As per schedule 1 of CGST Act, any supply between different GST registrations having the same PAN (distinct persons) shall be treated as “supply” even when made without consideration.
The said provision reads as follows:
Schedule 1: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION 1…
2… Supply of goods or services or both between related persons or between distinct persons as specified in section 25 , when made in the course or furtherance of business
Further, section 25 of the CGST Act states that “A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.” Further section 25(5) of the Act states that “Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”
It is the combined reading of Schedule 1 and the concept of distinct persons that gives rise to the need to cross charge. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity shall be termed as a supply and shall attract GST. In line with the said provisions, every supply between distinct persons result in cross charge between such entities. Such supply shall be undertaken by issue of appropriate documents. Further, the receiver of the supply shall be entitled to GST credit subject to conditions.
Cross charging can be understood in better manner with help of below mentioned example-
XYZ Limited has Head office in Maharashtra, following centralized billing and payment mechanism. XYZ Limited has 2 registrations at Delhi and Karnataka. HO has availed certain audit services on payment of IGST. However, such audit services shall be used at both the locations i.e. Delhi and Karnataka. Thus, when the HO charges for the said audit services to respective locations, it shall be required to supply under an appropriate invoice and cross charge the value of audit services accordingly.
Value of supply of services between Head office and alternate locations
As per the section 15 of CGST Act, value of supply, in case of distinct person, shall be determined as per Rule 28 of CGST Rules which prescribes the methods to determine the value.
Rule 28 of CGST Rules reads as under- The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- a) be the open market value of such supply; b) if the open market value is not available, be the value of supply of goods or services of like kind and quality; c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order. Rule 30 provides for value as 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services. Rule 31 provides value shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter. Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value of the goods or services.
Based on the above provision, HO shall be required to discharge GST on the following value,
a) Open market value of such supply
b) Value of supply of like kind or quality
c) 110% of cost of acquisition of such goods or cost of provision of such services or
d) Any other reasonable means
Cross charge / ISD to SEZ units
A situation may arise wherein a location might require to cross charge to a unit located in SEZ. Since supply to a Special Economic Zone is considered as a zero rated supply, cross charge may be required to be considered as export under both the options i.e. on payment of IGST or under LUT without payment of IGST.
Further, an ISD may distribute credit attributable to SEZ under an invoice and SEZ shall be eligible to avail the credit on the same.
GST law requires state wise registration and treats each registration as distinct person. The common expenses may be either distributed via ISD or may be charged via cross charge. Both the options attract their respective compliances which shall be adhered to with all the provisions of the GST law which at times may be cumbersome also especially with regards to maintenance of accounts and record along with audit provisions under GST regime. However, for supplies made between distinct taxable persons, cross charge is the only option. While ISD mechanism brings in a lot of structure in the manner of distribution of credits, it also increases the compliance burden as monthly returns need to be filed for entities registered as an ISD. Cross charge mechanism offers flexibility and is also, the only mechanism that can be employed for distribution of credits related to goods and capital goods. Both mechanisms have their pros and cons and need to be evaluated carefully before a decision is taken.