In a significant move aimed at streamlining international business transactions, the Central Board of Indirect Taxes & Customs (CBIC) has unveiled new valuation norms concerning services provided by foreign companies to their Indian subsidiaries. These services can now be assessed at open market value, contingent upon the Indian subsidiary receiving full Input Tax Credit (ITC). This development is part of a broader initiative encapsulated in 16 recent circulars issued by the CBIC. One notable clarification pertains to the Reverse Charge Mechanism (RCM), where the financial year in which the recipient issues the invoice will determine the time limit for availing ITC.
Relief for Foreign Companies
Foreign companies operating in India can breathe a sigh of relief following the CBIC’s latest circular. When a foreign company provides services to its Indian subsidiary, eligible for full ITC, the service’s value stated in the invoice by the domestic entity will be accepted as the open market value. In instances where no invoice is issued by the subsidiary, the value of such services will be considered Nil but still deemed to be the open market value.
This approach mirrors the existing valuation mechanism for domestic companies with head offices in one state and branches in another. According to a previous circular, services supplied by a Head Office to its Branch Offices are valued based on the invoice amount, provided the recipient Branch Office is eligible for full ITC. If no invoice is issued, the value is considered Nil yet deemed the open market value.
Consistency in Valuation Under CGST Rules
The recent CBIC clarification aligns with Rule 28 of the Central Goods and Services Tax (CGST) Rules, which governs the valuation of supplies between distinct or related entities, particularly when the recipient can claim full ITC. The CBIC emphasized that last year’s circular regarding Head Office and Branch Office transactions set a precedent that applies equally to transactions between distinct and related persons.
In the context of importing services from a related foreign entity, the Indian recipient must pay the tax under the RCM. The Indian entity must issue a self-invoice and remit the tax on a reverse charge basis.
ITC Time Limit Calculation Under RCM
The Reverse Charge Mechanism is crucial for managing transactions between registered and unregistered entities, where the registered entity is liable for GST payment and eligible for ITC. According to the GST law, ITC can be claimed until September or November of the subsequent financial year. The CBIC clarified that for supplies received from unregistered suppliers under the RCM, where the recipient issues the invoice, the relevant financial year for ITC calculation is the year the recipient issues the invoice, provided taxes are paid.
If the recipient issues the invoice post the supply period and pays the tax accordingly, interest on delayed tax payment is applicable. Additionally, the supplier may face penalties for issuing the invoice late.
This structured and authoritative guidance from the CBIC aims to provide clarity and ensure compliance, significantly benefiting foreign companies and their Indian subsidiaries in navigating the complexities of tax regulations.