GST on Employee Secondment and Deputation in India: The Complete Guide After the NOS Ruling

Employee secondment triggers 18% IGST under reverse charge Following the Northern Operating Systems ruling (2022), salary reimbursement for seconded employees is supply of manpower services. Indian subsidiaries must pay 18% IGST under RCM via GSTR-3B. ITC available under Section 16 if employees further business; blocked under Section 17(5) for personal use.

Frequently Asked Questions

Is GST applicable on employee secondment from a foreign parent to an Indian subsidiary?

Yes. After the Supreme Court ruling in Northern Operating Systems (2022), salary reimbursement to a foreign parent for seconded employees is treated as consideration for supply of manpower services. The Indian subsidiary must pay 18% IGST under the Reverse Charge Mechanism.

Can the Indian subsidiary claim ITC on IGST paid under RCM for seconded employees?

Generally yes. ITC on RCM-paid IGST is available under Section 16 of the CGST Act provided the seconded employees are used for furtherance of business. However, ITC is blocked under Section 17(5) if the services are for personal consumption or non-business purposes.

What is the SAC code and GST rate for employee secondment services?

Employee secondment is classified under SAC 9985 (Support services) or more specifically under Group 85 (Manpower supply services). The applicable GST rate is 18% (9% CGST + 9% SGST for domestic, or 18% IGST for interstate/import transactions).

GST on Employee Secondment and Deputation: What Every MNC Subsidiary Must Know

Multinational corporations routinely second employees from their global headquarters or regional hubs to Indian subsidiaries. Until 2022, the GST treatment of these arrangements was deeply contested. Some companies treated salary reimbursements as a pure cost pass-through with no GST implications. Others paid GST under protest, hoping for favourable tribunal or High Court outcomes.

The Supreme Court's decision in Northern Operating Systems (NOS) settled the debate decisively, and not in favour of the taxpayer. Every Indian subsidiary receiving seconded employees from a foreign related party now faces a clear obligation: pay 18% IGST under the Reverse Charge Mechanism on the salary cost reimbursed abroad.

This guide breaks down the ruling, the compliance mechanics, and the practical steps your company must take.

Looking for expert help with GST compliance for MNC subsidiaries? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.

Secondment vs. Deputation: The Distinction That Matters

Before diving into GST implications, it helps to understand the two common arrangements.

The critical GST trigger is this: when an employee stays on the foreign parent's payroll and the Indian subsidiary reimburses the salary cost, the Revenue treats that reimbursement as consideration for a service supplied by the foreign entity to the Indian entity.

In a true deputation where the employee joins the Indian entity's payroll, there is no cross-border reimbursement and therefore no import of services to tax. The GST problem is almost entirely a secondment problem.

The Core GST Question: Supply or Cost Allocation?

The dispute centred on Section 7 of the CGST Act, which defines "supply" to include all forms of supply of services made for a consideration in the course or furtherance of business.

The taxpayer's argument: Salary reimbursement is not consideration for any service. The foreign parent is not supplying manpower. It is merely a payroll arrangement where costs are shared. The employer-employee relationship, while formally with the foreign entity, is substantively with the Indian subsidiary that exercises day-to-day control.

The Revenue's argument: The foreign parent is making available its employees to the Indian subsidiary. This constitutes supply of manpower services. The salary reimbursement is the consideration. Under Schedule I of the CGST Act, even transactions between related persons without consideration can be deemed supply - so a transaction with consideration is certainly taxable.

Multiple High Courts, including the Delhi and Karnataka High Courts, had previously ruled in favour of taxpayers during the pre-GST service tax regime, holding that secondment did not amount to manpower supply. The Supreme Court disagreed.

The Supreme Court Ruling: Northern Operating Systems (2022)

The landmark decision in M/s Northern Operating Systems Pvt. Ltd. vs. Commissioner of CGST & Central Excise (Civil Appeal No. 2289 of 2021, decided on 19 May 2022) fundamentally changed the landscape.

Key Holdings

1. Secondment is a supply of service. The Court held that when a foreign entity seconds its employees to an Indian entity and receives reimbursement of salary costs, this constitutes supply of manpower recruitment or supply agency services.

2. The reimbursement is consideration. The salary cost reimbursed by the Indian subsidiary to the foreign parent is not a mere cost allocation. It is consideration for the service of making employees available.

