GST Implications on Salary secondment: All You Need to Know

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Secondment is a temporary arrangement where an employee is moved from one position to another, usually within the same group of companies, for a specific period, benefiting all involved parties. This practice is common among global entities and corporations with a presence in various jurisdictions through group entities. Capitalizing on the opportunities presented by the globalized economy and leveraging locational advantages, overseas group companies often enter agreements with affiliates or local entities. The primary goal is to optimize economic advantages, whether in terms of manpower or other resource availability, to efficiently carry out specific tasks assigned by the overseas company.

As part of these agreements, secondment contracts are established, where employees from the overseas company, possessing the specific skills required, are deployed for the duration estimated for task completion. This practice has implications under both direct tax (income tax) and indirect tax (service tax / Goods and Services Tax).

Employees often prefer to maintain their employment contract with the original employer rather than the seconded employer due to reasons such as continued pensionary benefits. Typically, such agreements involve three parties: the employer initiating the secondment, the employee being seconded, and the employer to whom the employee is assigned. These arrangements are commonly known as “International hiring out of labor.”

According to Section 9(1)(ii) of the Income Tax Act, 1961 income in the form of salaries is considered to accrue or arise in India and is deemed to have been earned in India if it is received for services rendered in the country. Under the Act, regardless of the residential status of the employee, salary income is taxable in India if it is deemed to have been earned for services provided in India. For seconded employees who are tax residents of a country with which India has a Double Taxation Avoidance Treaty, the Indian tax authorities’ right to tax salary income depends on the terms outlined in the respective treaty.

 The employer and the host must mutually determine who will be responsible for compensating the secondee during the secondment. In cases where the secondee bears the remuneration, clear arrangements should be established for reimbursement by the host entity. Consideration should be given to whether the employer has the flexibility to adjust this fee during the secondment, accommodating factors such as any salary increases for the secondee. Additionally, the employer and the host need to reach an agreement on funding supplementary payments to the employee, including overtime, bonuses, and expenses. The allocation of such payments is likely contingent on productivity and whether they are already included in the overall payment structure.

In the typical scenario, even though the secondee is rendering services to the host entity, they will remain on the payroll of the original entity to preserve the right of lien on employment and to access social security benefits in their home country.

Salary secondment and GST                                                                           

Under the Goods and Services Tax (GST) framework in India, the secondment or deputation of expatriates, commonly referred to as “deemed supplies,” falls within the purview of GST if the Indian company reimburses the expatriate employee for the services rendered. The specific details of GST applicability on the secondment or deputation of expatriates can vary depending on various factors such as the nature of the services provided, the contractual arrangements between the parties involved, and the specific GST regulations in force.

When the expatriate works for an Indian company and receives payment from the company, the Indian company assumes the role of the service recipient. The services provided by the expatriate are then categorized as a “supply” under the GST law, necessitating the Indian company to remit GST based on the value of the deemed supply at the applicable rate. Conversely, if the Indian company does not reimburse the expatriate for the services rendered, the secondment or deputation of the expatriate remains exempt from GST.

It is crucial to emphasize that the precise applicability of GST to the secondment or deputation of expatriates can vary based on factors such as the nature of the services, contractual agreements between the involved parties, and the specific GST regulations in effect. Consequently, it is advisable to seek guidance from a tax professional or refer to the pertinent GST regulations and guidelines before engaging in the secondment or deputation of an expatriate to or from India. In the context of employee secondment, it is a straightforward transaction involving the supply of manpower from one entity to another. The receiving entity does not assume the role of either employer or economic employer of the seconded employee. Consequently, all subsequent tax treatments under direct and/or indirect tax laws follow accordingly.

When an overseas company has seconded an employee to its affiliated entity in India to make the skillset of the employee available. The Indian entity reimburses the overseas company generally on a “cost-to-cost” basis. Several judicial forums consistently assert that in the case of secondment of an employee to another company, the receiving company becomes the economic employer of the employee, leading to specific tax implications under both direct and indirect tax laws. The cost is reimbursed based on a cost-to-cost structure, emphasizing that once the relationship is deemed to be that of an employer-employee, there are significant differences in tax treatment under both direct and indirect tax laws.

The Supreme Court, in the matter of C.C., C.E. & S.T., Bangalore (Adjudication) v. Northern Operating Systems Pvt. Ltd. examined whether the practice of seconding employees from a foreign group company to an Indian entity constituted manpower supply service, thereby necessitating the Indian entity to pay service tax under the reverse charge mechanism (RCM). The court had held that as the place of supply is in India and the supplier is situated outside India, it qualifies as “import of services” and is subject to GST under the reverse charge mechanism.

