The Finance Ministry has put out a draft circular clarifying the taxability of services provided by head office, located in one State, to the branch office located in another. Technically, it is called cross charges and the issue is how tax can be calculated in such a case.
According to the draft, circulated during the GST Council Meeting on June 21, the Ministry said it received various representations seeking clarification on the taxability of activities performed by an office of an organisation in one State to the office of that organisation in other State. According to the law, both are considered as distinct person and the issue here is taxability of the supply of services between such distinct persons.
This is in line with the view taken by Karnataka Authority for Advance Rulings (AAR) that in-house functions such as human resources and payrolls, if carried out from a centre in one state for offices in other states, will face GST, for which invoice will have to be issued.
In order to bring uniformity in the implementation of law across the country, the draft circular has been issued.
The draft reiterated that where a taxpayer registered in different States is a distinct person, “an employee of a Head Office (registered as a separate entity) does not provide any service to a Branch office, rather the Head Office provides service to the Branch Office.”
With this it is clear that it is not just the salary of an employee sitting in Head Office and providing services like accounting, IT, human resource, branch offices in other States that will attract 18 per cent GST, but overall cost incurred by the Head Office in providing the service, which includes salary.
The draft said that there is need to apportion expenses incurred by one office for provision of output services to another office by any reasonable means “consistent with the principles of valuation in the GST law and generally accepted accounting principles.” Such apportionment or valuation of supply will be done on the basis of information maintained by the company in its normal course of working. There is no need to maintain additional records of activities undertaken by individual employees.
According to the draft, the only exception to this principle would be distribution of Input Tax Credit (ITC) in respect of input services procured by one office and distributed to the others for which Input Service Distributor (ISD) provisions apply as the taxpayer is expected to mandatorily obtain ISD registration. An input service distributor (ISD) is a business which receives invoices for services used by its branches. It distributes the tax paid, to such branches on a proportional basis by issuing an ISD invoice. The branches can have different GSTINs but must have the same PAN as that of ISD.
Commenting on the development, Harpreet Singh, Partner at KPMG, said while issuance of circular on transactions between Head Office and Branch Offices is a step in the right direction, it may not serve the intended purpose, where it is clarified that employee cost for activities like HR, admin etc also needs to be cross charged by Head Office(HO) to Branch Office (BO). “Issuance of circular on transactions between HO and BO clearly demonstrates that Government is lending their ears to the industry and is serious about clarifying on all ambiguous issues,” he said.
Expenses will need to be apportioned using valuation principles laid down under the GST Law and generally accepted accounting principles.
Experts said the government needs to treat employee of a company as employee of a single company irrespective of their location.