In 2023, India’s goods and services tax (GST) not only turned six years old but also achieved its highest tax revenue collection. To improve the ease of doing business in India, the government and the Goods and Services Tax Council have been streamlining the returns filing process and initiating reforms. This article will recap the key changes to India’s GST law in 2023, which had an impact on multinational corporations (MNCs) doing business involving India and registered persons engaged in the export of goods or services.
The taxability of corporate and personal guarantees
Circular No. 204/16/2023-GST, dated October 27 2023, clarified the following activities between related persons, even when performed without any consideration, to be a taxable supply:
A holding company providing a corporate guarantee for the benefit of a subsidiary company; and
A director of a company providing a personal guarantee to a bank or financial institution for the sanctioning of credit facilities to the company.
A new valuation rule (sub-rule (2) to Rule 28 of the Central Goods and Services Tax Rules, 2017) has been introduced, which provides that the taxable value of the supply of a corporate guarantee provided between related parties is 1% of the amount of the guarantee offered, or the actual consideration, whichever is higher.
The circular also clarified that the value of corporate guarantee services shall be governed by Rule 28(2), but the rule does not apply to determine the value of personal guarantee services. The circular clarified that as the Reserve Bank of India has mandated that commission cannot be paid for personal guarantee services, there is no question of such services having any open-market value.
The circular notes that there may be exceptional cases where remuneration or consideration is paid for personal guarantee services and in those cases the taxable value of the supply of the service shall be the remuneration or consideration provided to such a person or guarantor by the company, directly or indirectly.
Corporate guarantee services provided by overseas holding companies to Indian companies would trigger a liability on the latter to pay integrated goods and services tax (IGST) under a reverse-charge mechanism. While it appears to settle the ambiguity of taxability, this clarification raises the following questions:
Whether the new valuation rule applies when a taxpayer opts to pay GST with interest on a corporate guarantee issued prior to the insertion of the rule;
Whether GST is liable to be paid on every enhancement of a corporate guarantee on the entire value of the corporate guarantee or merely on the enhanced portion;
Whether GST is payable on a one-time basis or periodically, or on every renewal of a corporate guarantee; and
Whether the clarification is applicable to letters of comfort.
To qualify as an export of services eligible for the benefit of a zero rating, the receipt of a consideration in foreign exchange is required. In outbound transactions where Indian companies are providing a corporate guarantee for the benefit of a related party situated outside India, a doubt arises as to whether the corporate guarantee services would be regarded as an export of services when no consideration in foreign exchange is realised for the same.
The taxability of secondment transactions
One judgment that created ripples in 2022 and has a continuing impact is Northern Operating Systems (the NOS judgment) on the issue of the nature of secondment of employees by overseas entities to Indian firms and its service tax implications.
In 2023, based on the NOS judgment, many assessees were issued with notices demanding GST on their secondment transactions. Some of the aggrieved assessees have approached the writ courts challenging these notices. Few high courts in India have offered interim relief of stay (of the proceedings), by noting that the NOS judgment concerns the peculiarities of that case and cannot be applied when it cannot be disputed that salary will not be a taxable supply of service.
The assessees were offered some respite with Instruction No. 05/2023-GST, dated December 13 2023, issued by the Central Board of Indirect Taxes and Customs (CBIC) to clarify the following:
A careful reading of the NOS judgment indicates that the Honourable Supreme Court's emphasis is on a nuanced examination based on the unique characteristics of each secondment arrangement, rather than relying on any singular test;
The NOS judgment should not be applied mechanically in all cases; and
An extended period of limitation should not be mechanically invoked in all tax demands on secondment transactions.
It remains to be seen whether the Tax Department implements this instruction in its full spirit while deciding pending matters.
Warranties
Circular No. 195/07/2023-GST, dated July 17 2023, clarified that GST would not be payable on the replacement of parts or the supply of repair services, without any consideration from the customer, as part of a warranty. In such cases, the value of the original supply of goods (provided along with a warranty) by the manufacturer to the customer includes the likely cost of the replacement of parts and/or repair services to be incurred during the warranty period.
This circular puts to rest doubts on warranty supplies in purely domestic transactions. However, it raises doubts on whether IGST is leviable on warranty replacements by overseas suppliers to Indian customers. As customs duties will be leviable on free-of-cost (FOC) warranty replacements as the taxable event for the levy of customs duties is ‘import’ and not ‘supply’, a question that arises is whether IGST is leviable on the importation of FOC warranty replacements. If a stand is taken that IGST is not leviable, there are operational difficulties for a taxpayer to declare ‘nil’ or ‘zero’ IGST in the bill of entry to be filed through the Icegate portal.
The place of supply of select services
For a supply of service to qualify as an export of services, the place of supply has to be outside India. There were doubts as to whether co-location services – i.e., the renting of data facility services along with other bundled services and the renting of space on hoardings and billboards – are supplies in relation to immovable property, with the consequence of the place of supply being the place where the immovable property is located. When these services were provided to foreign companies, there were doubts that the same may not qualify as an export of services, solely on account of the place of supply being in India.
The CBIC has clarified that the supply of co-location services cannot be considered as the service of supply of the renting of immovable property as it not only involves the renting of physical space but also the supply of various services related to hosting and IT infrastructure services (see Circular No. 203/15/2023-GST, dated October 27 2023). The place of supply of co-location services would be the location of the recipient in terms of the general rule for place of supply.
According to this clarification, any foreign companies receiving co-location services from India need not bear the burden of GST as they would be treated as an export of services. It remains to be seen whether the absence of some of the bundled services would alter the view that the services are not in relation to immovable property.
Read the final part of the series on changes to Indian GST in 2023 here.
