IGST Applicability on Expatriate Employment in India: Karnataka High Court Provides Tax Clarity

Posted by Written by Archana Rao Reading Time: 3 minutes

The Karnataka High Court has delivered an important ruling clarifying the goods and services tax (GST) implications of expatriate employment arrangements, holding that remuneration paid to foreign national employees does not attract Integrated GST (IGST) under the reverse charge mechanism (RCM) where a genuine employer–employee relationship exists.

In Huawei Technologies India Private Limited vs. State of Karnataka, the state high court rejected the revenue department’s contention that the multinational company was liable to pay IGST on salaries paid to foreign employees for the financial years FY 2018-19 to FY 2022-23. Tax authorities had argued that such payments amounted to an import of manpower recruitment and supply services.

Employer-employee relationship outside GST scope

A central issue before the Karnataka High Court was whether the engagement of foreign nationals constituted employee services or a taxable cross-border service arrangement. The court held that the arrangement did not involve secondment from overseas group entities but instead reflected a direct employer–employee relationship between the Indian company and the expatriate personnel.

Accordingly, the payments fell within Entry 1 of Schedule III of the CGST Act, 2017. It excludes services provided by an employee to an employer from the scope of GST.

The Court relied on several factual indicators to establish the employment relationship:

  • Employment contracts defined tenure, reporting structure, working hours, compensation, and employment conditions.
  • Foreign nationals were placed on the Indian entity’s payroll and received salaries, bonuses, allowances, and statutory benefits in Indian bank accounts.
  • Income tax was deducted at source by the employer, and expatriate employees filed income tax returns in India.
  • Expatriates were treated at par with Indian employees in terms of remuneration and social security benefits.

These factors demonstrated that the expatriates functioned as employees rather than service providers.

Expatriates not treated as non-resident taxable persons

The High Court also accepted the company’s argument that foreign national employees qualified as Indian residents and therefore could not be categorized as “non-resident taxable persons” under Section 2(77) of the CGST Act.

The Court observed that:

  • Employee services are expressly excluded under Schedule III and therefore do not constitute supplies.
  • The expatriates resided in India for most of the relevant period and satisfied residency requirements.
  • Since the individuals were located in India, the location of the alleged supplier was also in India, meaning the arrangement could not qualify as an “import of services” under Section 2(11) of the IGST Act, 2017.

This finding effectively removed the basis for applying reverse charge liability.

No GST liability where full ITC is available

The Court further relied on CBIC Circular No. 210/4/2024-GST dated 26 June 2024. It noted that even if the arrangement were hypothetically treated as a related-party supply, the circular neutralizes additional tax exposure.

Under the circular:

  • Where a domestic entity does not raise an invoice for services received from a related foreign affiliate,
  • The value of such services may be deemed nil, which is treated as the open market value under Rule 28(1) of the CGST Rules.

As a result, no GST demand could arise even under an alternative characterization.

Reliance on earlier judicial precedents

The Court’s reasoning aligns with prior judicial decisions addressing expatriate employment structures and GST implications, including the Alstom Transport India Limited v. State authorities and the Metal One Corporation India Private Limited case.

Together, these rulings reflect a growing judicial consensus that genuine employment arrangements should not be recharacterized as taxable manpower supply services.

Business Implications for companies operating in India

The judgment provides significant clarity for multinational enterprises deploying foreign talent in India.

Reduced GST exposure

Companies engaging expatriates directly as employees are less likely to face IGST liability under RCM, provided employment relationships are genuine and properly documented.

Importance of structuring and documentation

The decision underscores the need for robust employment documentation, including clear contracts, Indian payroll processing, tax withholding, and demonstrable managerial control within India.

Alignment across tax frameworks

Organizations should ensure consistency between GST treatment, income tax compliance, and transfer pricing positions. Divergent characterizations across tax regimes may increase litigation risk.

Lower litigation and audit risk

Reliance on the CBIC circular signals administrative intent to avoid tax demands where full input tax credit is available, reducing disputes in intra-group arrangements.

Implications for foreign employees working in India

For expatriate employees, the ruling enhances regulatory certainty.

  • Foreign nationals working under Indian employment contracts are unlikely to be treated as independent suppliers or non-resident taxable persons.
  • GST compliance obligations remain with the employer rather than employees.
  • Recognition of employee status supports consistent treatment under income tax, payroll, and social security frameworks.

CLICK HERE TO KNOW MORE: Key Considerations for Expatriates Moving to India for Work

Strategic takeaway

The ruling highlights a broader policy and judicial trend toward recognizing substance over form in cross-border employment arrangements. Multinational companies should:

  • Reassess expatriate and secondment models to ensure they reflect genuine employment relationships.
  • Review past or ongoing GST disputes involving expatriate remuneration.
  • Strengthen coordination between HR, tax, and legal teams when structuring global mobility arrangements.
  • Maintain consistent documentation across immigration, payroll, and tax compliance systems.

Conclusion

The Karnataka High Court’s decision provides much-needed clarity on the GST treatment of expatriate employment arrangements in India. By reaffirming that salaries paid under a genuine employer-employee relationship fall outside GST, the ruling reduces uncertainty for multinational employers and supports smoother cross-border workforce mobility.

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