GST on Cross Charge-Different Services by H.O to Branch

Goods & Services Tax Implications on “Cross Charge” i.e. Various Services by Head Office to its Branches.

From the Starting of Goods and Services Tax, matter of Head Office services to Branches was very much discussed & concern were raised on its taxability. This was widely applicable issue but there was no clear solution or litigation free GST opinion on it. This is due to reason that, Head Office and Branch Offices are distinct persons as per Sec 25(4) of Central Goods & Services Tax Act, 2017.

According to Serial No two of Schedule I of Central Goods & Services Tax Act, 2017, When during the course of business or furtherance of business, a supply of goods or services, or both, between related parties or between distinct parties, is considered to have occurred even in the absence of consideration. Services provided by Head Office to branches are therefore subject to GST, even in the absence of payment/without consideration are taxable.

Authority of Advance Ruling:  When the following Authority of Advance Ruling and Appellate Authority of Advance Ruling held that support services provided by Head Office to branches are taxable under the GST Law, this issue gained more significance & attracted the attention of the industry:

The 35th GST Council meeting held on June 21, 2019, discussed the aforementioned subject of taxable services provided by the Head Office to branches. But, it was left open until the following GST Council Meeting and wasn’t settled at that time.

Recently, in order to clarify above mentioned issue faced by GST taxpayers, Indian Govt has issued Circular No. 199/11/2023-GST dated 17th July 2023, with respect to “GST Taxability of services provided by Head Office to Branches”.

In The Normal circumstance, this has also been called & discussed as “Cross Charge”. Above GST Circular No. 199/11/2023-GST issued on 17th July 2023 has settled long discussed & litigated issue of “Cross Charge” to Great Extent.

The following is an overview of the clarification provided by the aforementioned GST Circular:

PROCUREMENT OF COMMON SERVICES BY HEAD OFFICE, WHICH ARE USED BY HEAD OFFICE & BRANCH OFFICE OR BRANCH OFFICE’S ONLY

[ It means, Common Services for whole company such as Internal Audit or ERP Services or Consultant for complete whole company etc]

In such case, Head Office has alternative-II for compliances of Goods and Services Tax provisions.

ALTERNATIVE I: Head Office can either obtain input Services Distributor Registration & distribute common Input Tax credit as per input Services Distributor provisions given in Goods and Services Tax Law. OR,

ALTERNATIVE II : In this case, Head Office can issue Tax Invoice to Branch Office in respect of common input services procured from a 3^rd party by Head Office but attributable to the said Branch Office’s. The Central Goods & Services Tax Act, 2017’s sections 16 and 17 regulate how the Branch Offices may then claim Input Tax credit for the same.

NOTE – As per Press Release to 50th Goods and Services Tax Council meeting dated 11th July 2023, soon amendment will be made in Goods and Services Tax Law to make Input Services Distributor Registration Compulsory. In this case, after amendment in Goods and Services Tax Law in future, Alternative II will not be available. Suggestions made by Goods and Services Tax Council in this regard is as under:

“50th Goods and Services Tax Council meeting has also Suggestions that change may be made in Goods and Services Tax law to make Input Services Distributor system compulsory prospectively for distribution of input tax credit of such common input services procured from 3^rd parties”

INTERNALLY GENERATED SERVICES BY HEAD OFFICE TO BRANCH OFFICE’S LIKE HR DEPT OR ACCOUNTING OR ADMINISTRATION ETC SUPPORT BY HEAD OFFICE TO BRANCH OFFICE.

Here, there was doubt as to whether the cost of salary of said staff/employee to be charged by Head Office to Branch Office along with GST. Some Authority of Advance Ruling has ruled that, Head Office is needed to pay Goods and Services Tax on it. This circular has clarified and settled this issue. For said activity, two situation is provided in circular.

❖ CLARIFICATION ISSUE BY 50TH GOODS AND SERVICES TAX COUNCIL MEETING:

SITUATION-I: WHERE FULL INPUT TAX CREDIT IS AVAILABLE TO THE CONCERNED BRANCH OFFICE’S –

If Tax Invoice is issued by Head Office to Branch Office for said purpose: In such case, the value declared on the invoice by Head Office to the said Branch Office in respect of a supply of services shall be deemed to be the fair market value of such services as per 2^nd proviso to Rule 28 of Central Goods & Services Tax Rules 2017.

This is irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice. It means, whatever invoice value is mentioned for internal services of Head Office to Branch Office’s (where Branch Office is eligible for whole  Input Tax credit), same will be accepted and it will be deemed to be market value.

• If GST Invoice is not issued by Head Office to Branch Office for above purpose: It means, Head Office has not made cross charge to Branch Office for its services. In this case, Value of such kind of services may be deemed to be declared as Nil value by Head Office to Branch Office as per 2^nd proviso to Rule 28 of Central Goods & Services Tax Rules 2017.

SITUATION-II: WHERE FULL INPUT TAX CREDIT IS ‘NOT’ AVAILABLE TO THE CONCERNED BRANCH OFFICE’S –

• In respect of internally generated services provided by the Head Office to Branch Office, salary cost of employees of the Head Office, involved in providing the said services to the Branch Office, is not Compulsory needed to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the respective concerned Branch Office
• It means, Head Office is not need to raise GST invoice to Branch Office for said internal service & not needed to pay Goods and Services Tax.

With this welcome circular. The Indian Govt has made significant efforts to resolve the long discussed disputed around cross-charge.