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DGGI allege GST evasion of ₹1.5 lakh crore by shipping companies: Everything to Know About

Under the GST law, an establishment of a company/branch in India and outside India are treated as distinct persons and any service provided by the head office to the branch office is deemed as a supply, even when it is without any consideration.

Clause 4 of Schedule-I 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. Clause 2 of Schedule- I Supply of goods or services or both between related persons or between distinct persons as specified in section 25 , when made in the course or furtherance of business

Accordingly, Foreign Shipping Lines established their Indian Branches either in the form of Subsidiaries or in the form of branches, both are covered in Schedule-I (either in Clause-2 in case of Subsidiary or in Clause-4 in case of branch).

Further, as per N.N 10/2017-IGST(Rate) as amended:

Following Service is under RCM

Any service supplied by any person who is located in a non-taxable territory to any person other than non-taxable online recipient.

Shipping liners get their operational cost, such as lease rental, fuel charges, crew charges etc. to the head office located abroad and don’t charge the cost of these services to their branch office,” sources said

Accordingly, Indian Branch/Subsidiary is required to pay IGST on import of such services from their Head office situated outside India even without Consideration.

Further, The recent CBIC circular Number 199/11/2023 of July 2023 which says in case branch is eligible for full ITC, Zero Value may be adopted for such services, may not come to the rescue of the shipping liners as in some cases there have been exempted services provided by the liners. Further, the argument of revenue neutrality may not suffice in the present case looking into judgments in the service tax era.

(For complete details regarding Taxability of Services from Head Office to Branches please read at GST on Services Provided by Head Office to Branches.)

The import of services will be subject to tax when the place of provision with respect to these expenses will be in India. Further, some of these expenses could be in the nature of pure reimbursements, and the angle of pure agency may come into play.

The ongoing DGGI probe in the case of container and shipping liners is just akin to the case of foreign airlines in India wherein tax evasion has been noticed in import of services from the head offices of the foreign airlines by their branch offices in India wherein the airlines were including records of expenses ranging from HR expenses, management expenses and accounting software expenses borne by the head office, crew charges, fuel charges, etc. in their head office accounts without cross charging these expenses to their Indian offices though the services were used by the Indian branch offices.

Supply of service by the head office located overseas to a branch office in India even without consideration is not exempted from the GST regime. Since the import of services is subject to tax under reverse charge when there is an actual receipt of service, the investigation could unearth booking of expenses at the head office or branch office for administrative convenience which should have been subject to tax under reverse charge.

However, shipping liners have given detailed representation to the Finance Ministry, Central Board of Indirect Taxes and Customs (CBIC), DGGI and are seeking a resolution, but DGGI alleges that shipping liners are operating via a branch office in India and have evaded taxes on import of services from head office located abroad, sources added.

Disclaimer: Content of the news has been copied from CNBC TV-18 for academic purpose only.

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