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On June-26-2024, the CBIC issued Circular No. 210/4/2024-GST to address an issue concerning the valuation of import services from related foreign entities. This clarification is highly helpful for tax payers engaged in cross-border transactions with their related parties and aims to ensure uniformity in the application of the GST laws across different field formations.

As we all know, Import of business services from related persons located outside India is to be treated as supply, even if made without any consideration. {Ref –  S.No. 4 of Schedule I of the CGST Act.}

Issue faced by Industry :

Considering expansive interpretation of S.No. 4 of Schedule I of the CGST Act, the demands are being raised by some field officers seeking tax on a reverse charge basis for activities undertaken by related persons based outside India, treating these as import of services by the registered person in India, even though no consideration is involved.

In other words, businesses in India are facing RCM tax demands on services received from their related parties located outside India, even when those services are provided for free of cost.

The requests made by the Trade and Industry:

Trade and industry have requested the same treatment for foreign related parties as provided to domestic related parties under Circular No. 199/11/2023-GST dated 17.07.2023, where full ITC is available to the recipient in India.

In other words, businesses are requesting clarification that these free services from foreign affiliates should be treated the same way as similar services from domestic affiliates, which are not taxed if the recipient can claim ITC.

The CBIC’s clarification

Where a foreign affiliate provides services to a related party  in India and the Indian entity can claim full ITC, then:

  1. The service value shown on the invoice by the Indian business is considered the market value.
  2. If the Indian business doesn’t issue an invoice for these services, the value is treated as zero and considered the market value.

{Ref – Rule 28(1) of the CGST Rules.} 

Concluding Comments

The CBIC’s Circular No. 210/4/2024-GST is a welcome step in addressing the concerns of trade and industry, providing much-needed clarity on the valuation of import services from related foreign entities. By ensuring consistent treatment of such transactions, the CBIC has streamlined compliance and reduced the risk of unnecessary tax demands on businesses.

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