The Karnataka High Court ruled in Huawei Technologies India Private Limited vs. State of Karnataka that salaries paid to expatriate employees are not liable to IGST under reverse charge when a genuine employer-employee relationship exists, rejecting the revenue’s manpower supply service classification claim.
KARNATAKA: The Karnataka High Court recently issued a significant ruling concerning the implications of goods and services tax (GST) on expatriate employment arrangements. The court determined that remuneration paid to foreign national employees is not subject to Integrated GST (IGST) under the reverse charge mechanism (RCM) when a genuine employer-employee relationship exists.
In the case of Huawei Technologies India Private Limited vs. State of Karnataka, the court dismissed the revenue department’s claim that the multinational company was responsible for paying IGST on salaries disbursed to foreign employees for the fiscal years 2018-19 to 2022-23. Tax officials contended that such payments represented an import of manpower recruitment and supply services.
ISSUE: Whether hiring foreign nationals entailed employee services or constituted a taxable cross-border service arrangement?
Analysis of the court and observations:
The court concluded that the engagement reflected a straightforward employer-employee relationship between the Indian company and its expatriate staff rather than a secondment from overseas corporate entities.
As a result, the payments were classified under Entry 1 of Schedule III of the CGST Act, 2017, which excludes services rendered by an employee to an employer from the GST framework.
The court relied on various factual indicators to substantiate the existence of the employment relationship:
- Employment contracts outlined tenure, reporting hierarchies, working hours, compensation, and employment conditions.
- Foreign nationals were incorporated into the Indian entity’s payroll, receiving salaries, bonuses, allowances, and statutory benefits in Indian bank accounts.
- Income tax was deducted at source by the employer, and expatriate employees submitted income tax returns in India.
- Expatriates received equitable treatment compared to Indian employees in terms of remuneration and social security benefits.
These elements highlighted that the expatriates functioned as employees rather than as service providers.
Moreover, the High Court accepted the company’s argument that foreign national employees qualified as Indian residents and could not be classified as “non-resident taxable persons” under Section 2(77) of the CGST Act.
The court noted that:
- Employee services are specifically excluded under Schedule III and thus do not represent taxable supplies.
- The expatriates resided in India for a substantial part of the relevant timeframe, fulfilling residency criteria.
- Since these individuals were based in India, the location of the alleged supplier was also within India, meaning the arrangement could not be classified as an “import of services” under Section 2(11) of the IGST Act, 2017.
This finding effectively negated the foundation for applying reverse charge liability.
The court also referenced CBIC Circular No. 210/4/2024-GST from June 26, 2024, stating that even if the arrangement were hypothetically categorized as a related-party supply, the circular mitigates any additional tax obligation.
According to the circular:
- When a domestic entity does not issue an invoice for services received from a related foreign affiliate,
- The value of these services might be deemed nil, treated as the open market value per Rule 28(1) of the CGST Rules.
Consequently, no GST demand would arise even under alternative classifications.
The court’s reasoning aligns with previous judicial decisions regarding expatriate employment structures and GST consequences, such as in the Alstom Transport India Limited v. State authorities and the Metal One Corporation India Private Limited cases.
Impact of the Ruling:
These rulings reflect a growing judicial agreement that authentic employment arrangements should not be reclassified as taxable manpower supply services and provides considerable clarity for multinational companies employing foreign talent in India.
Companies that directly engage expatriates as employees are less likely to face IGST liabilities under RCM, given that their employment relationships are genuine and well-documented.
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The decision emphasizes the necessity for comprehensive employment documentation, including well-defined contracts, Indian payroll processing, tax withholding, and evident managerial control in India.
Organizations must ensure consistency across GST treatment, income tax compliance, and transfer pricing strategies. Mismatched characterizations across tax systems could lead to increased litigation risks.
Relying on the CBIC circular indicates an administrative intent to avoid tax demands when full input tax credit is available, which could decrease disputes in intra-group arrangements.
For expatriate employees, this ruling enhances regulatory certainty. Foreign nationals working under Indian employment contracts are unlikely to be viewed as independent suppliers or non-resident taxable persons. GST compliance obligations remain the responsibility of the employer rather than the employees. Recognizing employee status supports consistent treatment across income tax, payroll, and social security frameworks.
The ruling highlights a broader trend in policy and judicial practice that prioritizes substance over form in cross-border employment arrangements. Multinational companies should:
- Reevaluate expatriate and secondment models to ensure they represent genuine employment relationships.
- Review past or ongoing GST disputes related to expatriate remuneration.
- Enhance cooperation among HR, tax, and legal teams when structuring global mobility plans.
- Maintain consistent documentation across immigration, payroll, and tax compliance systems.
The Karnataka High Court’s ruling clarifies the GST treatment of expatriate employment arrangements in India. By confirming that salaries remunerated under a genuine employer-employee relationship are exempt from GST, the ruling alleviates uncertainty for multinational employers and promotes smoother cross-border workforce mobility.
Case Title: Huawei Technologies India Private Limited vs. State of Karnataka