GST implications on Foreign Liaison Offices in India
In the age of globalisation where world economy is open for everybody, any company can set-up its business in any another country in any form they want. Based on the fact, if any company residing outside India wants to initiate its business in India, it can enter by setting up liaison office or project office or branch office or subsidiary in India with the prior approval of Reserve Bank of India. Establishing any of the aforesaid setups have different tax implications. In this article we would analysis Goods and Service Tax Implications on liaison offices of foreign companies in India.
Before assimilation of the detailed GST implications, first get into the relevant extracts from the provisions of GST laws:
> Section 22 of the CGST Act, 2017 i.e. registration: Every supplier, having aggregate turnover of forty lakhs or twenty lakhs rupees for supply of goods or services respectively in a financial year is liable to get themselves register in the states from where he makes a taxable supplies.
> Section 7 of the CGST Act, 2017 i.e. meaning of supply: All form of supply of goods or services or both, for a consideration, by a person for business and its furtherance including supplies mentioned in Schedule-1 of S.7 of the CGST Act, 2017 i.e. supplies without consideration between related persons or distinct person as specified in S. 25 of the CGST Act, 2017, when made in course of furtherance of business.
> Section 25 of the CGST Act, 2017 i.e. distinct person: A person who has obtained more than one registration under same PAN, shall be treated as distinct person under GST laws.
> Explanation 1 to Section 8 of the IGST Act, 2017 i.e. distinct person: where the person has an establishment in India and any other establishment outside India shall be treated as distinct person.
After brief introduction of relevant GST provisions, let us understand Goods and Service Tax implications on liaison office in India below:
GST implications on Liaison Office:
i. What is liaison office: Liaison office is not defined under GST laws, however in terms of Foreign Exchange Management Regulations, 2016, Liaison Office means a) place of business to act as communication channel between the parent company and Indian companies, b) which cannot undertake any commercial activity, c) receives inward remittances via normal banking channels.
ii. Whether any taxable supplies are made by liaison office: Liaison office would work on the directions of its head office as per the terms and conditions stipulated by RBI and does not have any business activity of its own. Therefore, one can say that liaison office would not engage in supply of goods or services or both in terms of S.7 of the act.
iii. Registration: Liaison office is strictly prohibited to undertake any trading or commercial activity. It even cannot enter into any business contracts in its own name.
Therefore, there is no taxable supplies made by the liaison office and hence there is no requirement of registration under GST laws in terms of S. 22 of CGST Act,2017.
iv. Taxability on service by liaison office to foreign office: In terms of explanation 1 to S.8 of IGST Act, liaison office and foreign office deemed as distinct person for GST purposes Service by liaison office to its foreign office would not cover under transaction covered in schedule-I of S.7 of CGST Act, 2017, as liaison office and foreign office are neither related person in terms of explanation to S.15 of the act nor distinct person in terms of S. 25 of the act. Both would be treated as single business entity.
v. Taxability on reimbursement claimed by LO from HO: As per above discussion, in terms of Schedule-I of S.7 of the CGST Act, 2017, supply between related or distinct person even for without consideration would also become supply for GST purposes. However, this concept does not applicable for the transactions between HO and LO, as liaison office is working as an extended arm of the foreign entity and LO have no independent operations of its own. Therefore, any amount received by liaison office from head office, such as rent, salaries, electricity, travelling etc., for meeting out its expenses would also fall out the preview of supply of service and hence, not taxable.
vi. Relevant case laws/ advance ruling judgements: Hon’ble Rajasthan AAR- M/s Habufa Meubelen B.V wherein it was held that “when the liaison office is working as per the terms and conditions as mentioned in FEMA regulations, the reimbursement of expenses and salary paid by head office to the liaison office, is not liable to GST, as no consideration for any services is being charged by the liaison office
Hon’ble Tamil Nadu AAR- M/s Takko Holding GmbH wherein it was concluded that liaison office works as employees of foreign office and none of the activities of liaison office is covered under the definition of service and therefore not liable to GST.
However, Hon’ble Karnataka AAR in the matter of M/s. Fraunhofer – Gesellschaft Zur Forderung der angewandten Forschung e.v, Germany-Liaison Office it was held that activity undertaken by liaison office would be eligible as supply and Liaison office is liable for registration under GST Laws.
It may be noted that, in our opinion Hob,ble Karnataka AAR missed out some basic facts of the liaison office and its conditions under FEMR, 2016. Therefore, we understand that activity of liaison office is purely dependent upon its head office and hence non taxable under Indian GST Laws.
vii. Conclusion: Liaison office is only a communication channel between the Head office and the Indian customers and does not undertake any income generating activities of its own. It does not charge any separate consideration for the services provided to the Head Office. Therefore, it is difficult to distinguish a liaison office from the principal office. Therefore, the services provided by the Liaison Office does not fall under the purview of the term ‘supply’ under GST and hence, Liaison office is neither required to pay GST nor get themselves registered under the GST regime.
Disclaimer: Information contained herein are only for reference purposes and are based on the information publicly available as on the date of this publication i.e., 14th May 2021. The author or speaker takes no responsibility for its reliability and accuracy. It is advised to take appropriate legal/professional advice before undertaking any business activity or otherwise based on the above.