Understanding Secondment Under The GST Regime In India

In recent years, several Indian subsidiaries of multinational corporations have received show cause notices (SCNs) from GST authorities seeking to levy tax on salaries paid to employees seconded from foreign group entities. These notices, typically issued under the reverse charge mechanism (RCM), proceed on the premise that secondment arrangements amount to a supply of manpower services by the foreign entity to the Indian company. In many instances, the tax demands involved run into several crores, despite the Indian entity being otherwise eligible to claim full input tax credit. The resulting wave of litigation has brought secondment arrangements into sharp focus under the GST regime. While businesses continue to argue that secondment represents a continuation of the employer–employee relationship, tax authorities have increasingly relied on substance-based reasoning to characterise such arrangements as taxable services. Judicial intervention, particularly in disputes concerning salary reimbursements and valuation, has added further complexity to an already unsettled legal position.Against this backdrop, this article examines the manner in which secondment arrangements are being scrutinised under GST, with specific reference to valuation under Rule 28 of the CGST Rules, administrative guidance issued by the Central Board of Indirect Taxes and Customs, and recent judicial decisions that have shaped the current understanding of taxability.Concept and Commercial Reality of SecondmentIn commercial practice, secondment refers to an arrangement under which an employee of one entity is temporarily assigned to work for another entity, usually within the same corporate group. During the period of secondment, the employee typically performs day-to-day functions under the supervision and operational control of the host entity, while the formal contract of employment continues with the original employer. In cross-border group structures, it is common for employees of a foreign parent company to be seconded to an Indian subsidiary to provide managerial, technical, or specialised support. Although the Indian entity may bear the cost of remuneration, whether through reimbursement or direct payment, the secondee often continues to remain on the payroll of the foreign entity, with long-term employment benefits accruing outside India. It is this duality - operational control vesting in one entity while legal employment subsists with another - that lies at the heart of the tax controversy surrounding secondment under GST.Taxability of Secondment under GSTUnder Schedule III of the Central Goods and Services Tax (CGST) Act, 2017, services provided by an employee to an employer in the course of employment are excluded from the scope of “supply”. However, where an arrangement is found to involve one entity providing the services of its employees to another entity for consideration, the transaction may fall within the ambit of taxable services. In secondment cases, tax authorities have frequently taken the view that the foreign parent entity supplies manpower services to the Indian subsidiary, particularly where salary costs are reimbursed, and the employment relationship with the foreign entity is not fully severed. On this basis, GST liability is sought to be imposed on the Indian entity under the reverse charge mechanism applicable to services received from a related person or from outside India. The determination of taxability, therefore, does not depend merely on the nomenclature of “secondment” but on a factual examination of control, payroll arrangements, and the flow of consideration.Valuation under Rule 28 of the CGST Rules, 2017Relevance of Rule 28 Secondment arrangements commonly involve related parties, such as a parent company and its subsidiary. Consequently, the valuation of the alleged supply becomes subject to Rule 28 of the CGST Rules, which governs transactions between related persons or distinct persons. Rule 28 assumes particular significance in secondment disputes because the consideration charged often reflects internal cost allocations rather than pricing determined by market forces. Valuation Mechanism Rule 28 prescribes open market value as the primary basis for valuation. In practice, however, determining an open market value for secondment services is inherently difficult, as comparable transactions between unrelated parties are rarely available. This practical limitation has resulted in increased reliance on alternative valuation methods, including cost-based valuation under Rule 30 or valuation by reasonable means under Rule 31. Rule 28's proviso further provides that where the recipient of the service is eligible for full input tax credit, the value declared in the invoice may be accepted as the open market value. This proviso has assumed central importance in secondment disputes, particularly where the Indian subsidiary is entitled to claim complete credit of the tax paid under reverse charge.CBIC...

Understanding Secondment Under The GST Regime In India

Ayush Unnikrishnan

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