The 53rd Goods and Services Tax (GST) Council meeting was held on 22nd June 2024, which made several key recommendations with the objective to promote ease of doing business and reduce protracted litigation. In line with these recommendations, the Central Board of Indirect Taxes and Customs (CBIC) has issued certain circulars which seek to clarify some of the recommendations made. We have explained below the key circulars and its impact.
- Circular No 210/4/2024 – relating to import of
services between related person where Indian recipient is eligible
to full input tax credit
- Import of services from a related entity outside India is considered as a supply, even in cases where there is no consideration involved (Entry 4 of Schedule 1 to CGST Act, 2017). This provision resulted in issuance of notices for discharging GST (under reverse charge) by attributing certain activities of the overseas related entity as a service being rendered to the Indian related entity. In most cases, the litigation pertained to valuation of services, even if the transactions (in most cases) were 'revenue neutral', as the Indian related entity was eligible to avail entire input tax credit (ITC) of the GST paid under reverse charge.
- It is now clarified that if the Indian related entity is eligible for full ITC, the value of services stated in the self-invoice (if issued) by the Indian entity should be considered the open market value (as provided in the second proviso to Rule 28(1) of the Central Goods and Services Tax (CGST) Rules, 2017). In cases where the Indian related entity is eligible for full ITC but does not issue a self-invoice for the services received from the foreign affiliate, the value of such services should be considered as 'NIL' and treated as the open market value for the purposes of Rule 28(1) of the CGST Rules, 2017.
- Applying this circular, there is now no requirement to apply the valuation provisions to determine the appropriate valuation of services received from the overseas related entity, and that the value declared in the invoice should be considered for discharging GST. This circular should eliminate the entire cycle of issuing invoices, determining the appropriate valuation, depositing GST (if no invoice is issued), availing and utilizing ITC in cases where the Indian recipient of services is entitled to full IT
- Circular No 212/6/2024 – relating to conditions
for extending post-sale discounts through tax credit notes
- Post-sale discount (extended through tax credit notes) is not includible in the taxable value on satisfaction of certain prescribed conditions. One of the conditions require reversal of ITC (availed on the original invoice) by the recipient to the extent attributable to the tax credit note. Currently, there is no functionality available on the GST Portal to verify (by the supplier of tax authorities) whether this condition has been satisfied.
- The circular states that until a functionality is available on
the GST Portal to verify whether the ITC has been reversed by the
recipient, the following should be obtained from the supplier:
- GST involved in credit notes exceeds INR 0.5 million in a financial year – Certificate from a Chartered Accountant (CA) or a Cost Accountant (CMA) containing details of the credit reversed, along with other details such as the original invoice number, manner of reversal and the credit note number. This certificate should contain the Unique Document Identification Number (UDIN) to allow verification of the genuineness of such certificate issued.
- GST involved in credit notes does not exceeds INR 0.5 million in a financial year – Undertaking from the supplier (instead of the CA or CMA) with similar details as mentioned above.
- This clarification will certainly assist the suppliers in reducing litigation on account of post-sale discount credit notes. But on account of non-functionality on the GST Portal, there will be increased burden on the suppliers and the recipients (for submitting the certificate/ undertaking) even in cases of genuine transactions.
- Circular No 213/7/2024 – relating to taxability
of ESOP/ ESPP/ RSU provided to Indian employees through the
overseas holding company
- It is a common practice for certain Indian employers to offer an incentive plan to its employees, which involves issuance of shares/ securities of its overseas holding company. This incentive plan is generally a part of the compensation package and is commonly referred to as an Employee Stock Option Plan (ESOP), Employee Stock Purchase Plan (ESPP) or Restricted Stock Unit (RSU). On issuance of shares/ securities, the Indian subsidiary reimburses the cost of such shares/ securities to the overseas holding company. This reimbursement to the overseas holding company is a subject matter of dispute and the GST authorities have been demanding GST under the reverse charge mechanism of such reimbursement.
- The circular now clarifies that the purchase or sale of securities/ shares is neither a supply of goods nor a supply of services as per Section 2(52) of the CGST Act, 2017. Also, as per Entry 1 of Schedule III of the CGST Act, 2017, services by an employee to the employer in the course of or in relation to employment, shall neither be treated as a supply of goods or services. Accordingly, any cost-to-cost reimbursement to the overseas holding company for issuance of shares/ securities will be outside the purview of GST. However, GST will be applicable on any amounts charged by the overseas holding company over and above the cost of such shares/ securities as the same will be considered as rendering facilitation or arrangement services.
Given the industry practice of issuing ESOP, ESPP and RSU, this is an important clarification. This circular will help settle any on-going litigation on this issue and will also prevent GST authorities on issuing any further notices.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.