Cross Charge Vs Input Service Distribution – ISD is not a substitute for Cross Charge and Vice-Versa
Goods & Services Tax (GST) is one of the biggest tax reformations in Indian Indirect Tax History. With this reformation there are many unsolved issues which are still exist even after 3 years of implementation of GST Law.
The purpose of the government to implement GST is to bring India under one Indirect Tax System against “N” number of existing Indirect Taxes. We can say that the government is successful in subsuming the number of earlier Indirect Taxes but unfortunately there is corresponding Increase in unsolved issues. These unsolved issues are creating lack of clarity amongst the Taxpayers.
However, government must clarify some of the major issues is the need of the hour. Till that time, Taxpayers are advised to address these issues with proper / logical interpretations so that they were remain tax compliant.
One of the issue under GST till date is Cross Charge vis-a-vis Input Service Distribution (ISD).
In this article we try to understand the meaning of both the terms i.e. Cross Charge and ISD as per the provisions of GST Act.
A. Let us first understand meaning and implication of Cross Charge under GST:
Cross Charge is specifically not defined under any of the GST Acts. However, General meaning of Cross Charge is when a one person is providing service to another person and for providing such services the first person raises / charges amount from the second person.
For better understanding, Entry 2 of Schedule I of CGST Act, where it is specified that “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” is supply and in view of this entry when one perform services for others within a company is termed as cross charge.
In accounting terms, when a head office allocates common expenses to its branches, this methodology can also be termed as cross charge, where they are specifying that Head office is incurring expenses for branches / units and as a result Head office is allocating the cost to the respective units / branches.
We can also say that Cross Charge is a type of sharing of services between two or more Branches / Offices where one branch / office charges from other branches / offices for such sharing of services.
Now let us understand the Taxability of Cross Charge under GST as below:
In order to make any transaction taxable under GST, first we need to check whether it passes the Supply test which is prescribed under the provisions of GST Act, or not.
Section 7 of CGST Act defines the Scope of Supply under. Relevant Sub Sections of section 7 is reproduce below for understanding the same:
Section 7(1):For the purposes of this Act, the expression “supply” includes —
(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;
(c) the activities specified in Schedule I, made or agreed to be made without a consideration;
All supply of Goods or Services which passes the conditions laid down under Section 7 of CGST Act, as above should be considered as Supply under GST.
From Sub clause (a) of Section 7(1), it is crystal clear that to make a supply under GST, three important preconditions are required in any transaction which are:
i) there should be a supply of goods or services,
ii) there must be consideration,
iii) transaction should be in course of furtherance of business.
Now, for the subject matter which we are discussing i.e., Cross Charge we need to check whether all conditions are met or not.
⇒ Supply of goods or Services:
Section 2(52) defines goods as, “goods” means every kind of movable property other than money and securities but includes actionable claim, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under a contract of supply;
Section 2(102) defines services as, “services” means anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
Cross Charge is not any kind of movable property, as described initially also it is a Service which is provided by one unit / branch to other within the same Company. From the definitions also, Services are defined in such a way that nothing is left from the ambit of Supply under GST.
From the above facts, we can say that Cross Charge is a Supply of Service under GST. First condition to make a supply under GST is satisfied.
(Detailed analysis – refer below where Entry 2 to Schedule I is explained.)
Section 2(31) defines consideration as,
“consideration” in relation to the supply of goods or services or both includes —
(a) any payment made or to be made, whether in money or otherwise, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government;
(b) the monetary value of any act or forbearance, in respect of, in response to, or for the inducement of, the supply of goods or services or both, whether by the recipient or by any other person but shall not include any subsidy given by the Central Government or a State Government :
Provided that a deposit given in respect of the supply of goods or services or both shall not be considered as payment made for such supply unless the supplier applies such deposit as consideration for the said supply;
Consideration in simple terms means something is provided in return to the supplier in monetary or non-monetary terms.
Generally, in case of transactions between units / branches within a company, there is no flow of consideration for the supplies provided to one another. If there is no flow of consideration to the supplier, the same is not treated as supply as per the provisions of GST Act.
For further discussion, we are assuming transactions related to Cross Charge between different branches / offices takes place without any consideration.
The Second condition to make a supply under GST is not full filled. Cross Charge is not a supply under GST if there is no consideration. However, we need to consider Schedule I of CGST Act also to conclude this statement.
