Service Tax applicability on reimbursement of foreign expenses

[Asked by Guest]

X Co. (Based in Hongkong) is exploring market in Hongkong for Y Co(An Indian Co.). For this services X Co. has deputed thier one employee. Y Co. has to reimburse salary, TA/DA and travelling exp. of that employee of X Co. Is service tax is payble by Y Co. on amount reimbursed to X Co.

[Surender Gupta]

There is no tax on reimbursement of expenses alone if the main activity for which expenses are reimbursed is not taxabale at all. Therefore, you have to ascertain first that the main service is taxable or not. If the main service is taxable, the reimbursement of salary, TD/DA and other expenses will be forming part of taxable services.

[Madhukar N Hiregange]

The Payments made to Non Resident by residents would be liable if the same is specified. ( 16.6.2005 onwards inserted as an explanation and wef 19.4.2006 Section 66A) In your case since the service appears to be delivered in India it would be liable. If the servcie is not delivered in India then there may not be any liability. However care should be exercised as the import of services rules are new.

First determine the classification of service. If it is business auxiliary service paid to Hongkong Company for use in business in India, then the entire commission + salary + reimbursements would be subject to Service Tax in India. If you employ the person directly, then you have to make TDS on the salary and service tax on other reimbursements if they are liable to service tax in India. No service tax has to be paid on the salary. However, please also refer to DTAA of income tax between Hong Kong and India. By employing someone in hongkong for selling material in Hong Kong, you may land up paying Income tax on these profits in Hong Kong. International transactions laws have too much inamgiguity here and you must read all laws carefully before you arrive at a decision, especially if the activities are likely to be of a continuous nature.

AI Summary

Service tax on reimbursements depends on whether the principal service is taxable and where it is provided.
Service tax on reimbursements depends on whether the underlying activity is taxable and where the service is provided: reimbursements alone are not taxable if the principal service is not taxable, but if the principal service or a specified taxable category applies-such as business auxiliary services or imported services-reimbursements may be included in the taxable value; salary itself is not a service but reimbursements tied to a taxable service can attract service tax.