Treating such transactions as manpower supply services from a foreign group entity prompts the need to ascertain the place of supply for GST applicability. In this context, Section 13(3) of the IGST Act, as the residuary provision, becomes applicable, given the absence of a specific clause for manpower supply services. Consequently, the place of supply would be India, representing the location of the Indian entity.

To classify a service under the manpower recruitment or supply agency service, certain conditions must be met. These conditions include the agency being any person engaged in providing a specified service related to the recruitment or supply of manpower, either temporarily or otherwise, directly or indirectly, and to any other person. Further, the supply of manpower can be differentiated from a contract of employment on various factors. The primary control and supervision in supply of manpower always remain with the supplier/contractor although the secondary control and supervision would be with the recipient. However, in an employment contract, the complete control and supervision of the employee is with the employer and not with any other person. Further, the privity of contract of the worker is with the contractor in a manpower supply service and not with the recipient/principal employer for whom work is done. However, in employment contract privity of contract is between the employer and employee.

The Central Board of Indirect Taxes and Customs (CBIC), in the instruction dated 13th December, 2023 directed the concerned officials that, “only in the cases where the investigation indicates that there is material evidence of fraud or wilful misstatement or suppression of fact to evade tax on the part of the taxpayer, provisions of section 74(1) of CGST Act may be invoked for issuance of show cause notice, and such evidence should also be made a part of the show cause notice.” Read more: CBIC issues Instructions on GST Proceedings u/s 74(1) for Salary Secondment invoking Extended Limitation pursuant to Representations

Attention is invited to the Hon’ble Supreme Court’s judgment dated May 19, 2022 in the case of CC, CE & ST, Bangalore (Adj.) etc. Vs. Northern Operating Systems Private Limited (NOS) on the issue of the nature of secondment of employees by overseas entities to Indian firms and its Service Tax implications. Representations have been received in the Board that, subsequent to the aforesaid judgment, many field formations have initiated proceedings for the alleged evasion of GST on the issue of secondment under section 74(1) of the Central Goods and Services Tax Act, 2017 (CGST Act).

Exclusion of Employee Salary Secondment from GST Coverage: Reasons and Considerations

The consideration of joint employment arises concerning secondment, questioning whether it can be classified as a joint employment scenario. It’s crucial to note that there is no legal prohibition preventing an employee from being associated with more than one employer. If the documentation specifies that the employee will be jointly employed by both companies, such a transaction remains covered by Schedule III of the CGST Act. This understanding finds support in the Hon’ble Supreme Court’s decision in the case of Commissioner of Income-Tax Vs Eli Lilly and Co, (India) P. Ltd., emphasizing that an employee continuing on the payroll of an overseas company doesn’t affect their potential employment with an Indian company.

In the realm of GST, for a transaction to qualify as a supply, there must be reciprocity, with the provider of consideration expected to receive something in return. Reimbursement of salary from the seconding company to the other doesn’t qualify as a supply, as there is no service being provided by the seconding company to the recipient. The underlying transaction is the service provided by the employee to the recipient company, falling under Schedule III of the CGST Act. If no mark-up is charged over and above the salary, it may be argued that it doesn’t amount to a supply. Additionally, considering the Franco Indian Pharmaceutical (P) Ltd (supra) case, it’s conceivable to assert that seconding an employee creates a joint employment relationship by conduct, where both companies act as employers to the employee. However, the joint employment agreements has to be drafted meticulously in order to preserve the employer-employee relationship.

There can also be cases where staff is employed by one or more employers who normally share the cost of such employment. The services provided by such employee will be covered by the exclusion provided in the definition of service. However, if the staff has been engaged by one employer and only made available to other for a consideration, it shall not be a case of joint employment.

Another arrangement could be where one entity pays the salary and other expenses of the staff on behalf of other joint employers which are later recouped from the other employers on an agreed basis on actuals. Such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.”

However, the question arises as to what will be the treatment of such transactions if documentation doesn’t stipulate for joint employment clearly. it can still be called as joint employment. The said question was answered in affirmative by Mumbai tribunal in Franco Indian Pharmaceutical (P) Ltd. Vs. Commissioner of S.T., Mumbai reported at 2016 (42) S.T.R. 1057 (Tri. –Mumbai). In this case, tribunal held that services rendered in the course of employment have been kept outside the purview of service tax levy which is not only for the period under consideration but even at present under the negative list regime.

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