“Key insights from the 50th GST Council meeting revealed in 9 Notifications and 8 Circulars by CBIC. Learn about taxability of services from Head Office to Branch Offices, clarifying important issues for businesses with operations in multiple states.”
The 50th GST Council meeting held on 11th July 2023, taken various important decisions to facilitate trade and industry. The decisions were now officially declared by CBIC yesterday by way of 9 Notifications and 8 Circulars. This clarifies several issues were ambiguity was prevailing for a long time.
One important Circular released yesterday was Circular No: 199/11/2023-GST dated: 17.07.2023 which deals with the taxability of the Services from Head office (HO) to its Branch Offices (BO) both being distinct persons.
There were three important questions clarified by the CBIC and they are given below in a simplified manner for our better understanding.
These queries and clarifications applicable only for the business having presence in Multiple states. If any business having presence in only one state, then this circular is not applicable for them.
Context:
For example, if a business is having its Head Office at Mumbai (Maharashtra) and having branch offices at New Delhi (Delhi), Kolkata (West Bengal), Chennai (Tamilnadu), Bangalore (Karnataka) & Hyderabad (Telangana).
There may be instances where HO spending for some services centrally which will be used for all their Branches across India. Services like Legal, Banking, Insurance, Internet, Software Licensing, Branding, Advertisement, Travel arrangements etc., are few of the examples of such services which may be engaged by the HO for themselves as well as Bos. In such case all the Invoices issued by the Service providers will be addressed to HO and HO will be paying to the Service Providers. Wherever eligible ITC is available HO will be taking the same and the tax is then not distributed to its BOs directly.
If the HO has taken ISD (Input Service Distributor) registration under GST, then the HO will avail the ITC centrally and distribute the ITC to its BOs based on the proportional BO Turnover. Where ISD registration was not taken the entire ITC is being utilized by the HO.
There were also cases HO is providing some services to its Branch offices. It includes, Recruitment, Salary Processing, Taxation, Vendor Bill processing, Payments, Customer Coordination, Marketing, Centralized Purchases, Logistics Management, Exim activities etc.,
In such cases, HO will be doing the works for its entire organization and the teams were centralized at HO and extend their services to its Branch Offices wherever required. For these kinds of services, many Organizations were not charging for their services since it is being treated as service to the organization as a whole. Moreover, it is very hard to compute the value of the service rendered by the HO to its BO for each service, working out of the man-days / man hours spent, cost of salary proportionally to be charged to BOs etc.,
For the above two major ambiguities, ITC Availed by HO to transferring to its BOs and Services rendered by HO to its BOs, CBIC has given its clarifications in its Circular Circular No: 199/11/2023-GST dated: 17.07.2023.
As earlier said, CBIC categorized all the above issues into three questions and given its clarification:
1. In case of HO availing ITC for the services obtained centrally, whether HO can issue Invoices to its Branch Office or is it mandatory to have an ISD Registration and distribute the credit through ISD only?
Taking ISD Registration is NOT mandatory as per the present provisions of CGST Act and CGST Rules. However, there is an option to register under ISD and distribute ITC through ISD mode.
Hence Businesses have two options now:
a. HO to take ISD registration, avail Input Tax Credits on Common Services and distribute ITC to its Branch Offices proportionally through Input Service Distribution mechanism.
b. Not to take ISD registration, directly issue Tax invoice for the services rendered by HO to its Branch Offices for the services provided from HO to BO
The only condition is, that the services being charged should be actually received by the Branch office.
2. In case of internally generated services by HO (Recruitment, Marketing, Vendor management etc.,) to its BOs, what is the value to be determined for billing to its BOs? Whether salary component of each employee who provide such services has to be considered? (if the BO is eligible for availing ITC in full)
The value of internally generated services from HO to BO has to be determined as per Rule 28 of CGST Rules.
Accordingly, the options are:
a. Value of the Services shall be the open market value of similar services
b. If an Invoice issued by HO to BO under section 31, then the value declared in the Invoice has to be considered as open market value irrespective of whether any components / costs has been included or not in the value. (Hence computation of Salary component of employees are not mandatory)
c. If HO has not issued any Invoice to the BO for the services rendered by HO to BO, then the value of such services has to be treated as NIL.
(Obviously, option c. would be the one which will be considered by the businesses)
3. Incase of the situation mentioned in Question No: 2, but if the Branch office is not eligible to avail ITC, then what will be the procedure for computing the value of such services?
In respect of internally generated services by HO to BO where BO is not eligible to avail full ITC for such services, then there is no mandatory to include the cost of salary of the employees. Hence the business can decide the value of the services as per their own computation and charge tax on the same.
To summarize:
a. Common input services availed at HO can be either distributed through ISD or it can also charged through Invoices to BOs, only if the services are actually provided to BO.
b. Internally generated Services from HO to BO – value to be determined by the HO for the services. Cost of Salary of the employees not mandatory to be included in the value of services, irrespective of whether BOs can avail ITC or not for such services from HO.
c. These methods applicable only for the businesses having operations in multiple states
The CBIC has given its clear-cut clarifications for the services provided by the HO to its Branch Offices for the common services availed from external service providers and internally generated services from HO. All the above clarifications are for the services flowing from HO to BOs only.
There is no clarity given by the CBIC for the services rendered by the Branch Offices to Head Office or for the services rendered from one Branch office to another Branch office / multiple Branch offices.
There are situations where specific expertized services provided from one branch to other branches or Head Office.
Some organizations are also having classification of zonal wise, division wise offices pertaining to the same organization, where services generated and provided within some zones / divisions without involving Head Office.
The ambiguity on those parts is kept open and unresolved. Wish CBIC should come up with clarification for such services also.
Author Bio
