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Applicability of GST on Liaison Offices

Jyoti Jain

It is customary for companies to open liaison offices in countries other than home country in order to understand investment climate and to explore business opportunities. When a liaison office is set up in India, it undertakes various promotional activities in India on behalf of its head office and thereby incurs various expenses which are reimbursed by the head office to the liaison office. These transactions whether form 'supplies' and in turn attract GST or not, is the subject-matter of this article. The learned author discusses this issue in the light of statutory provisions and decided cases.

1. Liaison Offices--An introduction

With the increasing globalisation, many companies are opening its offices and branches in different countries. It is a general tendency to open a liaison office in order to check market feasibility before starting full-fledged commercial activities. Once companies are able to secure overseas projects or contracts, they plan to open branch or project office or subsidiary depending upon market conditions. In India also, many foreign companies are attracting and making investments due to the efforts of Government in 'Ease-of-Doing-Business' and various other schemes. Any person who is resident outside India can establish a liaison office in India with the permission of Reserved Bank of India (RBI) in the manner laid down in Foreign Exchange Management (Establishment in India of a branch office or a liaison office or a project office or any other place of business) Regulations, 2016 (Hereinafter referred to as the FEMA Regulations) regulated by RBI.

The term "liaison office" has been defined in regulation 2(e) of the FEMA Regulations as a place of business to act as a channel of communication between the principal place of business or head office or by whatever name called and entities in India but which does not undertake any commercial/trading/industrial activity, directly or indirectly, and maintains itself out of inward remittances received from abroad through normal banking channel.

The role of liaison offices is, therefore, limited to collecting information about possible market opportunities and providing information about the company and its products or services to the potential customers. It is not allowed to undertake any business activity in India and cannot earn any income in India.

The permission to set up liaison offices is granted for a period of 3 years (2 years for liaison office in the business of construction and development and Non-Banking Finance Companies (NBFCs).

2. Functions of Liaison Offices

As per Schedule II to the FEMA Regulations, the liaison office in India of a person resident outside India may undertake or carry on any of the following activities :--

-- Representing in India the parent company/group companies.