Introduction
The Fitment Committee, comprising state and central revenue officials, has delayed its decision on Goods and Services Tax (GST) compliance issues concerning Foreign Shipping Lines (FSLs) operating in India. The committee is focused on gathering more detailed data and thoroughly reviewing the ongoing investigations initiated by the Director General of GST Intelligence (DGGI). These investigations revolve around the applicability of the Reverse Charge Mechanism (RCM) for services received by FSLs from their head offices located outside India. This blog explores the implications of these investigations and the arguments from both sides, providing a detailed analysis of recent developments in this area.
What Is the Reverse Charge Mechanism (RCM)?
Under the RCM, the liability to pay GST shifts from the supplier to the recipient of the services. In this case, the DGGI asserts that FSLs must pay GST on services received from their foreign head offices. These services include vessel leases, repairs, and other maintenance activities conducted outside India. According to the DGGI, these costs should be subject to GST under the RCM, even though FSLs do not have a physical presence in India.
FSLs’ Argument: No Establishment in India
FSLs operate across international trade lanes and appoint agents to handle compliance in India. However, the crux of their argument rests on the provisions under Explanation 1 and 2 of Section 8 of the IGST Act, 2017. These provisions, they argue, do not apply to them, as they do not have a formal establishment in India. Additionally, since their Indian registration is not considered a “natural” or “juridical” person for tax purposes, they believe there is no “supply” of services or goods that should be subject to GST. As a legal entity cannot contract with itself, the FSLs contend that GST is not applicable in this case.
DGGI’s Stand: Taxable Services Under Indian Law
The DGGI, on the other hand, points to Section 7(1)(c) of the CGST Act and Schedule I, which stipulates that services provided by foreign head offices to their Indian counterparts are taxable, even if there is no consideration. The DGGI highlights various expenses, such as vessel leasing and repairs, incurred by FSLs that fall under taxable categories. Thus, the ongoing investigations aim to determine whether FSLs are liable to pay GST under the RCM for these costs.
Relief Provided by Circular No. 210/4/2024-GST
In the midst of these debates, Circular No. 210/4/2024-GST provides some relief to FSLs. The circular states that if full input tax credit (ITC) is available, the value of such services can be declared as nil. While this offers temporary relief, it does not provide a final resolution. The Fitment Committee is expected to make a more comprehensive decision by the end of the year.
Key Case Laws and Precedents
Several key case laws have provided guidance on the applicability of GST for foreign entities without physical presence in India:
- Sutherland Global Services Pvt Ltd v. Union of India (2017) – The case examined whether offshore services rendered to Indian subsidiaries by foreign entities are subject to Indian GST laws.
- M/s Flipkart Internet Pvt Ltd v. Commissioner of Service Tax (2019) – This case assessed the nature of services provided by foreign suppliers and their taxability under the RCM.
- GoDaddy India Web Services Pvt Ltd v. Assistant Commissioner of Commercial Taxes (2016) – The ruling in this case provided insights on services offered by foreign entities to their Indian counterparts and their tax obligations.
These rulings have been used by both FSLs and tax authorities to justify their respective stands on GST liability.
Conclusion: Awaiting the Final Verdict
The decision on GST compliance for FSLs remains deferred as the Fitment Committee continues its review. The ongoing investigations by the DGGI are expected to provide clarity, but a conclusive ruling may take time. In the interim, FSLs can rely on the temporary relief provided by Circular No. 210/4/2024-GST, but they must remain vigilant about future developments.