This article would help persons who have large number of foreign clients, persons who attend foreign business events held outside India, or have holding company outside India including procurement of services from outside India.
Service sector plays an important role in technology diffusion especially in areas such as financial services, software, information technology, computing and information process or management consultancy. In GST regime read with article 269A of Indian constitution, supply of goods or services or both in the course of import into the territory of India shall be deemed to be supply of goods, or of service or both in the course of inter-state trade or commerce. In simple words, import of services would be treated as inter-State supply for taxation purpose.
Import of service
As per Section 2(11) of IGST Act, import of service means supply of service, where,
a) Supplier of service is located outside India
b) Recipient of Service is located in India
c) The place of supply of service is in India.
Taxability of Import of Service under GST includes the following: –
a) Import of service for a consideration whether or not in the course or furtherance of business [Section 7]
b) Import of service without consideration by a taxable person from related person or from any of his establishment outside India, in the course or furtherance of business [ Schedule I to CGST Act].
Applicability of RCM in case of Import of Service
In terms of Notification no.10/2017-IT(R) dtd 28.06.2017, one of the notified category on which GST is applicable under RCM is “any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient”.
IGST liability under RCM in case of Import of service has to be paid in cash/bank. GST ITC to the extent of IGST paid can be availed and utilized in the same month subject to ITC eligibility.
Place of Supply in case of Import of Service
In case of import of service, if the nature of service does not fall under the one specified under Section 13(3) to 13(13) of IGST Act, then place of supply shall be the location of the recipient of service. Hence, IGST is to be discharged under RCM when recipient is in India.
RCM would generally be applicable on the cases wherein the place of supply would be that of the recipient of service (generally located in India).
No liability under RCM on import based on place of supply concept : Few scenarios
1) Intermediary Services: M/s. XYZ receives service from M/s. ABC (US based company) towards procurement of customer orders for business. M/s. ABC charges commission of 10% on all payments received from the prospect for services provided by M/s. XYZ to such customer.
In the above case, M/s. ABC is acting as an agent between M/s. XYZ and the customer. Service would fall within the meaning of ‘Intermediary services’. Hence, the place of supply shall be location of the supplier of service i.e. M/s. ABC as per section 13(8)(b) of IGST Act. Service provider (M/s. ABC) and the place of supply (US) is located in non-taxable territory, IGST is not required to be discharged under RCM.
2) Event based Services: M/s. A & Co. an architecture consultancy firm makes a payment to M/s. XYZ (foreign party) who is an organizer of exhibition. Few of the employees of M/s. A & Co. were sent to attend the exhibition which is held in Europe.
In the above case, as per section 13(5) of the IGST Act, the place of supply shall be the location where the event is held i.e. USA.
Service provider (M/s. XYZ) and the place of supply (Europe) is outside the territory of India. Hence IGST is not required to be discharged under RCM.
3) Services relating to Immovable Property: A goes for a business trip to Dubai and incurs accommodation expense towards stay in JW Marriott located in Dubai.
In the above case, the place of supply shall be the location of immovable property i.e. Dubai as per section 13(4) of IGST Act. Here the service provider and the place of supply is Dubai which is outside the territory of India. Hence IGST is not required to be discharged under RCM.
A comprehensive examination of Form 15CA/CB (foreign remittances), various agreements/ contracts entered between the service provider and recipient holds the key to understanding the taxation of such transactions. Few case studies also discussed for better understanding of RCM concept.
Case study #1:
Facts of the case:
1. Whether the above is an import of service under GST?
2. If yes, what would be the time of supply for such transaction?
1. Levy – Liable which is established based on Schedule I as services are from related person.
2. Valuation – Open market value would generally not be available, actual cost center allocations could be used.
3. Place of supply – In India in terms of Section 13(3) (a), therefore, satisfying Import of Service definition
4. Time of Supply –
a. Although they are related parties/associated enterprises, there is no entry in the books of ABC Pvt Ltd, thus Section 13(3) for time of supply would not be applicable.
b. Although, Section 13(5) would be applicable, and the liability would be 20th of every month, i.e. GSTR 3B due dates. (subject to extensions).
Therefore, here is a case where no payment is made, no accounting entry is recorded although the activity is liable as an import of service under GST.
Case study #2:
ABC Pte Ltd (Singapore) has entered into an agreement with XYZ Ltd. (India) for provision of administration/management services. This has been outsourced to PQR Associates. ABC Pte Ltd considers this transaction as an intermediary service under GST. (Although, services provided are on principal to principal basis).
The supplier PQR & Associates provides services to XYZ Ltd., invoices ABC Pte Ltd. as an export of service (without payment of GST).
For XYZ Ltd. as the transaction is an intermediary service, and place of supply is outside India, it is not an import of service and GST under reverse charge is not payable.
