The shifting sands of India’s indirect taxes

Crackdowns, exemptions, reviews, and payment orders – India’s GST laws are pulling taxpayers in many directions at once.

The goods and services tax (GST) has been a significant reform to India’s taxation system. The GST law aims to streamline and simplify the tax structure by bringing all goods and services under a common tax regime. However, because it is relatively new, it is bringing new issues for businesses – aside from the legacy tax issues they face.

TIMEFRAMES

Laws of limitations are a critical component of the legal framework. They define the maximum amount of time for action to be taken under a particular statute.

In GST law, there are very clear limitations on the time that tax authorities have to issue show-cause notices and to pass orders for taxpayers who either do not pay or short pay their dues.

The law requires taxpayers to file a statutory annual return every financial year, on or before 31 December. In the past, the Central Board of Indirect Taxes has issued notifications to extend the due dates for particular years. This has been done for July 2017 to March 2018; 2018-19; and 2019-20. In turn, these extension notices have had the effect of limiting the issuance of show cause notices and consequent orders.

Recently, the board extended the specified time limit for issuing orders on GST-related matters. The extension is specifically for cases where tax was not paid, or was short paid for reasons other than fraud, wilful misstatement or suppression of facts. As there must be three months between issuing show-cause notices in such cases and the issuance of an order, the date for issuance of show-cause notices has also been extended accordingly.

The GST Department is under immense pressure to act, especially for the period of 2017-18, where the last date for issuance of show cause notice was 30 September 2023. This has resulted in a sudden surge of notices being issued to taxpayers and a flurry of investigations.

Presently, the industry is reeling with the amount of show-cause notices on identical issues with similar allegations. As 31 December 2023 is the cut-off date to pass orders for the 2017-18 period, taxpayers will have to remain watchful. They should appear at all personal hearings before the department and make their submissions in detail, with documents.

GST AND SECONDMENT

The taxability of secondment arrangements is one area that is currently at the forefront of concerns. It is gradually increasing in significance for multinational companies.

It is a common market practice for Indian companies to second employees from offshore parent companies to meet specific business needs within the Indian entity. Generally, businesses were of the belief that the tax situation around reimbursements for seconded employees was more or less settled. However, the Supreme Court has revisited this issue.

In CC, CE & ST – Bangalore (Adjudication) etc v Northern Operating Systems (NOS judgment), the court held that an Indian subsidiary was the service recipient of manpower recruitment and supply by its overseas group entity. This specifically related to seconded employees. The court held the Indian subsidiary was liable to pay a service tax on the reverse charges made between the Indian and overseas entities. Although this judgment was made in context of service tax, GST tax authorities have relied on it extensively to demand Indian businesses pay GST on money paid to expats after July 2017.

While upholding the levy of tax in the NOS judgment, the court gave a number of observations that might help businesses to identify whether they have any exposure to tax.

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  In the NOS judgment, the Indian entity was providing back-office services to the overseas entity. Deputation was sought for this purpose.

• While the seconded expats were working in India, their salaries were being paid to them by the overseas entity in their home country.
• The amount of salary was reimbursed by the Indian entity to the overseas entity with a markup and an administrative cost. The court noted that this arrangement meant the seconded employees were on the payroll of only the overseas entity.

In view of the globalisation of businesses, more and more Indian companies are deputing foreign nationals to serve their clients. The Supreme Court’s NOS ruling is creating financial hindrance by increasing the tax liability on Indian businesses. Therefore, it becomes imperative for Indian businesses to optimise their tax structure with better secondment arrangements when bringing in foreign nationals.

The NOS judgment was rendered on a very specific set of facts that may also be distinguished by the scope of work undertaken during the deputation, the obligation to pay salary to the seconded employee, reimbursement to the offshore parent company, mark-up and other fees paid to the offshore company during reimbursement, and employment conditions stipulated under the employment agreement. However, the possibility of a dispute may not be ruled out.

Apart from the GST department, the Income Tax Department has also relied on the NOS judgment for issues surrounding fees for technical services and the taxability of reimbursements. As the Department of Revenue is pushing for more tax collection around secondments, it seems that this may be just the tip of the iceberg. Indian businesses have a long road ahead of them.

ONLINE GAMING

The GST Council has imposed a 28% GST tax on the full face value of bets placed on online gaming, as opposed to gross gaming revenue. The decision was implemented from 1 October 2023, with a review after six months.

Previously and globally, online gaming businesses in India paid value-added tax and even GST on gross gaming revenue – that is, the stake less winnings. Further, there was a huge debate about whether to classify online gaming as a game of skill or a game of chance.

A consequence of the GST Council’s decision is the need to decide whether the amendment is clarificatory and, therefore, has a retrospective application, or whether it should be made effective only after 1 October 2023. This is important for estimating past period liabilities, if any.

Given that jurisprudence around online gaming was developing before this amendment arrived, businesses are having a tough time in grappling with the change. In fact, some businesses have already received show-cause notices for the 2017-18 period. Should such liabilities crystalise, these businesses will be required to cough up the tax and interest, with a penalty added on top. Further, on account of input tax credit restrictions, any GST paid will be a cost to the businesses.

As GST is now applicable on the full face value of bets, businesses are employing retention strategies that allow gamers full credit for their stakes. Thus, businesses are presently taking the hit and this is causing cash flow issues – a practice that is not sustainable in the long run. Also, while it may be feasible for big businesses to apply this retention strategy, it may not be practical for smaller businesses, which may be forced to shut down.

Amendments have also made it compulsory for offshore e-gaming companies to be registered in India if they allow users in India to access their services. To enable registration, a simplified scheme of registration has been provided for in GST laws.

To ensure compliance, the GST law now provides that any kind of access, of any service or platform provided by an offshore company, by any user in India, will be blocked if the companies do not register. Further, any information generated, transmitted, received or hosted, in any computer resource, used for supply of online money gaming by a non-compliant supplier, will also be blocked.

While stringent measures have been built into the GST laws, public domain data shows that no new offshore players have so far registered. Earlier this year, the Enforcement Directorate cracked down on foreign registered online gaming companies that were suspected of money laundering. Given this, it should only be a matter of time before non-compliant offshore e-gaming businesses are tracked by the GST authorities. It is clear that the authorities are keeping a keen eye on non-compliance in this sector.

One will have to wait and watch to see how the industry reacts to the policy changes within the policy check period of six months imposed by the GST Council. Given that the industry is already up in arms against the new taxation regime, it is hoped that policymakers take a balanced and holistic view when they review the changes, for the economic benefit of the country.