3. Related party provisions apply. Since the foreign parent and Indian subsidiary are related persons under Section 15 of the CGST Act, even if the reimbursement is at cost (no markup), it is still a supply.

4. RCM applies on import of services. Since the supply originates from a person located outside India to a person in India, it qualifies as import of services under Section 2(11) of the IGST Act. The Indian recipient must pay IGST under the Reverse Charge Mechanism.

What the Court Rejected

The Court specifically rejected the "substance over form" argument that many companies relied on. Even though the Indian subsidiary exercised day-to-day control over the seconded employees, the formal employment relationship with the foreign entity was decisive. The Court observed that the foreign parent:

• Selected and deputed the employees
• Continued to pay their salaries
• Retained the power to recall them
• Maintained their service records and terminal benefits

These factors established that the foreign entity was the supplier of a service, not merely a payroll intermediary.

Comparison

Before vs. After the NOS Ruling

How the Supreme Court changed secondment GST treatment

Parameter	Before NOS (Pre-May 2022)	After NOS (Post-May 2022)
Treatment of reimbursement	Cost allocation, not consideration for supply	Consideration for supply of manpower services
GST liability	No GST on salary reimbursement (per multiple HC rulings)	18% IGST under RCM on full reimbursement amount
Substance vs. form	Substance-over-form: Indian entity treated as real employer	Legal form prevails: foreign entity is the supplier
ITC availability	Not applicable (no GST paid)	Available if services used for business
Compliance burden	Minimal - no RCM filing required	Significant - RCM computation, GSTR-3B filing, ITC tracking
Risk on pending assessments	Taxpayer-favourable precedent	Revenue can reopen past assessments citing SC ruling

Takeaway: The NOS ruling shifted the entire burden to Indian subsidiaries. Companies that did not pay GST on secondment reimbursements now face retrospective demands.

The RCM Mechanics: How to Compute and Pay

Once the NOS ruling established that secondment attracts GST, the compliance framework is straightforward but demands precision.

Legal Basis for RCM

• Section 5(3) of the IGST Act permits the Government to specify categories of supply on which tax shall be paid by the recipient (reverse charge).
• Notification No. 10/2017-IGST (Rate) dated 28 June 2017 specifies that any service supplied by a person located in a non-taxable territory to a person located in a taxable territory shall attract IGST under reverse charge.
• SAC Code: 9985 (Support services including manpower supply). More specifically, Group 85 covers manpower supply services.
• Rate: 18% IGST (no split into CGST/SGST since this is an import).

Worked Example: RCM Computation

Consider an Indian subsidiary, TechIndia Pvt. Ltd., that has three employees seconded from its US parent, TechGlobal Inc.

Important: The taxable value includes all components reimbursed to the foreign entity, not just the base salary. Social security contributions, insurance premiums, relocation costs, and any other employment-related costs reimbursed form part of the consideration.

ITC Recovery: TechIndia can claim ITC of Rs 5,40,000 in the same month's GSTR-3B (Table 4A - ITC on inward supplies liable to reverse charge). The net cash impact is the time value of money between RCM payment (by the 20th of the following month) and ITC utilisation.

ITC on RCM-Paid IGST: What You Can and Cannot Claim

General Rule: ITC Is Available

Under Section 16(1) of the CGST Act, every registered person is entitled to take ITC on inward supplies of goods or services used in the course or furtherance of business. Since seconded employees work for the Indian subsidiary's business, the ITC on RCM-paid IGST is generally claimable.

The Section 17(5) Restriction

Section 17(5)(b) blocks ITC on certain categories of services when used for personal consumption. While "manpower supply" is not specifically listed in Section 17(5), there are edge cases:

• If seconded employees are used for constructing immovable property for the company's own use, ITC may be blocked under Section 17(5)(c) and (d).
• If any portion of the seconded employee's time is for non-business activities, a proportionate reversal of ITC may be required under Section 17(1).

Practical Position

For most MNC subsidiaries, the seconded employees are working full-time on business operations. The full ITC should be available. The net GST cost is effectively zero (cash flow cost only). However, if the Indian entity is engaged in exempt supplies or has a mixed-use scenario, proportionate ITC reversal under Rule 42/43 of the CGST Rules applies.

Domestic Secondment: Cross-Charges Within India

When a holding company in India seconds employees to its Indian subsidiary (both entities located within India), the analysis differs.

