Services to your own foreign branch: GST’s “distinct person” bar is set to go
The GST Council has recommended deleting the condition that stops an Indian company from treating services supplied to its own overseas office as an export. It is the right fix. It is also not yet law.
At a glance
| Source | Recommendations of the 57th meeting of the GST Council, New Delhi, 8 October 2026 (item 10 of the Finance Ministry release) |
| Main proposal | Omit sub-clause (v) of section 2(6) of the IGST Act, 2017, so that a supply between an Indian establishment and a foreign establishment of the same entity can qualify as an “export of services” |
| Related proposals | Omit section 13(3)(a) on services performed on goods; deem certain deliveries into an SEZ or FTWZ for an overseas buyer to be supplies to the zone; a circular on receipt of export proceeds |
| Status | A recommendation. It needs an amendment to the IGST Act by Parliament and a notified commencement date |
| Effective date | None stated |
| Who is affected | Indian companies with branch, project, liaison or representative offices abroad; repair, testing and job-work providers serving foreign customers; manufacturers delivering into SEZs and FTWZs for foreign buyers |
The problem today
Section 2(6) of the IGST Act sets five conditions for a supply to be an export of services. The supplier must be in India, the recipient outside India, the place of supply outside India, and payment received in convertible foreign exchange or in rupees where the RBI permits. The fifth condition is that the supplier and recipient must not be “merely establishments of a distinct person”.
That last condition turns on Explanation 1 to section 8, under which an establishment in India and an establishment outside India of the same person are treated as establishments of distinct persons. A branch is not a separate legal entity from its head office. So when an Indian company supports its Dubai or Singapore branch, the two are distinct persons for the purpose of making the transaction a supply, and merely establishments of one person for the purpose of denying it export status.
CBIC’s Circular No. 161/17/2021-GST of 20 September 2021 confirmed where the line falls. A company incorporated abroad, whether a subsidiary, a holding company or a group company, is a separate person, and services supplied to it can be exports. A foreign branch of the Indian company itself is not.
| Indian company supplies services to | Position today | Position if the amendment is enacted |
|---|---|---|
| Its wholly owned subsidiary incorporated abroad | Can be an export, if the other four conditions are met | No change |
| Its own branch or office abroad | Not an export, because of condition (v) | Can be an export, if the other four conditions are met |
| A foreign customer, routed through its own foreign branch | The leg to the branch is not an export | That leg can be an export |
The consequence has been commercial as much as legal. Two companies doing the same work for the same foreign market are taxed differently depending on whether the overseas presence is a subsidiary or a branch. Banks, insurers, engineering and construction contractors and others who operate abroad through branches, often because local regulation or the project owner requires it, have carried a tax cost or a blocked refund that their competitors with subsidiaries have not.
What the Council recommended
Deleting condition (v)
The Council recommended omitting sub-clause (v) of section 2(6) altogether. Its stated purpose is to facilitate refunds for Indian service providers on services supplied to or through their foreign offices and branches, and to promote export of services.
Services performed on goods
Under section 13(3)(a), where the recipient must make goods physically available to the supplier, the place of supply is where the service is actually performed. An Indian workshop repairing or testing equipment sent in by a foreign customer therefore supplies its service in India, and cannot treat it as an export, subject to a limited carve-out for goods temporarily imported for repair. The Council recommended omitting clause (a), so that the default rule in section 13(2) applies and the place of supply is the location of the recipient.
Deliveries into SEZs and FTWZs for overseas buyers
An explanation is to be added to section 16(1). Where goods are sold to an overseas buyer but delivered to that buyer in an SEZ or free trade and warehousing zone, and payment is received in convertible foreign exchange or permitted rupees, the supply will be deemed a supply to the SEZ or FTWZ. This gives manufacturers certainty of zero rating on a structure that is common where the foreign buyer warehouses or processes goods in India before onward shipment.
