A host of back offices of multinational companies in the financial sector face a tax whammy, with Goods and Services Tax authorities denying them refunds of amounts paid on inputs, saying the work done for parent companies can’t be considered as exports and will be counted as a service for the same entity. GST authorities have rejected refunds on these grounds across states, including Haryana, Maharashtra, Tamil Nadu and Karnataka. The denial of refunds running into hundreds of crores of rupees to these outfits can derail their business model and may impact India’s attractiveness as the world’s back-office hub, especially with the emergence of low-cost sites in the Philippines and East Europe. “Rejection orders are based on the premise that the services are provided by the local entity to its overseas affiliate company, which is the ‘same entity’ and therefore, the said services do not qualify as exports,” said an industry official privy to the development.
Industry has approached the government for expeditious resolution of the issue. Individual companies will approach appellate bodies to seek relief. Typically, tax paid on inputs that are used for exports is refunded. According to a clarification provided by the Central Board of Indirect Taxes and Customs in the form of frequently asked questions, where the Indian arm is set up as a liaison office or a branch, they would be treated as establishments of the same entity and hence, supplies between them will not qualify as export of services. “However, if the Indian arm is set up as a wholly owned subsidiary company incorporated under the Indian laws, the foreign company and the Indian subsidiary would not be governed by the provisions of a distinct person or related person as both are separate legal entities,” it said.