The indirect tax department wants the software companies to value the global brand names and logos used in India, charge a fee on that and pay 18% goods and services tax (GST) on top of it, according to people with direct knowledge of the matter.
Industry trackers said currently there is no valuation mechanism for global technology companies in India.
In most cases, a brand licensing agreement is undertaken for which the Indian arms pay a fee to the parent that software majors club under “management fees” or “consultancy fees”.
Software companies including Google, Facebook, Microsoft, SAP and Oracle, among others, have been questioned by the tax department and asked to explain whether they assign value on such transactions.
None of the companies responded to an email query ET sent.
“The moot point of debate will remain whether there is a mutual agreement for rendition of service. Further, the absence of consideration in various cases would lead to exclusion from the definition of supply,” said Abhishek A Rastogi, partner, Khaitan & Co, a law firm.
Tax experts said under the GST framework, nothing is for free. So a transaction between related parties — a company and its subsidiary— can come under the tax net even if there is no consideration involved. This has resulted in the indirect tax department raising demands on the brands and logos that are owned by a holding company or conglomerate but used by subsidiaries and group companies without any payment.
This will also increase the compliance burden of the companies, experts said, as the companies will have to pay the GST through a “reverse charge” mechanism.
The reverse charge mechanism is mainly used in cases where the company that is required to pay the taxes is not present in the country. In this case, the Indian subsidiaries will be required to pay the GST through the reverse charge mechanism. Earlier, the indirect tax department had questioned several banks and conglomerates on the same issue.
“The problem is that this is a revenue neutral transaction, that is, software companies can claim credit of GST paid,” said a tax expert advising one of the companies.
Although this would still end up in litigation, experts said many companies may not immediately get the credit after they pay GST— as the investigating officer and the assessing officer in such cases are different.