard, reference is drawn to Gujarat State Fertilisers & Chemicals Ltd. vs Commissioner of C. Ex[1], wherein the Hon’ble Apex Court has held that there is no provision of service when two persons are sharing costs for the development of infrastructure for common use.
However, the above order pertains to the erstwhile service tax regime wherein the definition of a service was linked to an activity, and contrary to the above, under GST, a supply is not linked to an activity. Hence, the application of the above principle under GST may be subject to judicial scrutiny.
Nevertheless, referring the Article 15 of BEPS on intra group services, an argument can be made that when two group entities work for themselves, even if there is a supply of service, it is incidental and not deliberate with an economical value for the recipient.
- Revenue sharing arrangements: - In this case, the taxability would be highly dependent on the agreement of the parties. However, in a perfect world, if the foreign company and Indian company are executing some contracts on a revenue sharing basis then, an argument could be made that there is no supply of services between them interse hence, GST is not at all leviable in this situation.
The above finds support from the jurisprudence developed under the erstwhile service tax regime wherein it was held that there is no service involved in the revenue-sharing arrangements. See Commissioner vs Murmugao Trust[2] and Commissioner vs Inox Leisure Ltd[3].
However, as discussed above, the application of the above jurisprudence would depend on as to how the judiciary interprets the dissociation of the service from an activity under GST.
- Employees coming to India for governance functions: - The activities of group companies aimed at governing functions such as complying with reporting requirements, corporate structuring, etc. may be considered as shareholder functions and may not be leviable to GST per Article 15 of BEPS on intra-group services. However, it is cautioned that the judiciary in the context of the Indian Income Tax Act has rejected the arguments supporting the shareholder’s function theory. Thus, the matter is open for interpretation by the judiciary under GST.
- Employees coming to India to provide other services: - If the foreign company is sending its employees to the Indian company to perform some specific services such as giving training to the Indian companies then, it may be a case of supply of specific services between the group companies which could attract GST as import of services on reverse charge basis.
- Secondment with salary reimbursements: - This concerns the vanilla structure being followed wherein the employee of the foreign company is seconded to the Indian counterpart. The salary, employee benefits, and all the perks are paid to such employees by the foreign company. The foreign company, in turn, seeks reimbursement of such costs from the Indian company.
In these arrangements, the age-old principles being applied to are the test of control and supervision. However, as discussed in the first part of our article, such tests have become obsolete.
Thus, in these arrangements, the Indian company should analyze who is the real employer for the seconded employee by the applications of the following tests.
If the maximum tests confer that the real employer is a foreign company then, it may amount to the supply of manpower services by the foreign company to the Indian company attracting GST under reverse charge. However, if the maximum tests suggest that the employer is the Indian company then there is no liability to pay GST on the reimbursements made by the Indian company.
Consequently, the relevant tests and their interpretation are tabulated below;
|
N
|
Test
|
Application
|
|
1
|
Whether the seconded employees have a lien on their employment with the foreign company?
|
If yes then, the foreign company may be said to be the real employer of the seconded employee and the reimbursements would be taxable under GST.
|
|
2
|
Who has the defacto control over the seconded employees?
|
This would include satisfying the classic test of supervision and control i.e. if the defacto control is with the Indian company then, the employer would be considered as the Indian company.
|
|
3
|
Whether the Indian company have a right to terminate the employment of the seconded employee?
|
If an Indian company merely has a right to terminate the secondment agreement then, it would not satisfy this test.
To satisfy this test, the Indian company must have a right to terminate the employment of the seconded employee.
|
|
4
|
Whether the seconded employees have retained their right to participate in the retirement benefits of the foreign company?
|
If the seconded employees retain such rights then it may construe that they have retained their lien with the foreign company and the foreign company is the real employer.
|
|
5
|
Whether the Indian company can be established as an employer from the documents?
|
If the Indian company is not nomenclated as an employer in any agreement/document then, the foreign company may be considered as a real employer.
|
|
6
|
Whether the employee is integrated into the employer’s business?
|
If the activities of employees are more integrated with the foreign company’s business then, such a company would be considered as a real employer.
|
|
7
|
Who is paying the wages to the employer?
|
Since in this case, the reimbursement is paid by the foreign company, such a company would become a real employer.
|
|
8
|
Who owns the asset with which the work is to be done by the employee?
|
This, although not mandatory, appears to be a directive test.
|
|
9
|
Whether the seconded employees continue to be on the payroll of the foreign company?
|
If yes then, the application of other tests would become more apprehensive since in such cases, the seconded employees may have to have a lien on the employment with the foreign company.
|
|
10
|
Whether the seconded employees receiving any special allowances for working in India?
|
If yes then, it could hint that the Indian company is not the real employer since it suggests a temporary deputation only.
|
- Secondment without salary reimbursements and dual employment: - In this model, there is no reimbursement involved. However, since the supply of services between group companies qualifies as a supply of service even if made without consideration, the Indian company should analyze the application of the tests listed in the above table and consider whether there is an import of service.
- Secondment without salary reimbursements and single employment: - When the seconded employee has permanently resigned from the foreign company, the Indian company remains his sole employer hence, there is no question of the presence of a service between the Indian company and the foreign counterpart.
Having said the above, one must not forget that when the courts change the law, they exhume the buried skeletons. Meaning thereby, with the pronouncement of Northern Operating’s case, the GST department has looked into all nooks and corners to seek tax liabilities on the deputation of the employees.
Considering the above initiations from the Revenue, businesses should analyze the tax implications on old contracts, and considering the materiality of the amount involved, the risk appetite, and the arguments of the revenue neutrality, etc., the businesses may brace themselves for litigation that is standing on their doorstep.
Nevertheless, the classic principle that always paves the way is the substance of a transaction. Thus, as long as the substance reflects the form of the contract, one may remain carefree and go back to sleep unless the judgment of Norther Operating’s case gets judicial scrutiny from a GST perspective.
Till then, Sayonara!
(Authors: CA Ashish Chaudhary and CA Pooja Jajwani, can be reached at ashish@hnaindia.com and poojajajwani@hnaindia.com, respectively)
(The authors extend their thanks to CA Roopa Nayak for vetting this article).
