Introduction:
The Central Board of Indirect Taxes and Customs, under the Ministry of Finance, Government of India, has issued Circular No. 199/11/2023-GST to provide clarity on the taxability of services rendered by an office of an organization in one state to another office of the same organization in a different state. This circular aims to address the concerns raised by various stakeholders and ensure consistent implementation of the law across all field formations.
Taxability of Services between Distinct Persons
Under Section 25 of the Central Goods and Services Tax Act, 2017 (CGST Act), offices of an organization in different states are considered distinct persons. The circular provides much-needed clarification regarding the taxability of services exchanged between these distinct persons.
1: Input Tax Credit for Common Input Services
The circular clarifies that when the Head Office (HO) procures common input services from a third-party, which are attributable to both the HO and Branch Offices (BOs) or exclusively to one or more BOs, there are two options for availing Input Tax Credit (ITC). The HO can either use the Input Service Distributor (ISD) mechanism, as outlined in Section 20 of the CGST Act and Rule 39 of the CGST Rules, or issue tax invoices under Section 31 of the CGST Act directly to the BOs. The BOs can then avail ITC based on these invoices, subject to the provisions of Section 16 and 17 of the CGST Act. However, the current provisions do not mandate the HO to follow the ISD mechanism for distributing such ITC. If the HO chooses to distribute ITC through ISD, it must register as an ISD as per Section 24(viii) of the CGST Act. The distribution of ITC through ISD can only be made if the input services are attributable to or provided to the BO in question.
2: Valuation of Internally Generated Services
In cases where the HO provides internally generated services to the BOs, there may be situations where the HO does not issue tax invoices or does not include certain components, such as the salary cost of employees involved in providing these services, in the computation of the value of services. The circular states that the value of supply of services between distinct persons, in this case, should be determined as per Rule 28 of the CGST Rules and subsection (4) of Section 15 of the CGST Act. According to clause (a) of Rule 28, the open market value of such supply of services between distinct persons shall prevail. The second proviso to Rule 28 specifies that if the recipient BO is eligible for full input tax credit, the value declared on the invoice by the HO shall be deemed to be the open market value. Therefore, even if the cost of certain components, like employee salaries, is not included in the invoice, the value declared on the invoice by the HO will be considered the open market value if the BO is eligible for full input tax credit. In cases where the HO has not issued a tax invoice for a particular service, the value of such services may be deemed as Nil in the invoice, still considered as the open market value as per the second proviso to Rule 28.
Illustration:
XYZ Corporation has its Head Office (HO) in State-1 and branch offices (BOs) in State-2 and State-3. The HO procures security services worth Rs. 50,000 from a third-party security agency, which are required for the entire organization. Additionally, the HO provides marketing services to the BOs, incurring a cost of Rs. 30,000 for employee salaries involved in providing these services.
1. Input Tax Credit (ITC) for Common Input Services:
The HO has two options for availing ITC for the security services:
Option 1: Using ISD Mechanism
– The HO registers as an Input Service Distributor (ISD).
– The HO issues a tax invoice under Section 31 of the CGST Act to the BOs in State-2 and State-3, specifying their share of the security services.
– The BOs can then avail ITC based on these tax invoices.
Option 2: Directly Issuing Tax Invoices to BOs
– The HO issues tax invoices under Section 31 of the CGST Act directly to the BOs in State-2 and State-3 for their share of the security services.
– The BOs can then avail ITC based on these tax invoices.
2. Valuation of Internally Generated Services:
The HO provides marketing services to the BOs without issuing tax invoices or including the cost of employee salaries in the computation of the service value.
– If the BOs are eligible for full input tax credit, the value declared on the invoice by the HO for the marketing services, even if it does not include the salary cost, will be deemed as the open market value.
– Suppose the BOs in State-2 and State-3 are eligible for full input tax credit.
– The HO declares the value of the marketing services as Rs. 30,000 on the invoices issued to the BOs, which will be considered the open market value.
In this illustration, the circular provides clarity on availing ITC for common input services and determining the value of internally generated services, ensuring consistent implementation of the law across the organization’s different offices in different states.
Conclusion: The circular provides essential clarification on the taxability of services exchanged between offices of an organization located in different states, deemed as distinct persons. It explains the options available for availing input tax credit for common input services and highlights the valuation principles for internally generated services. Field formations are urged to publicize the contents of this circular through suitable trade notices, and any implementation difficulties should be brought to the attention of the Board.
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