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Corporates with multi-city offices can breathe easy as the GST Council has recommended a mechanism for taxability of ‘cross-charges’. It has also paved the way for clarification on the issue of ‘input services distributor’ (ISD).
Cross-charges mainly involve remuneration paid to Chief Executive Officer (CEO), Chief Financial Officer (CFO), Chief Experience Officer (CXO), besides other top management officials, as also officials and employees of departments such as human resources and accounting. These officials function from company headquarters, but provide services to offices set up in other places. The issue was over calculating tax according to place of supply.
GST law considers the head office located in one State and a branch office located in another as distinct entities. On Tuesday, the GST Council recommended clarifying the taxability of the internally generated services provided by one distinct entity to another.
A senior government official told businessline, “The clarification circular will be applicable on services where input tax credit (ITC) is available. Normally, companies have surplus credit. Now tax officials will accept the value mentioned in the invoice issued for services provided by the head office to a branch office and vice versa, and, accordingly, tax due will be set off with ITC.” This means there will be no cash outgo for tax payment. “Even if the value mentioned in the invoice is nil, it will be accepted,” added the official. Further, he stressed that this circular will not be applicable where credit is not available.
The council also recommended clarifying through a circular that the ISD mechanism is not mandatory for distribution of input tax credit of common input services procured from third parties to distinct persons, as per the provisions of GST law. It also said that an amendment may be made in GST law to make the ISD mechanism mandatory prospectively for distribution of input tax credit of such common input services procured from third parties.
Prateek Bansal, tax partner with White and Brief (Advocates & Solicitors), says the GST Council’s clarification on making the ISD mechanism non-mandatory for previous periods regularises/ endorses the cross-charge of common external expenses by one unit of a company to another, so as to allocate the ITC to the respective states. Though “this will resolve tax disputes arising on account of legality of cross-charge vs ISD mechanism, it is needless to mention that appropriate documentation such as agreement between two units, issuance of periodic invoices, etc, would need to be produced before the authorities for the validation of such cross-charge,” he said
The council’s recommendation to make ISD mandatory prospectively will give businesses time to implement the changes by obtaining ISD registration, intimating their vendors, and filing ISD returns.
As regards the scope of ‘internally generated services’, it is critical that such clarification encompasses all requirements of pan-India businesses, so as to determine the services which are ‘internally generated’ by one unit and the benefit of which is enjoyed by other units. “Allocation of employee salary expenses by head office to its units has been a contentious issue, and the matter is currently sub-judice before Karnataka High Court. One may hope that this clarification will put rest to such uncertainly and reduce litigation on this topic,” Bansal said.
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