[Parv is a student at Institute of Law, Nirma University.]
In the previous year, the Directorate General of GST Intelligence (DGGI) issued summons to numerous foreign airlines for tax evasion on import of services by their Indian branch offices. This led to a strong response from International Air Transport Association's Director General Willie Walsh at the roundtable discussion of the 80th annual general meeting, who stated a potential withdrawal of all foreign airlines from the Indian market due to such tax complexities. This situation is detrimental to both India and the foreign airlines, as it could disrupt international connectivity and economic growth.
The article analyses the validity of the summons issued by the DGGI. It begins by examining the contentions made by the authorities and the airlines. Further, the author examines the current legal framework to determine whether these contentions are supported by the law or not. Finally, the author identifies various loophole scenarios in the current tax provisions and offers various suggestions to resolve the conflict, thereby promoting economic growth and development.
Background
Before serving these notices, DGGI conducted a thorough search at the Indian offices of these foreign airlines, including Etihad, Emirates, Qatar Airways, Oman Air, Air Arabia, and Kuwait Airways. They also requested documentation from these foreign airlines covering all the expenses incurred by them while operating in India, including aircraft lease, costs of ground staff and crew, jet fuel, and any other maintenance or repair expenses. The central rationale for these actions by the tax authorities is that these services are furnished by the head office to the branch office, one legal entity to another, and are thus accountable to pay tax in India. This contention is based on the clarification given under the GST Circular Number 161/17/2021-GST (GST Circular) stating that any subsidiary of a foreign company would be treated as a separate ‘person’ under the Central Goods and Services Tax Act 2017 (CGST Act) and thus considered as a separate legal entity from the foreign head office.
On the other hand, foreign airlines contend that when the DGGI grants them permission to operate in India, the services are furnished to their global headquarters and not to the branch offices. Moreover, these branch offices do not perform any crucial operations; for instance, they do not take any decisions regarding strategic risks and functions. The place of service at all times was both the head office and branch office. Thus, they argue that they should only be liable to pay taxes on what is eligible to be taxed in India. For example, hotel accommodation used by any Indian staff outside India can be taxed. However, it is difficult to discover the place of service in certain situations, such as maintenance and rental transactions between offices.
At the outset, both the arguments are valid as they are backed by law. Such situations arise due to differences in the interpretation between tax authorities and taxpayers. Now the main question is: how can these differing interpretations be reconciled to ensure fair and mutual taxation?
Assessing the Legal Framework
Current legal structure
To determine whether these airlines are liable to pay tax, the ‘place of service’ is relevant, specifically whether it is the head office, the branch office, or both. Since these services are provided by the head offices to the branch offices, Section 13 of the Integrated Goods and Services Act 2017 (IGST Act) is applicable, which states that when the supplier or recipient of the services is located outside India and:
1. Where the location of the recipient is available, the place of supply of service shall be the location of the recipient; and
2. Where the location of the recipient is not available, the place of supply of service shall be the location of the supplier.
In the present case, the branch office is the recipient, and the head office is the supplier located outside India. Thus, the branch office shall be treated as the place of supply of service. According to the Reverse Charge Services list under the reverse charge mechanism, when the supplier is in a non-taxable territory and the recipient of the service is located in the taxable territory (other than any non-assessee online recipient), the recipient would be liable to pay IGST under the reverse charge mechanism, which is the branch office in this case.
Foreign airlines may argue that the reverse charge mechanism is not applicable since both the supplier and recipient are related parties. Additionally, the DGGI granted all operational permissions to the head office, and the branch office is merely a subsidiary with no crucial operational responsibilities. However, as per Schedule 1 of the CGST Act, when there is an import of services from the head office to the branch office in the course or furtherance of business, it is considered as a supply for tax purposes, and this related party transaction is taxed at 18% and 5% for domestic Maintenance, Repair, and Overhaul services. So, if the branch office is eligible to claim the input tax credit (ITC), then the value stated in the supplier’s invoice will be treated as the open market value of the services, but caution must be taken to determine the value of supply. For instance, A Limited provides services to its related entity, B Limited at INR 2,000 and to an unrelated entity, C Limited, at INR 3,000. In this case, it can be inferred that the relationship has influenced the pricing by A Limited. Hence, for valuation purposes, INR 3,000 will be considered the appropriate value.
Ambiguities in the law
The above analysis might give the impression that the goods and services tax (GST) imposed on foreign airlines is valid, and they are liable to pay taxes for the import of services by the branch office. However, the factual reality reveals many ambiguities and situations where the above law might not be applicable. The following are potential loophole situations in the current framework:
Import of services
Import of service is taxed under the reverse charge mechanism, but often, for operational simplicity, expenses are entered at the head office or branch office, regardless of where the service was actually received. For example, if the head office receives a service but the branch office books the expense in India, this might give the impression under Section 13 of the IGST Act that the branch office is the place of supply, resulting in an erroneous application of GST.
Clarification on related parties
Although the GST Circular provided some clarity regarding the treatment of related parties as separate entities for tax purposes, it only addresses the ‘export of services’ treated as supply, not the ‘import of services.’ Therefore, airlines still need to carefully review whether their specific situations fall under GST. It is not realistic to foresee every minute transaction between the head office and the branch office.
Pure agent transactions
If the airline, with proper documentation and adherence to the regulatory definitions of a pure agent under Rule 33 of Central Goods and Services Tax Rules 2017, can establish that it acted as a pure agent by providing services to the branch office without any markup, the transaction should not be taxable as the head office did not benefit from it and the service was provided on the cost.
Suggestions
The Indian aviation market size is expected to close at USD 13.89 billion in 2024, and foreign airlines are expanding in India at exponential rates. For instance, Emirates Airlines carried more than 2.54 million passengers to India in the financial year 2023-24. On the other hand, overall GST evasion (including fake ITC) amounted to INR 1.36 lakh crore in the financial year 2023-24. This shows how crucial it is to resolve the ongoing conflict and the current legal provisions’ insufficiency in addressing it.
A middle ground can be found between the DGGI and foreign airlines by providing some relief to the latter through amending the provisions for related party transactions, thus paving the path for the evolution of GST. In cases where full ITC can be claimed, the government can exempt these foreign airlines from paying tax at the time of import of services by the branch office. Instead, the branch office can be taxed later, at the time of service discharge, by a forward shift. This will ensure that the government receives its tax revenue, although slightly delayed, while foreign airlines would be relieved of the immediate tax burden following the import of services. Further, since it is a very complex issue as it involves a plethora of varying expenditures and services made by the airlines, the authorities should take into account and check each fact and the actual position of the law before holding these airlines liable for any tax evasion.
Lastly, the government can provide some leeway by acknowledging the lack of clarity in the current provisions and adopting a middle ground by accepting the airlines’ contentions up to the present and establishing clear provisions on a moving forward basis. For instance, in the current scenario, the government can provide tax relief on all aircraft leasing to date and impose the tax with clear provisions on all future transactions.
Conclusion
India is a developing nation, and the aviation sector not only contributes significantly to the GDP, but is also crucial for job creation, facilitating trade, and promoting tourism. Therefore, it is essential to support foreign airlines to achieve economic growth and development. India must move past the tendency to make last-minute interpretations of tax provisions, despite GST being in place for around 7 years. Implementing the suggested relief measures and improving coordination with foreign airlines would signify a commitment to fostering unprecedented growth and the development of innovative and sustainable tax laws. This proactive approach will ensure that India remains a competitive and attractive destination for the global aviation sector.
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