Taxability on salary paid to ex-pat has always been a matter of dispute in service tax, as taxation authorities wanted to consider this transaction as supply and levy tax on the same. On the other hand, assesses did not want to discharge any tax liability on it as they believed the service provided to the employer is about his employment, and transactions related to the employer-employee relationship are out of the purview of tax. In the current regime also, tax authorities could not pave the way to bring clarity on this issue. Even after more than 3 years of implementation of GST, the law regarding such issues is not settled yet. Considering this, relevant provision has been complied to derive a conclusion but first, let us understand the term, Ex-pat.
Meaning of Ex-pat
A person living (temporarily) and working (or for work reasons) in a country other than his (or her) country of citizenship is called an Ex-pat or an Ex-patriate.
An extract of Section 7 of CGST Act 2017
- For this Act, the expression “supply” includes–
- all forms of supply of services or goods (or both) such as barter, sale, exchange, rental, license, disposal, transfer, or lease agreed or made for a consideration in the furtherance of business by a person.
- Notwithstanding anything contained in sub-section (1), –
- transactions or activities specified in Schedule III; or
shall be treated neither as supply of services nor as a supply of goods.
- An extract of Schedule III of CGST Act 2017
TRANSACTIONS OR ACTIVITIES WHICH SHALL BE TREATED NEITHER AS A SUPPLY OF SERVICES NOR AS A SUPPLY OF GOODS
- Services by an employee to the employer during or in relation to his employment.
- An extract of Section 9(3) of CGST ACT 2017
The Government may on the suggestion of the Council by information, defined categories of supply of both (services or goods), the Tax-which shall be paid on the reverse charge basis (abbreviated as “RCM”) by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax concerning the supply of such goods or services or both.
Thus, in accordance with Notification no.10/2017-IT(R) dated 28.06.2017, When any service supplied by any person who is located in non-taxable territory to any person other than the non-taxable online recipient, then tax shall be paid by the recipient of service that a is person who is located in the taxable territory (other than the non-taxable online recipient)
- As per Section 2(11) of IGST ACT 2017
The supply of any service means Import of Services, where––
(i) service supplier is located outside India.
(ii) the recipient of service is in India, and
(iii) the place of supply of service is in India.
Analysis of Transaction
To understand the thin line of difference between taxability and non-taxability on salary paid to ex-pat employee, we need to understand 2 different scenarios through which services of an ex-pat can be taken:
Scenario 1: Dual Employment Agreement
In this scenario, 2 sets of agreements are executed between 3 types of a person involved in the transaction. This is called a dual employment agreement. The person involved in the agreement are:
- Foreign company
- Indian company
- An Ex-pat
The First agreement is executed between ex-pat and the foreign company regarding permanent employment. Thereafter, another agreement is executed between a Foreign company and an Indian company wherein the ex-pat will serve the Indian Company for a particular term period as stated in the agreement. As long as ex-pat renders services in India, his salary shall be paid by an Indian company. Indian companies disperse the salary portion to an ex-pat and the remaining amount to a foreign company who further disperse the amount to the family of an ex-pat. Hence, foreign companies take care of the social responsibility of the ex-pat. Under an employment agreement, an employee is provided by a foreign company to an Indian company for a fixed term.
In scenario 1, an Indian company has an employment agreement with an ex-pat, hence the ex-pat is an employee of the company therefore GST is not applicable on the services provided by the Ex-pat to the company as transactions between employee and employer are outside the preview of GST as per Schedule III. Furthermore, in the recent ruling of AAR Maharashtra, it has been ruled out that GST is not applicable on accounting entry of Ex-pat employees’ salary by Project Office of Foreign Company.
Scenario 2: Service Agreement
In this scenario, there is an agreement between a foreign company and an Indian company wherein a foreign company will deploy his employee and charge consideration against services provided by an ex-pat in India.
In this scenario, the foreign company will issue an invoice for the ex-pat salary to an Indian company. Therefore, such transactions shall be regarded as an import of service and will fall under section 2(11) of IGST act,2017. Further, in the preview of Section 9(3) of the CGST Act, Indian Companies shall be required to discharge tax liability under RCM on the service received from a foreign company.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
Posted by: CA Tarun Kapoor