NEW DELHI: Indian corporates are encountering certain challenges related to GST compliance, particularly with the self-invoicing and reverse charge mechanism (RCM) for services received from foreign entities. 

The government is taking steps to address these concerns by issuing Circulars, although the pace of these developments has been somewhat gradual. While Infosys recently secured partial relief from demands raised by the Directorate General of GST Intelligence (DGGI) over free services rendered by related foreign subsidiaries, other companies may also be on their way to some relief, particularly those that have received invoices from abroad. 

According to experts, in these scenarios, the invoices issued by foreign parties may not play a significant role in determining GST liability. Instead, the self-invoice raised by the Indian counterpart becomes the key document for GST compliance, as per Section 31(3)(f) of the Central Goods and Services Tax (CGST) Act. This means that the value stated in the self-invoice will be the basis for any GST demand, providing a window of hope, for corporates who may find themselves facing unexpected liabilities. 

“There are several other companies which are facing similar issues, where an invoice has been issued. In such cases, it is pertinent to note that, the invoice of the foreign party would not be of much consequence as the self invoice raised by the Indian counterpart would be the GST invoice u/s 31(3)(f) of The CGST Act. Hence, the value as per such self-invoice should be considered for a GST demand in case any,” said Vivek Jalan, partner with Tax Connect Advisory. The Supreme Court’s ruling in the Northern Operating Systems case established that service tax on RCM applies to salaries provided to expatriates by related Indian companies, treating it as a service rendered by foreign holding or subsidiary companies.

This principle has been extended under GST, where even services provided without consideration by foreign entities to related Indian companies are considered a supply. As a result, the Indian companies involved are liable to pay GST under the RCM. Clearing the confusion, Circular No. 199/11/2023-GST, issued on July 17, 2023, clarified that in cases where branches of the same company operate across states—such as a Maharashtra branch providing services to a Haryana branch—if the Haryana branch is eligible for full Input Tax Credit (ITC) and no invoice is raised by the Maharashtra branch, the supply value would be treated as NIL, and no GST would apply. However, the question which needs further answer is what happens in a case when invoices are issued by foreign subsidiaries.

Meanwhile, there are also ambiguities in interpretation of the Explanation I under section 8 of the IGST Act 2017 in relation to the definition of distinct persons, which need to be clarified further.

“The dispute has risen predominantly due to the definition of the import of services in the IGST act. As per revenue, they are relying on explanations in section 8, which provide that a branch and an Indian entity will be treated as distinct persons,” said Abhishek A Rastogi, founder of Rastogi Chambers.

Arguments to contest the Infosys matter

According to Shivam Mehta, Executive Partner, Lakshmikumaran and Sridharan, the DGGI’s interpretation of the services being availed by Infosys from branches and leviable to GST under reverse charge may not hold good in case the place of supply of the services falls outside India. The prominent services covered under the said criteria include intermediary services and performance-based services.

Regardless of the taxability, the valuation, as claimed by Infosys can be taken care by Circular 210/4/2024 dated 26th June 2024, which has clarified that the value of supply as declared in the invoice or Nil (in case no invoice has been issued) to be the open market value in case full ITC is available to recipient. 

"However, the possibility of department denying the benefit of circular to assesses wherein there is consideration involved between the parties cannot be ruled out since the circular has not specifically dealt with such situations, if read carefully," Mehta stated.