Over­haul of Jobs Sur­vey Pro­posed

Ser­vice tax au­thor­i­ties re­fer mat­ter to RBI, en­force­ment direc­torate

The Economic Times - - Front Page - Deepshikha.Sikar­war @times­group.com

New Delhi: Multi­na­tion­als that have chal­lenged ser­vice tax levies on salaries paid over­seas to ex­pats em­ployed in In­dia may be faced with a more fear­some chal­lenge — scru­tiny un­der the For­eign Ex­change Man­age­ment Act (FEMA), which deals with forex vi­o­la­tions.

Re­mit­ting the salary of any­one em­ployed in In­dia by an en­tity in the country in for­eign cur­rency is not per­mit­ted un­der FEMA, said an of­fi­cial.

Ser­vice tax au­thor­i­ties have al­ready re­ferred the mat­ter to the Re­serve Bank of In­dia and the En­force­ment Direc­torate (ED), the per­son said.

Tax au­thor­i­ties con­tend that com­pa­nies may have not de­clared pay­ments as salaries to their em­ploy­ees in the country while seek­ing per­mis­sion from RBI be­fore mak­ing fund trans­fers. “Au­thor­i­ties need to as­cer­tain how th­ese trans­fers are be­ing made,” said the of­fi­cial cited above.

Typ­i­cally, com­pa­nies that em­ploy ex­pats pay a part of the salary in In­dia while the rest is paid by the over­seas par­ent. This money is then re­im­bursed by the In­dian arm to the par­ent.

Tax au­thor­i­ties, af­ter closely scru­ti­n­is­ing pay­ments made to for­eign par­ent com­pa­nies, had ar­gued that they were li­able to ser­vice tax on this as th­ese were in the cat­e­gory of ‘man­power sup­ply ser­vices’.

A taxable ser­vice was be­ing ren­dered by a for­eign com­pany to an In­dian com­pany. Ser­vice tax was levi- ed on the pay­ment made to the for­eign par­ent by the In­dian arm, since it was re­garded as im­port of ser­vice un­der the re­verse charge mech­a­nism.

Show-cause no­tices were is­sued to a num­ber of com­pa­nies by the au­dit wing of the ser­vice tax de­part­ment. The com­pa­nies con­tested this, ar­gu­ing that th­ese were pay­ments to their own em­ploy­ees for work in In­dia. This ar­gu­ment of theirs has raised red flags.

Tax ex­perts said the mat­ter needs to be ex­plained as In­dia is keen to at­tract for­eign cap­i­tal and needs ex­per­tise in many sec­tors.

“We need clar­ity in law as sec­ond­ment of em­ploy­ees is a pop­u­lar prac­tice among MNCs,” said Bipin Sapra, part­ner at EY. He said some ju­di­cial pro­nounce­ments had in fact given re­lief to com­pa­nies on levy of ser­vice tax. With a num­ber of for­eign in­vestors set­ting up base in the country, In­dia has be­come an at­trac­tive des­ti­na­tion for ex­pat post­ings. A 2014 HSBC sur­vey said sec­tors such as telecom­mu­ni­ca­tions, in­for­ma­tion tech­nol­ogy and In­ter­net ac­counted for 21% of to­tal ex­pats, fol­lowed by con­struc­tion and engi­neer­ing at 19%.

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