In the context of GST, the import of services involves certain tax obligations and compliance requirements. This blog will delve into the specifics of what constitutes an import of services under GST, with a focus on related-party transactions and recent clarifications issued by the GST authorities. 

Import of Services 

In common parlance, any services except OIDAR services received from a person located in a non-taxable territory shall be considered Import of Services and are liable for reverse charge under GST. As per Section 5(3) of Integrated Goods and Service Tax read with Notification No. 10/2017 Integrated Tax (Rate) – 28th June 2017, a person who has received a service from a non-taxable territory shall pay tax on such a service and is eligible to claim the input tax credit after the payment of tax. 

Section 2(11) of the IGST Act 2017 defines the import of services as any services where:  

– a) The supplier of services is located outside India. 

– b) The recipient of services is in India. 

– c) The place of supply is in India. 

The supply shall be considered as an import of services only upon the satisfaction of the above three conditions. 

Import of Services from Related Persons 

By virtue of Section 7 of the CGST Act 2017, “Supply” includes the activities mentioned in Schedule-I of the CGST Act, made or agreed to be made even without consideration. 

S. No. 4 of Schedule -I of the CGST Act 2017 states: 

– Import of services by a person from a related person or from any of his other establishments outside India, in the course or furtherance of business shall be considered a supply even if made without consideration. 

There is a dichotomy among the taxpayers and tax officers regarding services received from a related person located outside India. Often, the proper officer seeks tax under the reverse charge mechanism on such services, considering them as an import of services as per S. No. 4 of Schedule I of the CGST Act 2017. Consequently, proper officers have issued show cause or pre-show cause notices to many taxpayers for the determination of tax not paid or short-paid in respect of such supplies. However, the person located in India may consider this as no supply since no consideration is involved. 

To address these concerns, the 53rd GST Council meeting held on 22nd June 2024 recommended clarification regarding the valuation of the supply of import of services by a related person where the recipient is eligible for full input tax credit. Accordingly, Circular No. 210/4/2024-GST dated 26/04/2024 was issued. 

Gist of the Circular 

1) Circular Number 199/11/2023-GST Dated 17.07.2023 has been referred to, providing the same treatment to related/distinct persons as it does to the supply of services from a Head Office (HO) to its Branch Office (BO). It is clarified that where the HO has supplied services to the BO, the value of services declared in the invoices shall be deemed to be the open market value if the recipient BO is eligible for full input tax credit. 

2) If the HO has not issued the tax invoice to the BO, the value of such services shall be deemed to be NIL by the HO to the BO and deemed to be the open market value in terms of the second proviso to Rule 28(1) of the CGST Rules. 

3) Proviso to Rule 28(1) of the CGST Rules 2017 states that where the full input tax credit is available to the recipient, the value declared in the invoice shall be deemed to be the open market value. 

   – “Rule 28. Value of supply of goods or services or both between distinct or related persons, other than through an agent. – 

     – (1) The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- 

     – (a) be the open market value of such supply. 

     – (b) if the open market value is not available, be the value of supply of goods or services of like kind and quality. 

     – (c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order: 

     – Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person: 

     – Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.” 

4) Furthermore, the circular clarifies that the clarification given in Circular No. 199/11/2023-GST Dated 17-07-2023 shall also be applicable in respect of import of services between related persons. 

5) Import of Services from related persons: Tax is required to be paid under the reverse charge mechanism. A self-generated invoice under Section 31(3)(f) of the CGST Act will be issued, and tax is to be paid by the related party in India. 

6) If the related party in India did not issue the self-generated tax invoice for services provided by the foreign entity, the value of services shall be deemed to be NIL and may be deemed to be the open market value in terms of the second proviso to Rule 28(1) of the CGST Rules 2017. 

Conclusion 

The issued circular is a significant relief to taxpayers, helping to resolve pending litigation cases where the officer has determined the tax liability on the import of services from a related foreign entity. Additionally, taxpayers are now better positioned to assess the taxability of import of services from foreign affiliate entities, considering these clarifications. 

Example Case:

In a recent case, the leading IT Services Company Infosys received a pre-show-cause notice in Form GST DRC-01A from the Director General of GST Intelligence (DGGI) for tax evasion amounting to over Rs. 32,000 Crore for non-payment of tax under reverse charge for services received from its foreign-located entity for the period of July 2017 to the financial year 2021-2022. This notice was subsequently withdrawn considering the above circular.