India: GST on Secondment in India

Several Multi-National Enterprises (MNEs) operating in India second their employees to their Indian arm for purposes ranging from providing them with several technical expertise to training to maintain a check from Indian operations.

In the context of such secondments, a question arises as to whether the seconded employees become employees of the Indian subsidiary or group company. This poses several tax issues in India for thee seconded expatriates on personal tax issues and for the MNEs under the Corporate taxes. The latest complexity to this already vexed topic is the charge under the Goods and Services Tax brought in by the recent judgment of the Hon’ble Supreme Court of India.

Under the erstwhile Service tax law (before the introduction of Goods and Services Tax in 2017), in the matter of Northern Operating Systems (P.) Ltd, the Hon’ble Supreme Court addressed the taxability of secondment contracts to examine if such secondments had the effect of a contract of service or contract for service under the Service Tax. To determine the taxability, the Court evaluated the following:

Test of 'Control'

The mere test of control is insufficient to accurately determine the existence of an employer-employee relationship. In the case of seconded employees, their terms of employment continued to align with the policies of the foreign entity/overseas employer. Upon the completion of their secondment, these employees returned to their original employers, which is the overseas entity that had only temporarily "loaned their services."

Reimbursement of employer for the salary paid to secondee employee

The Court observed that the seconded employees were carrying out activities related to the Indian company, not the foreign entity, during their secondment period. Although the foreign entity was responsible for paying the salaries of the seconded employees, the Indian company was liable to reimburse those salaries, as the seconded employees were not performing any tasks related to the foreign entity's business during their secondment. It was a legal requirement for the seconded employees to remain on the payroll of the overseas employer, as they were entitled to social security benefits in their country of origin.

Applying the principle of substance over form, the Court determined that employees working under a secondment arrangement cannot be considered actual employees of the Indian company. Instead, the foreign entity that seconded the employees continues to qualify as their employer. The arrangement between the two entities is deemed to be in the nature of "manpower recruitment or supply agency service," which the foreign entity provides to the Indian entity. As a result, this service is subject to Service Tax. It is worth noting that the judgment has an impact under the current GST regime as well and hence the secondment shall be subject to GST on Reverse Charge basis in the hands of the Indian entity. Hence, all multinational corporations seconding their employees to their Indian arm are reviewing their agreements/arrangements to determine the applicability of GST. However, the way these arrangements usually work, GST would typically apply.