Local Arms of MNCs Come Under Service Tax Scanner

Anti-evasion wing is summoning executives of many cos to check if they have paid service tax

Indian tax officials are looking at various business activities undertaken by the local units of multinationals on behalf of their parent companies to ascertain whether services tax was paid on them. Such marketing, sourcing and development exercises have hitherto been regarded as exports and were even liable for tax refunds but with new place of supply rules coming into force, the authorities contend that service tax applies.

The anti-evasion wing dealing with indirect taxes has summoned executives of a number of companies across sectors to check on business details and asking if they have paid service tax that could run into hundreds of crores of rupees. Service tax authorities have also issued notices to companies. Officials are looking into transactions by many big names and brands engaged in information technology, IT enabled services, marketing and sourcing, said several people aware of the development.

Tax practitioners have asked clients to quickly examine contracts to ensure they are not on the wrong side of the law and have sought clarity from officials on rules related to the concept of `intermediary' that have led to the issue arising. They also point out that this comes as the government has promised a non-adversarial and stable tax regime to foreign investors to lure investments and has sought to ease the climate of hostility in this regard. “The concept of intermediary has created confusion in the case of ser vice providers... The government should relook at the provision as it is ambiguous and leaves lot of room for interpretation,“ said Bipin Sapra, partner, EY.

Several local units are engaged in marketing and promoting goods of the parent, such as passing on orders. The parent deals directly with the customer and pays the Indian unit in foreign exchange for its assistance. Similarly , other companies help parent firms in sourcing products from India. In the past, these transactions were treated as exports and the Indian entities facilitating them got refunds on input taxes paid by them.However, changes in place of supply rules in October 2014 expanded the definition of intermediary .

The impact of this has been that such services, hitherto treated as exports, came within the ambit of service tax. Citing this change, tax authorities have not only held back refunds in a number of cities but also sent out letters seeking details of businesses, said the people cited above.

Tax officials maintain that MNC subsidiaries were facilitating the execution of contracts between the Indian client and foreign parent, essentially functioning as intermediaries and therefore liable to service tax. The prima facie view being taken by authorities is that if there are three parties involved, then one of them could be an intermediary.

Tax experts are not convinced by this logic, arguing that most entities carried out work for the parent, exporting services, receiving payment in foreign exchange and therefore are not liable to tax.

“There was a sigh of relief for service exporters when to a great extent a finality had been obtained in the interpretation with regard to meaning of exports under the export of services rules,“ said Anita Rastogi, partner, indirect tax, PwC. The enlargement of the definition of `intermediary' has led to this new twist, she said.

The underlying pattern of each transaction needed to be examined to determine whether the term `intermediary' could be applied, she said. Some experts said the argu ment is being used to deny tax refunds. “At a time when service exporters are facing a cash crunch, instead of helping the exporters to survive, the export refunds are rejected on flimsy grounds across the country ,“ said Sachin Menon, partner and national head, indirect tax, KPMG India. Menon said the denial of rightful refund claims should be viewed with the same seriousness as evasion.

MNCs Must Go for Advance Rulings

The showcause notices on MNCs reveal that these are grey areas in India's service tax law that has undergone many changes over the last two decades. But frequent disputes owing to differing interpretations raise the compliance burden of MNCs and will bring the country further down in the ease of doing business index. An efficient dispute-resolution mechanism is needed. MNCs, which operate in different tax regimes, should use advance rulings. The facility, available in India, helps them to know their tax dues ahead. But our tax laws should also be simple and clear.

The Economic Times, New Delhi, 22nd Sept. 2015