Related Party Cross-Charges Under Section 15

• The transaction is between related persons (holding-subsidiary).
• Under Schedule I, Entry 2 of the CGST Act, supply of goods or services between related persons - even without consideration - is treated as supply.
• The valuation must be at open market value under Rule 28.
• GST applies at 18% on the cross-charge amount.
• This is a forward charge (not RCM), since both parties are in India.

The Cross-Charge Controversy

Many Indian groups have been cross-charging common costs (including employee costs) between group entities. The 53rd GST Council Meeting (June 2024) discussed the issue but did not provide a blanket exemption. The position remains that employee cost cross-charges between distinct persons (separate GSTINs) are taxable.

Impact on Pending Assessments and Retrospective Demands

The NOS ruling has significant implications for past periods.

For Service Tax Period (Pre-July 2017)

The Supreme Court ruling, while delivered in the context of service tax, applies the same legal logic. The Revenue is issuing show cause notices for service tax periods where companies did not pay service tax on secondment reimbursements. The extended period of limitation (5 years under proviso to Section 73(1) of the Finance Act, 1994) may apply if the department alleges suppression.

For GST Period (Post-July 2017)

Assessments for FY 2017-18 through FY 2021-22 are being reopened. Companies that did not discharge RCM liability on secondment costs are receiving demand notices under Section 73 (non-fraud cases, 3-year limitation) or Section 74 (fraud/suppression, 5-year limitation) of the CGST Act.

Quantifying the Exposure

For a company reimbursing Rs 5 crore per year to its foreign parent for seconded employees:

This does not account for the ITC that the company could have claimed. In many cases, the net exposure after ITC adjustment is primarily the interest component and penalty.

How Companies Are Restructuring Post-NOS

Strategy 1: Convert Secondment to Deputation

Transfer the seconded employee to the Indian entity's payroll. The employee becomes a direct hire. No cross-border reimbursement, no import of services, no RCM. This is the cleanest solution but requires coordination with immigration authorities (work permits may be tied to the foreign employer) and social security treaty implications.

Strategy 2: Employer of Record (EOR) Arrangement

Use a third-party EOR in India to employ the individual. The EOR bills the Indian subsidiary for the employee's cost plus a margin. GST is charged on the EOR's invoice (forward charge). The Indian subsidiary claims ITC. The foreign parent is removed from the transaction entirely.

Strategy 3: Accept and Comply

Many companies simply accept the NOS position, pay RCM, and claim ITC. For companies with full ITC eligibility, the net cost is minimal (interest on the RCM payment for the credit period). This is the path of least friction.

Step-by-Step Guide

RCM Compliance Checklist for Indian Subsidiaries

Steps to ensure full compliance post-NOS ruling

1

Confirm GST registration

Ensure the Indian subsidiary is registered under GST. If secondment costs are the only taxable activity, registration is still mandatory for RCM under Section 24(iii) of the CGST Act.

Registration

2

Compute RCM liability monthly

Identify all components reimbursed to the foreign entity: base salary, social security, insurance, benefits, relocation. Sum these for each month to arrive at the taxable value.

Computation

3

Issue self-invoice

Under Rule 46 of the CGST Rules, the recipient paying RCM must issue a self-invoice (or payment voucher) for the services received. This document supports ITC claims.

Documentation

4

Pay IGST in GSTR-3B

Report the RCM liability in Table 3.1(d) of GSTR-3B. Pay IGST at 18% on the total reimbursement. Due date: 20th of the following month.

Payment

5

Claim ITC in the same return

Report the ITC on RCM in Table 4(A)(3) of GSTR-3B. Ensure the ITC is used only against output tax on taxable supplies. Maintain documentation linking seconded employees to business use.

ITC

6

Report in GSTR-1 and annual return

No reporting in GSTR-1 for RCM (outward supply statement). However, ensure the RCM details are correctly captured in the annual return GSTR-9 (Table 4F for RCM paid, Table 6C for ITC on RCM).

Annual Filing

Source: Section 5(3) IGST Act; Notification 10/2017-IGST; Rule 46, CGST Rules

GST Notice on Secondment: How to Respond

If your company receives a show cause notice or demand for GST on secondment reimbursements, consider the following response strategy:

Step 1: Verify the period and amounts. Cross-check the demand with your actual reimbursement records. Revenue often uses approximate figures from balance sheets or tax returns.

Step 2: Compute the ITC offset. Even if the demand is sustained, the ITC on RCM should be available for the same period. File a claim for ITC along with your reply to reduce the net demand.

