Service tax authorities have issued notices to Indian arms of several multinational firms asking them to stump up taxes on salary payments by their parent into expatriate managers' overseas bank accounts, potentially igniting a confrontation at a time the government is trying to roll out the red carpet to global businesses.

A posting in India often qualifies as "expat terms" assignment at many MNCs in which Indian arms remit a portion of salaries of expats to the parent for transfer to employees' bank accounts back home.

MNCs get notice to stump up taxes on salary of expatsTax authorities say this transfer should attract service tax and argue that the practice of transferring salaries for work done in India to foreign accounts by the parent company, which is later reimbursed by the Indian entity, makes it akin to supply of manpower. This makes it a service that needs to be taxed.

Tax practioners say showcause notices have been issued to many firms across sectors, and if enforced, the tax claims could make it costlier for companies to employ expats in India. Tax experts estimate that the total liability could run into hundreds of crores of rupees.

Tax authorities claim that since there is a "manpower supply service" rendered by a foreign company to the Indian entity, service tax should be paid on the 75 per cent of the salary transferred to the parent. They contend that since there is an import of service involved, the Indian company becomes liable to pay under a so-called 'reverse charge mechanism'.

There have been judicial pronouncements on the issue favouring companies, and tax authorities in some jurisdictions have even taken note of them by dropping tax demands.

But some fresh notices on the issue has left the industry confounded, although a service tax official played down the issue saying these notices could be recurrent ones. India's tax regime has attracted lot of criticism in recent years, with investors and companies alike complaining about arbitrary and extreme interpretations of rules. The most high profile of them was the case involving British telecom giant Vodafone, on which the tax authorities imposed a demand worth billions of dollars. When the government lost the case in court, it carried out a retrospective amendment to the income tax laws to force the company to pay the tax, a move that made headlines around the world and became a sore point with many international businesses.

More recently, the levy of minimum alternate tax (MAT) on foreign portfolio investors raised a global outcry. The Narendra Modi-led NDA government that promised a stable and non-adversarial tax regime soon after taking over promised not to open fresh cases under the retro law and has accepted the high-profile panel headed by AP Shah to sort out the MAT issue in investors' favour.

MNCs get notice to stump up taxes on salary of expats India is home to tens of thousands of expat workers across sectors. According to a HSBC survey, sectors such as telecommunication, information technology and Internet businesses account for 21 per cent of total expats working in India, followed by construction and engineering at 19 per cent.

The 2014 survey pointed that 23 per cent of expats working in India were from the United Kingdom, followed by the United States at 14 per cent and Japan and Canada at 7 per cent each.

Most multinationals employing expat managers in India follow a practice wherein around 25 per cent salary is paid into Indian bank accounts, with the balance deposited in the foreign bank account of the employees.

For this amount, the Indian subsidiary of the multinational company requests its foreign parent to directly remit the amount in the employees' overseas bank account of the expat and the foreign company is paid the 75 per cent cost by the Indian company. Tax experts say it's common for multinationals firms to post expat managers in senior positions at their Indian arms for which the local entity often issues employment letters.

"Expats pay Indian income tax on salary received and effectively work as an employee of the Indian entity. In these circumstances, demand of service tax on the basis of salary paid in foreign exchange in their bank accounts outside India or by the parent entity (later reimbursed by Indian entity) is not justified," said Pratik Jain, partner at KPMG India.

Jain said the government should clarify what would constitute such employment. "What should be seen is as to whether 'effective employment' of such people has been transferred to the Indian entity or not," he said. Experts also suggest that companies put in place robust paperwork to establish precise nature of the employee-employer relationship.

"All Indian companies need to re-look at their arrangements with foreign entity. A robust documentation and proper agreement may save them from a 14 per cent service tax being levied as import of services should the expatriates be the employees of the Indian company," said Anita Rastogi, partner-indirect taxes at PwC.