“Explore the intricacies of ISD and Cross Charge in GST with CA Sagar V Shah. Delve into Circular No. 199/11/2023-GST, dissecting the taxability of internally generated and third-party services. Gain insights into the nuances, including the treatment of salary costs and the distribution of ITC. Unravel the complexities to make informed decisions in your business. Contact CA Sagar V Shah for expert advice. Disclaimer: This content is for informational purposes only and not professional advice.”
Disturbing sleeping lion makes him more dangerous. So is the case when GST council is aiming such sleeping lion i.e. litigated issue. One such issue GST council took up in its 50th meeting was with regards to ISD and Cross Charge.
Circular No. 199/11/2023-GST dated 17/07/2023 was issued in line with the topic in discussion. Firstly understanding of circular is important to further dissect the same.
The moot issue that the circular took in its radar was w.r.t. taxability of services performed by an office in a state of a PAN-based taxpayer to the office in a different state of the same PAN-based taxpayer. For ease of understanding, primary idea of ‘internally generated services’ and ‘third party services’ is important.
Internally generated services
Internally generated services are those services which an office in a state provide to office in another state of a same PAN centrally. For eg. Accounting services, IT services, etc. provided centrally from a single office for the organisation as a whole.
Third party services
Third party services are those services provided by an outsider to the organisation as a whole. For eg. License services, Professional services, etc.
What circular says w.r.t. Internally generated services
Internally generated services (where full ITC is available to BOs)
– In respect of supply of services by HO to BOs, the value of the said supply of services declared in the invoice by HO shall be deemed to be open market value of such services, if the recipient BO is eligible for full input tax credit.
– Accordingly, in cases where full input tax credit is available to a BO, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services, irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice.
– Further, in such cases where full input tax credit is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28 of CGST Rules.
Internally generated services (where full ITC is not available to BOs)
– In respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.
What circular says w.r.t. Third party services
– HO has an option to distribute ITC in respect of such common input services by following ISD mechanism.
– However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such input tax credit by ISD mechanism.
– HO can also issue tax invoices under section 31 of CGST Act to the concerned Bos in respect of common input services procured from a third party by HO but attributable to the said Bos and the Bos can then avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.
– Further, such distribution of the ITC in respect a common input services procured from a third party can be made by the HO to a BO through ISD mechanism only if the said input services are attributable to the said BO or have actually been provided to the said BO.
– Similarly, the HO can issue tax invoices under section 31 of CGST Act to the concerned BOs, in respect of any input services, procured by HO from a third party for on or behalf of a BO, only if the said services have actually been provided to the concerned BOs.
Dissecting pertinent issues
1. Meaning of supply
The levy of GST is solely dependent on ‘supply’. First clarity on supply between distinct persons is necessary depending on which taxing event would follow. Without identifying events of ‘supply’ between distinct persons and forming Council’s opinion on the same alongwith clarification on the same by just forming an opinion by an example (example of salary cost) does not meet the desired objective. Clarity in this sense infact brings more unclarity.
2. Overlapping of internally generated services and third party services
Grey is where there is no white or black. It is not always possible to identify centralized services as internally generated services or backed by third party. For eg. IT services centrally operated from an office may seem as internally generated services but it also inherently involves expenditure of third party’s software services. In fact in that sense, cross charge becomes more transparent and least controversial rather than treating the same either as self-generated services or third party services.
3. Full ITC
What constitutes as ‘Full ITC’ is in itself a pandora box. Whether full ITC in respect of a specific transaction (cross charge in our case) needs to be understood or whether full ITC (all ITCs taken together) is available to that specific GSTN (overall) needs to be understood? Certainly it makes sense to accept former view as accepting later view is unreasonable as there are always chances present of some ITC being unavailable to any GSTN.
4. Case of salary of employees only covered
Its is clarified that in respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, in cases where full input tax credit is not available to the concerned BO. Why the case of cost of salary of employees is only covered, there are many other costs not involving GST too. By just clarifying position on one such example, exclusion of other similar costs (For eg. Corporate guarantee cost) for cross charge is left to the choice of the taxpayer; especially when colour of the transaction is unclear between internally generated services or third party services.
5. Supply of goods
Rule 28 of CGST Rules, 2007; does not distinguish between goods or services. Whereas circular focuses only on aspect of services. Ideally the circular should also squarely apply to supply of goods, in line with provisions of law.
6. Related person
Again Rule 28 of CGST Rules, 2007; is applicable to both distinct and related persons. Circular clarifies the aspect related to distinct persons only, the same should be clarified or in line with related persons too.
7. ISD v Cross Charge
On one-side, Circular mentions to distribute ITC on common third party services either as an ISD or cross charge; Press Release emphasis to opt for ISD mechanism mandatorily for distribution of input tax credit of such common input services procured from third parties. This is against clarification provided by Circular itself.
Summarizing on the subject, it is advised to continue stand of issuing tax invoices under Section 31 to the concerned BOs as Circular itself takes its stand on ‘can’ which is interpreted as an option. It is said so because you can never know view of department at later stage for the said subject. Also blur line of interpreting internally generated services or third party services makes it more obvious.
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CA Sagar V Shah | Sagar V. Shah & Associates | (Chartered Accountants) | M : +919979977066 | E : casvsassociates@gmail.com
DISCLAIMER: The views expressed are strictly of the author and Sagar V Shah & Associates. The contents of this article are solely for informational purpose. It does not constitute professional advice or recommendation of firm. Neither the author nor firm and its affiliates accepts any liabilities for any loss or damage of any kind arising out of any information in this article nor for any actions taken in reliance thereon.
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