Step 3: Challenge extended limitation if applicable. If the notice invokes extended limitation (Section 74 - alleging fraud or suppression), argue that the position was based on prevailing High Court rulings and there was no intent to evade. This can reduce the penalty and interest significantly.

Step 4: Evaluate the settlement route. Under Section 73(5)/(6), if you pay the tax and interest before the issuance of the show cause notice or within 30 days of the notice, penalties are waived or reduced.

Looking for expert help with GST notice response for secondment demands? The team at Tax Garden, based in Kondapur, Hyderabad, helps Indian SMEs stay compliant end-to-end: filings, notices, and advisory, all in one place.

FAQ: GST on Employee Secondment and Deputation

Frequently Asked Questions

Does the NOS ruling apply to secondment from Indian parent to foreign subsidiary?

No. The NOS ruling specifically addresses inbound secondment (foreign to India). When an Indian company seconds employees to a foreign subsidiary, the Indian company is the supplier. The foreign subsidiary is the recipient. GST may apply as an export of services (zero-rated under IGST), but the compliance obligation falls on the Indian sender, not a foreign recipient.

What if the secondment agreement says the Indian subsidiary is the employer for all practical purposes?

The Supreme Court in NOS rejected this argument. Even if the agreement characterises the Indian entity as the employer for day-to-day purposes, if the formal employment relationship remains with the foreign entity and salary is reimbursed, GST applies. The legal form of the arrangement prevails.

Is GST applicable if the foreign parent does not charge any markup on the salary reimbursement?

Yes. Under Schedule I of the CGST Act, supply between related persons is taxable even without consideration. Since a markup is not required for the transaction to be a supply, at-cost reimbursement is equally taxable. The valuation is done under Rule 28 at open market value or cost.

Can the Indian subsidiary avoid RCM by paying the salary directly to the employees?

Potentially, but only if the employees are formally transferred to the Indian entity's payroll. If the employees remain on the foreign entity's rolls and the Indian entity pays their salary on behalf of the foreign entity, Revenue may still treat this as a tripartite arrangement involving import of services.

What about secondment between two Indian companies that are not related?

If an Indian company seconds employees to an unrelated Indian company and receives reimbursement, this is straightforward manpower supply. GST at 18% applies on forward charge. The supplier charges GST on the invoice, and the recipient claims ITC. No RCM applies.

How does GST apply if the seconded employee splits time between the Indian subsidiary and other group entities?

The reimbursement attributable to work done for the Indian subsidiary is taxable. Companies should maintain time-allocation records. The portion allocated to the Indian entity attracts RCM at 18%. Proper documentation of time-split is critical to defend the apportionment in an assessment.

Is there any GST exemption for secondment in SEZ units?

Services imported by SEZ units for authorised operations are exempt from IGST under Section 26(1)(b) of the SEZ Act read with the IGST Act. If the Indian subsidiary is an SEZ unit and the seconded employees work exclusively for SEZ operations, the IGST on RCM may be exempt. This requires careful documentation and SEZ authority approval.

What records should the Indian subsidiary maintain for secondment GST compliance?

Maintain: (1) the secondment agreement, (2) monthly salary statements from the foreign entity, (3) proof of reimbursement (bank remittance records), (4) self-invoices issued under Rule 46, (5) GSTR-3B returns showing RCM payment and ITC claim, (6) time-allocation records if employees split time across entities.

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Let Tax Garden Handle Your Secondment GST Compliance

Employee secondment GST is a high-stakes area where errors compound quickly across assessment years. Tax Garden works with MNC subsidiaries to compute monthly RCM liability, issue self-invoices, file GSTR-3B with correct RCM reporting, and reconcile ITC claims. If you have received a demand notice for past periods, our team can prepare your response with proper ITC offset computation and limitation arguments. See our compliance plans or learn how it works.

This guide is based on the Supreme Court judgment in M/s Northern Operating Systems Pvt. Ltd. vs. Commissioner of CGST & Central Excise (Civil Appeal No. 2289 of 2021, decided 19 May 2022); Section 7 and Schedule I of the CGST Act, 2017; Section 2(11) and Section 5(3) of the IGST Act, 2017; Notification No. 10/2017-Integrated Tax (Rate) dated 28 June 2017; Rules 28 and 46 of the CGST Rules, 2017. Interpretations reflect the authors' professional understanding and should not be treated as legal advice. Consult a practising professional for case-specific guidance.