⇒ Transaction should be in course or furtherance of business
Section 2(17) defines business as, business includes —
a) any trade, commerce, manufacture, profession, vocation, adventure, wager or any other similar activity, whether or not it is for a pecuniary benefit;
b) any activity or transaction in connection with or incidental or ancillary to sub-clause (a);
c) any activity or transaction in the nature of sub-clause (a), whether or not there is volume, frequency, continuity or regularity of such transaction;
d) supply or acquisition of goods including capital goods and services in connection with commencement or closure of business;
e) provision by a club, association, society, or any such body (for a subscription or any other consideration) of the facilities or benefits to its members;
f) admission, for a consideration, of persons to any premises;
g) services supplied by a person as the holder of an office which has been accepted by him in the course or furtherance of his trade, profession or vocation;
h) activities of a race club including by way of totalisator or a license to book maker or activities of a licensed book maker in such club; and]
i) any activity or transaction undertaken by the Central Government, a State Government or any local authority in which they are engaged as public authorities
The earlier Excise / Service tax laws do not define the term business. However, it is defined under the CST Act / State VAT laws. The definition in the GST law is a modified version as compared to the definition under CST / VAT laws.
This definition is very wide and covers all the transactions that were subjected to various taxes that are being subsumed in the GST Laws. The definition includes General activities as well as specific activities. To sum up, any activity directly or indirectly, with regular frequency or not, whether done with profit motive or not is Business under GST laws.
Cross Charge services are generally ancillary supplies to the main / principal activities of the supplier. It is exceedingly difficult to say that transactions within different branches / offices is for non-business purposes, if it is so, the taxpayer must be ready for implications of other tax laws.
Hence, we are assuming these transactions are in course or furtherance of business which is the requirement to make a transaction a supply under GST.
Form the above analysis, Cross Charge is a Supply of Service which is carried out in course or furtherance of business by the Taxpayers but without consideration.
Further, Clause (c) of Sub section (1) of Section 7 of CGST Act, specifically includes activities which are specified under Schedule I of CGST Act when made or agreed to be made without consideration.
Now, we need to analyze relevant activities of Schedule I to make Cross Charge a Supply under GST.
Entry No 2 of Schedule I of CGST Act Specifies:
ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION
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:
Provided that gifts not exceeding fifty thousand rupees in value in a financial year by an employer to an employee shall not be treated as supply of goods or services or both.
Schedule I of CGST Act, lays down the activities which are Supply under the provisions of GST Laws even if they are provided without any consideration.
As specified in Entry No 2 above, Cross Charge is a Supply of Service which is in course or furtherance of business, the same is discussed earlier in this article.
Now we must understand the meaning of distinct person as pe the provisions of CGST Act.
Section 25(4) of CGST Act specifies the condition where person is considered as distinct person for this Act – “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”.
In simple words, Taxpayers registered under GST Act with same PAN or under Same PAN are considered as distinct person under GST Act.
For example, CDE Private Limited is a company registered under GST in the state of Delhi. The Company has its branch in Pune for which they have taken registration under GST in Maharashtra also. Now as per Section 25(4), Delhi GSTIN and Maharashtra GSTIN are considered as distinct person for the purpose of this act.
It is pertinent to note that Section 25(4) says, person who has obtained or required to obtain more than one registration. This means one cannot say that, if he is registered in Delhi and not in Maharashtra despite of the fact that he is required to take registration as per Section 22 of CGST Act in Maharashtra, are not be considered as distinct person under GST Act.
So, where a person has registration under GST in one state and is required to obtain registration in other state (not taken as of now), then also they both are considered as distinct person as per GST Act.
Also, it is needless to mention that for the purpose of GST Act, each GSTIN is considered as separate legal entity in eyes of GST law, i.e. each registration is considered as different from one another even if they are registered under same PAN.
To continue from the nature of Services which we left earlier while discussing definition of Services. We will now discuss in detail to understand what exactly the services are provided by corporate office / head offices to its branches which could be treated as Cross Charge.
a) Many companies operates / have their presence in more than one state. They have their branches in various states, however they are having a common Corporate office in a state from where all the operations of branches are controlled.
The Corporate office generally does not have its own supply in which the company is principally engaged, supplies of main product / services are from branches in different states.
Now, one needs to understand that these branches are working under the control of its Corporate office. In order to control the branches, corporate office has its own employees, infrastructure and all its related cost. The Corporate office is managing the overall business of the company from a location where all the major decisions are taken and based on such decisions, branches are instructed to work upon.
Also as discussed above, the corporate office and branches are separate legal person as per GST since they have different GSTINs.
b) Assume a situation where a Company appoints another Company to provide these Services like budgetary decisions, marketing decisions, controlling decisions etc. against a consideration. Then the latter company is providing services as per GST Act to the former company for which they will raise Invoice charging GST (assuming all other conditions are satisfied).
