The Central Board of Indirect Taxes and Customs (CBIC) issued Circular No. 210/04/2024-GST to clarify the valuation of supply of import of services by a related person where the recipient is eligible for full input tax credit (ITC).
This circular addresses concerns raised by businesses regarding demands for tax on reverse charge basis for certain activities undertaken by related persons based outside India.
Key Points from the Circular No. 210
- Import of Services as Supply: According to S.No. 4 of Schedule I of the CGST Act, the import of services by a person from a related person or from any of their other establishments outside India, in the course or furtherance of business, is treated as a supply, even if no consideration is involved.
- Concerns Raised by Trade and Industry: Businesses have expressed concerns about demands raised by field formations for tax on reverse charge basis for activities undertaken by related persons based outside India. These demands are based on an expansive interpretation of the deeming fiction in S.No. 4 of Schedule I of the CGST Act, despite no consideration being involved.
Clarification on Valuation
- Rule 28 of CGST Rules: Rule 28 specifies the value of supply of goods or services between related persons. It states that if the recipient is eligible for full ITC, the value declared in the invoice is deemed to be the open market value.
- Second Proviso to Rule 28(1): This proviso applies to all cases involving the supply of goods or services between related persons where full ITC is available to the recipient. Therefore, the value declared in the invoice is considered the open market value.
Application to Import of Services
- For the import of services by a registered person in India from a related person located outside India, tax must be paid under the reverse charge mechanism.
- The registered person in India must issue a self-invoice under Section 31(3)(f) of the CGST Act and pay tax on a reverse charge basis.
- If the foreign affiliate provides services to the related domestic entity and the recipient is eligible for full ITC, the value declared in the invoice is deemed to be the open market value. If no invoice is issued, the value may be deemed to be Nil.
Examples for Better Understanding
- Scenario 1: Foreign Affiliate Providing Services: ABC Ltd. in India receives consulting services from its foreign affiliate, XYZ Inc. ABC Ltd. is eligible for full ITC. The value declared in the invoice by XYZ Inc. is deemed to be the open market value, and ABC Ltd. must pay GST on a reverse charge basis.
- Scenario 2: No Invoice Issued: ABC Ltd. receives IT support from its foreign affiliate but no invoice is issued. Since ABC Ltd. is eligible for full ITC, the value of such services is deemed to be Nil, and no GST is applicable.
FAQs
Q1: Are services imported from related parties always subject to GST? Yes, services imported from related parties are subject to GST under the reverse charge mechanism, even if no consideration is involved.
Q2: What is the significance of Rule 28 in CGST Rules? Rule 28 provides guidelines for valuing supplies between related persons. It ensures that if the recipient is eligible for full ITC, the value declared in the invoice is deemed to be the open market value.
Q3: How should businesses handle transactions with related foreign entities? Businesses should issue self-invoices for such transactions and pay GST on a reverse charge basis. If the recipient is eligible for full ITC, the declared value in the invoice is considered the open market value.
Read also: GST on Loans between Related Parties: Circular-218
Conclusion
The clarifications provided in Circular No. 210/04/2024-GST are crucial for businesses engaged in cross-border transactions with related parties. Understanding these guidelines helps ensure compliance with GST regulations and avoids potential disputes with tax authorities. Stay informed and consult with tax professionals to navigate the complexities of GST on imported services effectively.