GST would be payable on such services, as the concept of ‘intermediary services’ may not hold good in this scenario. Intermediary under GST – arranges or facilitates the supply of goods or services or both, or securities, between two or more persons, but does not include a person who supplies such goods or services or both or securities on his own account;
Therefore, PQR & Asst. would raise an export invoice to ABC Pte Ltd, although for XYZ Ltd., as it is not an intermediary service, i.e. services provided on principal to principal basis, GST is to be paid under reverse charge considering it to be an import of service. The structure in place may lead to tax evasion.
Taxability of Intellectual Property Rights
There is a practice to charge for intellectual property rights by a holding company outside India wherein it agrees to provide right to intellectual property in terms of goods and/or IT software and other related services.
Under erstwhile VAT laws, it was understood that where the transaction involves granting the right to use trademarks, patents, technical know-how or technology right etc., then it would be construed as transaction in goods. Transfer of technical know-how was accepted as ‘goods’ and constituted as sale under VAT as provided in case Mechanical Assembly System Vs State of Kerala [2006, 144 STC 536]. As per Supreme Court decision in TATA Consultancy Services vs. State of Andhra Pradesh, the canned software is ‘goods’ for the purpose of levy of VAT.
Under GST regime, temporary transfer or permitting the use or enjoyment of intellectual property right constitutes supply of service as per Schedule II r/w Section 7(1A) of CGST Act. Following are the rates applicable for Intellectual Property Right based on HSN:-
|HSN||Rate of tax||Description of Service|
|99733||12%||Temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP) right in respect of goods other than information technology software.|
|997331||18%||Temporary or permanent transfer or permitting the use or enjoyment of intellectual property (IP) right in respect of information technology software.|
|998599||18%||Other support services– management services for rights to industrial property (i.e. trademarks, franchises, etc.).|
Based on agreement entered between service provider and recipient, analysis can be done with respect to treatment of usage of Intellectual property right to ascertain if such right is in respect of goods or information technology software. The GST rate varies in each of the categories.
Also, it is important to note, the Time of Supply applicable [Proviso to section 13(3) of CGST Act] to such scenarios. When procured from associated enterprises and from others, the time of supply varies as discussed in earlier paragraphs.
Illustration for easy understanding of time of supply:
M/s. ABB& Co.(Indian Company) has a holding company M/s. SS & Co. which is Germany based company.
M/s. ABB & Co. makes royalty payment towards use of intellectual property right in respect of ‘’brand name” of holding Company. Let us assume payment is made on quarterly basis amounting to Rs. 6,00,000/- (April-June).
|Date of entry in the books of the recipient (a)||Date of payment
|Time of Supply
(a)/(b) which is earlier
|GST to be discharged under RCM|
(Provision entry passed amounting to Rs.2 lakh)
GST to be paid in April 2018 GSTR 3B
|GST to be discharged
(Provision entry passed amounting to Rs.2.5 lakh)
GST to be paid in May 2018 GSTR 3B
|GST to be discharged
|Invoice received on 23.06.2018
(Amounting to Rs.6 lakh)
GST to be paid in June 2018 GSTR 3B
|GST to be discharged
=12%*1,50,000 (6 lakh – 2 lakh – 2.5 lakh)
♦ The TOS provision of 60 days for payment to vendor/61st day if unpaid would not be applicable here.
♦ ITC on the GST paid under reverse charge would be eligible in the same month.
♦ In the instance that, the Invoice value for the quarter is lesser than RCM paid based on 2 months provisions, there would be no requirement to reverse RCM paid or ITC claimed, as it has a NIL revenue impact.
Recent change in Section 13(13) of IGST Act (w.e.f 1st October 2019):
In terms of Section 13(3) of IGST Act 2017, the place of supply for services where goods have to be made physically available by the recipient to the supplier of service would be the location where services are performed.
Based on industry representation, to enable such transaction to be considered as an export of service, the place of supply had to be shifted to the location to recipient of service.
To enable the same, notification 04/2019-Integrated Tax(rate) was issued. Summary of the changes made provided below:
Certain services have been listed where the place of supply would be the location of the recipient of services irrespective of goods being made available to the supplier. Various Research & Development services (for Pharma sector only):
1. Integrated discovery and development
2. Evaluation of the efficacy of new chemical/ biological entities in animal models of disease
3. Evaluation of biological activity of novel chemical/ biological entities in in-vitro assays
4. Drug metabolism and pharmacokinetics of new chemical entities
5. Safety Assessment/ Toxicology
6. Stability Studies
7. Bio Equivalence and Bio Availability Studies
8. Clinical trials
9. Bioanalytical studies
In such cases, where the suppliers are located outside India, and the recipients are within India, such services would now be liable under reverse charge as an import of service.
(This article has been prepared by Varsha Vasante Gowda (Audit Executive) and CA Akshay Hiregange vetted by CA Mahadev R. The author could be reached at email@example.com and firstname.lastname@example.org .)
(Republished after updation with Amendment since last Publication)