Just like there are liaison offices of foreign companies in India, there are branch or liaison offices of Indian companies as well overseas. And in this article, we are discussing the liability of GST to set up a liaison office in India.
A liaison office is a place of business that acts as a channel of communication between the principal place of business or the Head Office. However, it will not be involved in any commercial activities directly or indirectly and would maintain itself out of the inward remittances that it receives from abroad through banking channels.
When the Head Office is out of India and supply of service of liaison office is happening from India, it is called ‘intermediary service’. The payment is received in foreign exchange, but it shouldn’t be confused with ‘export of service’. Thus the GST should be payable on the amount that is received from out of India for the maintenance of the branch office.
This amount can be treated as a value of service for the liaison office being set up out of India and because it is not taking part in any other activity. Besides, as pre-RBI regulations, it is not allowed for the office to take up any business in India.
However, if the business decides to set up the liaison office in India and supply service to the HQ located out of the country, the branch will have to be liable to pay tax on the amount recovered from the HQ for these services.
Liaison Office out of India of Indian parent company
In case of the liaison or the branch office situated out of India that is providing liaison services to the Indian parent company, the situation will be reversed.
The parent company in India will remit foreign exchange overseas to maintain the office out of India. This would be allowed only of such remittance is within the limits as prescribed by RBI.
The branch office that is out of the country is ‘intermediary’ as per the definition, and therefore the point of supply will also be out of India.
There will be no ‘import of service’ when the supply of a service by liaison office out of India to the Indian parent company.
Section 2(11) of IGST Act
“Import of service” means the supply of any service, where –
(a) the supplier of service is located outside India,
(b) the recipient of service is located in India, and
(c) the place of supply of service is in India.
As you can see that the supply of service of the liaison office of the parent company in India is taking place overseas, the service supplied is not an import.
According to the section 7(4) of IGST Act, the supply of service that is imported into the territory of the country will be treated as supplies of service in the course of the inter-state trade and commerce.
No reverse charge can be applied
Again the Notification No. 10/2012-IT (Rate) dated 28/06/2017 states that if any service supplied by any person who is located in a non-taxable territory to any person (apart from the non-taxable online recipient), recipient of facility located in the taxable region (apart from the non-taxable online recipient) is required to pay tax under reverse charge.
Nevertheless, the particular notification does not create a tax liability. It will only shift the tax liability from the supplier to the recipient. Thereby, when the supply is not tax liable, the recipient will not be required to pay tax under reverse charge.
So, in conclusion, we can say that when the Head Office is in one country, and the business set up the liaison office in India, they will be considered as ‘distinct persons’.
The liaison office is ‘intermediary’, and the place of supply is where this intermediary is situated.
The supply does not fall within the definition of ‘export of service’ when the service of liaison office is supplied to its parent company. It will be inter-state supply and IGST will be payable only to liaison office in India on the amount received for maintenance.
And when the liaison office of Indian parent company is out of India, the supply of service by the liaison office is not ‘import of service’ since the place of supply is overseas. It will also be inter-state supply by definition, and the company will be exempted from the IGST.
The GST law is still in a state of flux, and other views are also possible.