Author: Ashwarya Sharma, Advocate | Co-Founder & Legal Head, RB LawCorp
Date: 17/03/2026
Introduction: When Employment Is Mistaken for Supply
The taxation of cross-border employment arrangements under GST has been a recurring area of dispute, particularly in cases involving multinational corporations deploying expatriate employees in India. A key controversy has been whether salary paid to foreign nationals can be subjected to GST by treating it as “import of manpower recruitment and supply services.”
In a significant ruling, the Karnataka High Court addressed this issue by examining a fundamental question — can an employer–employee relationship be recharacterised as a taxable supply under GST?
Factual Background
The case involved an Indian entity forming part of a global group, engaged in software development and IT-enabled services. As part of its operations, foreign nationals were employed for specific roles in India through formal employment contracts.
The department alleged that the salary paid to such expatriates constituted consideration for “import of manpower services” and sought to levy IGST under the reverse charge mechanism.
A show cause notice was issued on this basis, treating the foreign employees as non-resident taxable persons supplying services to the Indian entity.
Core Issue Before the Court
The central question before the Court was:
Whether salary paid to expatriate employees can be taxed as consideration for import of manpower recruitment and supply services under GST?
Key Legal Principles Examined
1. Employer–Employee Relationship under GST
Under Entry 1 of Schedule III of the CGST Act, services provided by an employee to the employer in the course of employment are treated as neither a supply of goods nor a supply of services.
This exclusion places such transactions completely outside the scope of GST.
2. Distinction Between Employment and Manpower Supply
The Court emphasised the critical distinction:
- Employment: Individual works under control, supervision, and direction of the employer → Not taxable
- Manpower Supply: Personnel supplied by one entity to another while remaining under supplier’s control → Taxable
Where individuals are directly employed and integrated into the organisation, the relationship is one of employment — not service provision.
3. Import of Services — Conditions Not Satisfied
For a transaction to qualify as import of services under GST:
- Supplier must be located outside India
- Recipient must be in India
- Place of supply must be in India
The Court held that expatriate employees working in India under employment contracts cannot be treated as independent suppliers located outside India, thereby failing the basic test of import of services.
Findings of the Court
After examining employment agreements, payroll structure, and tax treatment, the Court held:
- A genuine employer–employee relationship existed
- Salaries paid to expatriates were in the nature of employment income, not consideration for services
- Foreign nationals could not be treated as non-resident taxable persons
- The attempt to classify the transaction as import of manpower services was legally unsustainable
Accordingly, the show cause notice proposing levy of IGST was set aside.
Key Takeaways
- Employees are not service providers under GST
- Salary payments cannot be artificially treated as taxable consideration
- Substance of the relationship prevails over departmental characterisation
- Import of services provisions cannot be invoked in absence of an external supplier
- Employment contracts play a decisive role in determining tax implications
Practical Implications for Businesses
This ruling is particularly relevant for:
- Multinational corporations
- Cross-border employee secondments
- Global mobility and expatriate arrangements
It highlights the importance of:
- Clearly drafted employment agreements
- Proper payroll structuring
- Consistent tax treatment (including TDS and income tax compliance)
- Demonstrating control and supervision by the Indian entity
Conclusion: Substance Over Form
The judgment reaffirms a foundational GST principle:
Employment relationships lie outside the GST framework and cannot be converted into taxable supplies through artificial interpretation.
For businesses, the decision serves as a reminder that documentation and contractual clarity are critical in defending tax positions, especially in complex cross-border arrangements.
📎 Attached PDF for detailed reading 👉
📎 Full Published Version: https://taxindiaonline.com/news/guest_column/details?id=53907
(The author is a practicing advocate, Co-Founder and Legal Head of RB LawCorp.
He specializes in GST law. Suggestions or queries can be directed to
ashsharma@rblawcorp.in. The views expressed in this article are strictly
personal.)