Receipt of export proceeds
The Council also asked for a circular to clarify issues on receipt of payment in foreign exchange or rupees for exports of goods and services.
What the proposal does not settle
When it takes effect
The release gives no date. Unlike some other items in the same package, which carry dates of 1 November 2026 or 1 April 2027, the export measures are left to the amending legislation. The realistic vehicle is a Finance Bill or a standalone GST amendment bill, followed by a commencement notification.
Past periods and pending disputes
Nothing in the release suggests the change will be retrospective. Refund rejections and demands for past periods will, on present information, continue to be decided under the law as it stood.
The payment condition
Condition (iv) stays. Head office and branch do not always settle with each other in the way independent parties do; costs may be allocated by book entry, or funded by the head office. Unless there is an actual remittance to India in convertible foreign exchange, or in rupees where the RBI permits, the supply will still fail the export test. The promised circular on receipt of payment may help here, and is worth waiting for.
Supply without consideration
Supplies between distinct persons are taxable under Schedule I even without consideration. If a head office supports its branch without charging for it, there is a deemed supply with nothing received against it. Whether such a supply can meet the payment condition is not addressed.
The reverse flow
The proposal concerns services going out. Services received by an Indian company from its own foreign branch remain an import of services, taxable under reverse charge. The package contains one narrow relief on this side, for Indian establishments of foreign shipping companies.
The drafting
Section 2(6)(v) has been in the Act since 2017 and other provisions and circulars have been written around it. The amending text, and what is done to Explanation 1 to section 8, will need to be read closely when it appears.
Welcome, and overdue. Do not restructure for it yet.
The distinction between a foreign subsidiary and a foreign branch has never had a good tax policy reason behind it. Foreign exchange comes into India either way. Removing it puts the choice of overseas structure back where it belongs, with regulatory and commercial considerations, and removes a cost that has fallen hardest on sectors that are required to operate through branches.
For now the position is unchanged. A company that treats branch billings as exports before the amendment is in force is exposed to tax, interest and penalty. And the amendment, when it comes, will not help a business whose branch never actually pays the head office. The preparation worth doing now is on documentation and cash flows, so that the business can claim the benefit from the first day it is available.
What to do now
Companies with foreign branches or offices
- List every service flowing from India to each overseas establishment, charged or not, and how each is treated for GST today.
- Quantify the GST paid on those services and the input tax credit that would become refundable if they were exports.
- Check whether the branch actually remits payment to India for those services, in what currency, and whether inward remittance documentation is obtained. If settlement is by book entry, consider what would need to change, having regard to FEMA and to the tax position of the branch in its host country.
- Put a written inter-office arrangement and a consistent pricing basis in place, if there is none.
- Continue to charge and pay GST as now until the amendment is notified.
Repair, testing, calibration and processing businesses with foreign customers
- Identify contracts where goods are sent to India by a foreign customer and the service is now treated as supplied in India. These are the contracts that may move to export treatment once section 13(3)(a) is omitted.
- Review pricing on long-term contracts that currently build in unrecoverable GST.
Manufacturers delivering into SEZs or FTWZs for foreign buyers
- Review how these supplies are currently invoiced and whether zero rating has been claimed or challenged. The proposed explanation supports zero rating going forward; it is not stated to validate past treatment.
Businesses with pending refund rejections or demands on this issue
- Do not withdraw or settle on the strength of the recommendation. Keep proceedings alive and watch for the text of the amendment and any accompanying circular.
References
- Ministry of Finance, Recommendations of the 57th Meeting of the GST Council, press release of 8 October 2026, item 10 (read as reproduced by TaxGuru)
- Integrated Goods and Services Tax Act, 2017: section 2(6); section 8, Explanation 1; section 13(2) and 13(3)(a); section 16(1)
- Central Goods and Services Tax Act, 2017: Schedule I
- CBIC, Circular No. 161/17/2021-GST, 20 September 2021