Applicability of GST provisions on Liaison Office
Applicability of GST provisions on Liaison Office of a person resident outside India (PROI)
The term ‘Liaison office’ has been defined in the Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 as:
“’Liaison Office’ means a place of business to act as a channel of communication between the principal place of business or Head Office or by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.”
A body corporate incorporated outside India (including a firm or other association of individuals) may initiate business in India by setting-up a subsidiary or branch office or liaison office or project office or any other place of business, by whatever name called, after taking prior approval of the Reserve Bank of India (RBI). Further, in order to open a liaison office in India, an application has to be forwarded by the foreign entity through an AD Category-1 bank to RBI in Form FNC (Annex-1) with reference to the provisions of Foreign Exchange Management Act, 1999 as per Master Circular No.7/2015-16 issued by RBI. This article focuses on the applicability of GST provisions on a liaison office considering the provisions of FEMA, circulars issued by RBI and rulings issued by advance ruling authorities.
As per the Master Circular No. 7/2015-16 issued by RBI, a Liaison Office (also known as Representative Office) can undertake only liaison activities, i.e. it can act as a channel of communication between Head Office abroad and parties in India. It is not allowed to undertake any business activity in India and cannot earn any income in India. Expenses of such offices are to be met entirely through inward remittances of foreign exchange from the Head Office outside India. The role of such offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products to the prospective Indian customers.
Further, categorically a Liaison Office can undertake the following activities in India:
- Representing in India the parent company / group companies.
- Promoting export / import from / to India.
- Promoting technical/financial collaborations between parent/group companies and companies in India.
- Acting as a communication channel between the parent company and Indian companies.
However, Liaison offices are not permitted to undertake any activity that generates income. It is imperative to analyse the applicability of GST on the transaction where a liaison office after its incorporation in India, undertakes various promotional activities in India on behalf of its head office and thereby incurs various expenses which are reimbursed by the head office to the liaison office in India.
As per section 9 of CGST Act, GST will be levied on intra-state supply of goods and services at the specified rate. As per section 5 of IGST Act, IGST will be levied on inter-state supply of goods or services. Therefore, it is essential to understand the meaning of “supply”, Section 7 of the Central Goods and Services Act, 2017 (CGST Act) has defined supply as under:
7 (1) For the purposes of this Act, the expression “supply” includes—
|(a)||all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;|
|(b)||import of services for a consideration whether or not in the course or furtherance of business;|
|(c)||the activities specified in Schedule I, made or agreed to be made without a consideration; and|
|(d)||the activities to be treated as supply of goods or supply of services as referred to in Schedule II.|
Further, Schedule I lists down the activities which are to be treated as supplies even if those are made without consideration and It includes the supply of goods or services or both between related parties or between distinct persons as specified in Section 25 of the CGST Act, when made in the course of furtherance of business. As per Section 25 of the CGST Act “distinct persons” have been defined as:
“A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act”.
The basic intent of this provision, is to treat two offices of the same entity, who have taken separate registration under the GST Act as separate/distinct persons for the purpose of this act, which would otherwise not be treated as separate legal entity in the normal course of business.
The above transaction was recently put up before the advance ruling authority in the matter of M/s Takko Holding GmbH on the following three questions:
- Whether Liaison office is liable to pay GST?
- Whether Liaison office is required to be registered under GST Act?
- Whether the Activities of a Liaison office amount to supply of services?
On the above matter, the authority decide the case and ruled as follows:
- The liaison activities are in line with the conditions specified by the RBI and it does not amount to supply under CGST and SGST Act
- Therefore, the applicant is not liable to pay CGST, SGST or IGST.
- The applicant is not required to get itself registered under GST for the liaison activities.
With regards to the above discussion and the ruling given by the advance ruling authority, it can be concluded that the services provided by the Liaison office in accordance with the conditions specified by the RBI in its master circular No.7/2015-16, do not fall within the meaning of “supply”, hence they are not liable to GST and a liaison office of a foreign entity is not required to take registration under the GST law.