India’s premier technology industry body, Nasscom, has raised a red flag over the Goods & Services Tax (GST) treatment of internal transactions between head offices and branches of IT companies.
The association said that the current GST framework is creating artificial tax liabilities and compliance hurdles, even though such transactions are merely internal cost allocations within the same legal entity and not genuine supplies of goods or services.
Under the prevailing tax system, India’s IT Industry typically signs a master agreement with foreign clients, after which offshore services are delivered from India while onsite work is executed through either a foreign branch or a subsidiary.
However, Nasscom points out that these two operational structures are treated differently under GST, leading to unequal tax outcomes.
Uneven Tax Treatment for Overseas Deliveries in IT Industry
According to Nasscom, when services are delivered through a foreign subsidiary, exports are considered zero-rated, allowing companies to claim input tax credit refunds.
In contrast, if the same work is routed through an overseas branch of the Indian entity, the scenario changes.
The transfer from head office to branch is viewed as an exempt supply, while the branch-to-head office support is treated as an import of services, attracting reverse charge liability.
This inconsistent treatment, Nasscom said, leads to procedural complications and unnecessary tax burdens on IT companies that are already contributing significantly to India’s export revenues.
The body emphasized that the law’s current interpretation does not align with the global operating model of IT and IT-enabled services companies, which often function seamlessly across borders under a single corporate umbrella.
Nasscom’s Recommendations and the Way Forward
In a representation submitted to the Finance Ministry in September, Nasscom has proposed two possible solutions.
The first is to amend the definition of “export of services” by removing the clause that excludes internal establishments, while keeping all other export conditions intact.
The second suggestion is to introduce a specific carve-out in Schedule I of the GST Act, exempting cross-border intra-entity flows that are directly linked to export deliveries.
To prevent misuse, Nasscom has recommended strict conditions such as valid foreign contracts, proof of foreign exchange realisation, and continued reverse charge for services consumed domestically.
Meanwhile, it has urged the government to issue a consolidated circular clarifying that transactions backed by export documentation should qualify for nil valuation and refund eligibility, offering much-needed certainty to the IT sector.
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