No GST on salary expenses for expats accounted to meet Indian Accounting Requirements: AAR

The Maharashtra bench of the Authority for Advance Ruling has held that Goods and Services Tax is not applicable on salary expenses accounted for meeting Indian accounting requirements. The applicant, a European company, incorporated under the Laws of Germany has been awarded contracts for the supply of goods and supervisory services by an Indian company in relation to development projects located in the states of Maharashtra, Uttar Pradesh and West Bengal. The applicant sought an advance ruling to clarify whether the Goods and Services Tax is applicable to the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees.

The AAR observed that "for GST to be applicable to the accounting entry made for the purpose of Indian accounting requirements in the books of accounts of Project Office for salary cost of Expat employees paid by the Head Office, such accounting entry should be seen as a supply of goods, services or both. Since we find that there is a relation of employer and employee between the Project Office and the expat employees, the provisions of Schedule III of the CGST Act comes into play in this case as per which services by an employee to the employer in the course of or in relation to his employment will not be considered as a supply and therefore will not attract GST."

The ruling reinforces the concept that applicability of GST is to be seen only from the perspective of GST law and not as per Indian Accounting Standards. A requirement under any other statute like Companies Act, 2013, which requires an accounting entry to be made by Project Office, cannot lead to levy of GST if the underlying GST provisions do not mandate that.

In this case, it was observed that there is an absence of any supply of service and hence no GST was required to be paid on the salary paid to expats reflected in the accounting entry. This is a legal, logical and balanced ruling by the advance ruling Authority, where project offices are established to be a legal extension of foreign head office and thereby no GST needs to be paid on the services received from expat employees of such overseas Head office. The ruling is believed to bring relief to numerous multinational companies operating in India through a project office or liaison office, especially the oil and gas sector which is expected to immediately benefit from this announcement.