India Implements a Comprehensive Goods and Services Tax that May Affect US Companies’ International Tax Liability

Countries are looking for stable revenue sources, and consumption-based taxes are quickly becoming a popular alternative to income-based taxes because they tend to be less prone to variation during challenging economic times.

Effective July 1, 2017, India has implemented a comprehensive goods and services tax (GST) in an effort to modernize and streamline its tax net. This consolidation of various federal and state-level taxes into a single GST is an important step toward simplifying India’s tax regime and finding stability, but its implementation might still be challenging. There will likely be areas where the Indian government will need to provide clarification and adjust processes.

The new rules will likely impact US businesses in a number of ways, perhaps most immediately for US companies that contract with Indian subsidiaries.

Import of Services

GST is payable on all taxable supplies rendered in India, including supply of services. Because GST is generally a destination-based tax, it’s imposed at the place of supply, which can mean the following for:

  • Cross-border servicesLocation of the service recipient
  • Undetermined location of service recipientLocation of the service supplier

Service importers will need to self-assess GST under a reverse-charge mechanism if their service provider isn’t registered for the tax. An Indian business that pays a US consulting firm will have to impose the GST on the import of the consulting firm’s service, for example.  This could exert pressure to buy services from Indian businesses, which may make US and European service providers less competitive.

A detailed and exclusive list of nontaxable services has been published to provide clarification on which services aren’t subject to the GST. These generally include services provided by the government and its agencies or municipalities as well as some educational, health care, and transportation services.

Export of Services

A GST exemption is available on the export of services from India, impacting US companies with Indian R&D centers, outsourcing operations, and sales and marketing entities. These exports have the following qualities:

  • Supplier is located in India
  • Recipient and place of supply are located outside India
  • Payment for services received is in convertible foreign exchange
  • Supplier and recipient aren’t establishments of a distinct person

Indian companies have two options for claiming their tax-exempt status:

  • Issuing a bond or letter of undertaking prior to the export of the service
  • Claiming a refund of input taxes paid on purchases after the export of the service

The bond or letter of undertaking is an advance certification process that requires the service provider to work with the Indian government prior to the provision of the service.  In addition to the potential administrative headache, not all service providers are eligible for advance certification. The other option—charging the GST on the export of a service and then claiming a refund—can create cash flow issues. 

Transactions without Consideration

The GST law also provides for the payment of the GST on transactions—also known as taxable supply—made or received without consideration between related parties or between distinct persons.

For example, if the Indian office of a US company is carrying out any activity that can be considered as taxable supply, GST will need to be paid to the Indian government based on the rules of valuation for that activity, even though no consideration is exchanged.

Next Steps

The GST will likely bring some relief to India’s complex tax system, if implemented in a principled manner, but there will be a period during which the enactment of the new legislation will create uncertainty and risk. Help protect your business by becoming familiar with the new GST regime and proactively planning for its effects.

We’re Here to Help

For more information on how the GST could affect your international tax burden, contact your Moss Adams professional.