Now, from the above two scenarios (a) and (b), in first scenario is one where all the major decisions are taken by Corporate office of the Company itself, no other party is not involved and in the second scenario where third party is involved for providing some services. There are two differences in both the scenarios:
1. There is no consideration in the first scenario as compare to second,
2. In first scenario, the services are provided by Company’s corporate office in one state to its branches in other state, however as per GST law both are considered as separate legal person since they both bears different GSTINs. In the Second scenario, the services are provided by third party, however it does not create any difference as such, since in both scenarios’ services are provided by a one legal person to another legal person as per GST.
So, the only point of difference is consideration. However, Schedule I has specifically list out the activities where, the activities are treated as supply under GST even if there is no consideration.
The Scenario one in our case above falls under the Schedule I activities, here services are provided by Corporate office having a specific GSTIN to its branches in different states having different GSTINs without any consideration. This will be considered as Supply as per GST Act even if there is no consideration.
To sum up, we can say that person registered under same PAN having different GSTIN are distinct person and if they are providing any services to one another the same is considered as supply as per GST law and taxes to be discharged accordingly.
This activity or transaction is termed as Cross Charge, where a Corporate office is controlling or providing services to its branches in different states and same is taxable under GST Act. The supplier of Service will raise Tax Invoice for supplying such services and recipient branches can claim the eligible credit.
The Value of Supply of service in this case is a different aspect which will be discussed separately.
B. Now understand the concept of Input Service Distributor (ISD)
Section 2(61) defines ISD as,
“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office;
ISD Mechanism is similar to the provisions of erstwhile Service Tax regime. As per the above definition under CGST Act, an ISD is a person who receives Tax Invoices towards receipt of Input Services only and that input services are used by a single branch / GSTIN or more than one branch / GSTINs or all the branches / GSTINs registered under same PAN.
Let us analyze the concept of ISD Mechanism.
In present scenarios, Companies generally takes services of various types for all its branches in different locations from a single supplier for smooth functioning of the businesses like ERP packages for the whole Company, Audit and related professional services, etc where its is a bit difficult to prescribe the Value for each branch / office. In such scenario ISD mechanism will play its role. The total ITC which is charged by the supplier on its Invoice for the services for the Company as a whole will be distributed on the basis of the turnover of the respective states if the services are used by the all the branches.
Also, it is pertinent to note that why this provision is brought up into GST law, If we refer to the provisions of Section 16 of CGST Act, where requirements for eligibility to take ITC are prescribed. One of the conditions to avail ITC as prescribed in Section 16(1) is as below:
Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Under GST law, each GSTIN is considered as separate legal entity and all the conditions / sections are equally applicable on each GSTIN.
So, in our earlier example, if we say Company CDE ltd has taken ERP package for all of its branches in different states and if its Invoice is raised on its Corporate office only, then one can say that Corporate office is not eligible to take full ITC, since services are used by all branches / offices and not only by Corporate office alone. Referring to the provisions of section 16(1), if services are not used by the taxpayer for his business, then he is not eligible to take ITC on such services.
In order to tackle such situation, ISD mechanism is placed into the picture. The taxpayer is required to take a registration as a ISD under GST. And after obtaining such registration, the taxpayer is required to take all the Service Invoices which are related to the company as whole or form more than one branches / offices on its ISD GSTIN number.
On monthly basis the ISD registration will transfer the ITC which is received by it from various services to the branches / offices which are using such services.
Cross Charge or ISD: –
We need to keep in mind that Input Service Distribution is related or is linked to the receipt of Inward supplies by a taxpayer, on the other hand Cross Charge is from the Outward supply perspective.
So ISD is not a substitute for Cross Charge or Cross Charge is not a substitute for ISD.
It is important to note that taxpayers are required to understand that both the terms have separate meaning and purpose. Cross Charge Is something where Services are provided by one branch / office to other branches / offices whereas ISD is a mechanism to transfer the ITC in a prescribed manner to the respective unit for the services received by them.
It is important to note the below two points:
1. One cannot simply say that instead of taking ISD registration, the branches / offices will allocate the ITC related to the other branches / offices by issuing Tax Invoice.
2. Cross Charge is totally different from ISD mechanism, Cross charge is the charges against the services provided by one branch to another and Invoice for Services related to all the branches are received on a single GSTIN from where ITC is transferred to the respective branches / offices in the prescribed manner.
Conclusion – ISD and Cross charge both are separate provisions under GST law and one provision cannot substitute for other provision. So, if a single Invoice is received for all the branches / offices in different states, the ITC can be claimed only on the basis of ISD mechanism under section 20 read with Rules.
Whereas Cross charge is a supply as per section 7 of CGST act read with Schedule I on which taxes are required to be discharged.