Guide for Multiple GST Registrations & Cross-Charging

If you have more than One GST Registration-Then this is for you

Introduction

In the present growing Bharat, businesses have existence in multiple locations and engaged in business activities. They have, many times, centralized units to manage those activities which are required for all the units in the country. For this, centralized units procure, generate and provide such facilities to the rest of Bharat. This is very common these days. In GST, every activity is chargeable to tax if it has taxable event, i.e. Supply. In order to charge tax on transactions made between such units of the organization, GST envisages certain deeming provisions also. Another aspect would be at what value these units will bill each other for these common activities performed on each other’s behalf. In this article, I have tried to explain various aspects including chronological development relating to taxability of transactions between branch units and centralized unit working for them all.

What is Cross Charge and ISD?

Both the concepts are related to distribution of ITC to distinct persons. As per Sec-2(61) of CGST Act, “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 purpose of distributing the credit of CGST, SGST, IGST or UTGST paid on the said services to a supplier of taxable goods or services or both having the same PAN as that of the said office.

There is no such definition of the word “Cross Charge” under the CGST Act, 2017. In the present one nation one tax regime, organizations are functioning in whole of India. But for operational efficiency, they procure, perform and execute common activities at one central place for the entire country wide operations. Under such circumstances, that central place, normally head office (HO), accumulates expenses of both types on which GST is paid or not paid. Some of the examples of such common expenses are, salaries of directors and top officials who are taking decisions for the whole organization but sitting at HO, centralized sales & marketing services, single contract of internal audit for all branches, software services, financial and other administrative services. In that scenario, HO generates an invoice on pre-decided periodicity to various Branches and value of such invoices are determined on the basis of proportionate value of aggregate expenses divided on a reasonable basis and due GST shall be charged. This process of generating invoices is commonly called-Cross Charge.

Schedule I to Section-7 of CGST Act, 2017

Section-7(1) (c) of the CGST Act provides that the scope of supply extends to activities referred in Schedule-I which are made or agreed to be made even without a consideration.

As per Entry No-2 of Schedule-I of the CGST Act, 2017

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.

Due to this entry, the service supplied by the Corporate Office to its other units by way of performing activities which benefits the other distinct persons is liable to be charged to GST. Even though no consideration might have been charged by HO to its branches. In accounting terminology, this concept is referred to as “Cross Charge”. The Corporate Office will cross charge the other units of the same entity, the cost of rendering its services which benefit its other units, by raising a tax invoice and GST will be applicable accordingly. The Valuation for the supply of the service rendered by the Corporate Office to other distinct persons will be done in terms of Rule 28 or 30 of the CGST Rules.

Advance Ruling relating to Cross Charge:

1. Columbia Asia Hospitals (P) Ltd (AAAR Karnataka):

Appellate Authority for Advance Ruling, Karnataka in the case of Columbia Asia Hospitals (P) Ltd held that there is an employee-employer relationship only at the Head Office and not with the entity as a whole. Undoubtedly, an individual is employed by the entity and serves the organisation. However, the applicability of the entry 1 of Schedule III is to be understood in the background of the GST legal provisions. Every unit of an entity who is required to obtain registration in more than one state shall, in respect of each such registration be considered as a distinct person in terms of Sec-25(4) of CGST Act. A distinct person has an independent identity under GST law and the provisions of the GST laws, its procedures and compliances are applicable to every distinct person as an independent registered person.

The liability to GST on the supplies made by a distinct person is to be discharged by the said distinct person as a registered person and, the liability cannot be shifted to another distinct person on the grounds that they are part of the same entity. The employees stationed at the location of a particular establishment of a distinct person are deemed to be rendering their services only to that establishment of a distinct person and not to any other distinct person even though all distinct persons are of the same business entity. Such services of employees, when rendered in the course of their employment are not considered as a ‘supply of service’ in terms of entry 1 to Schedule III. However, when the services of employees are benefitting other distinct persons, then such services of employees will be considered as a ‘supply of service’ by one distinct person to another. The employee-employer relationship is to be viewed separately for every registered unit of the business entity. Therefore, in the instant case, the services of the employees at the Head Office in so far as they are benefitting the other registered units of the appellant are to be considered as a ‘supply of service’ by one distinct person to another, and by virtue of the entry 2 of Schedule I, supply of services between distinct persons even if without consideration is a ‘supply’ within the scope of section 7 and is liable to GST.

It also held that since the Head Office of appellant is providing a service to its other distinct units by way of carrying out activities such as accounting, administrative work, etc with use of services of employees working in Head Office, outcome of which benefits all other units, such activity is to be treated as a taxable supply in terms of Entry No-2 of Schedule-I read with Sec-7 of CGST Act.

2. Cummins India Limited (GST AAAR Maharashtra):

The Cummins India Limited (Appellant) sought for Advance Ruling with respect to the following questions:

i. Whether availment of ITC of tax on common input supplies on behalf of other unit/units registered as distinct person, and further allocation of the cost incurred for same to such other units, qualifies as supply and attract levy of GST?

Held that availment of ITC on common input supplies on behalf of other unit/units registered as distinct person qualifies as supply and attracts GST.

The Impugned Order has ruled that supply made between distinct persons of the Appellant qualifies as ‘Supply’ even in absence of any consideration and therefore Appellant is required to levy GST thereon. The necessity to pay GST on every function performed between distinct persons may also cover in its fold the functions performed by an employee from one distinct unit for another distinct unit.

ii. If GST is leviable, whether assessable value can be determined by arriving at nominal value?

Held that Assessable Value shall be arrived in terms of Rule 30 of the CGST Rules,2017 (i.e. 110% of the cost of provision of such services).

Rule 30 prescribes for value of supply of goods or services or both based on cost of production or manufacture. The applicant has submitted that they are engaged in manufacture, sale of a variety of diesel engine, parts thereof, and related services, and undertakes all day-to-day activities required. Thus, the cost of production of goods is available and therefore, it would be prudent for them to arrive at a value which is 110% of the cost of production. Hence, we find Rule 30 is very much applicable in the appellant’s case.

iii. Once GST is levied and ITC thereof is availed by recipient unit, whether the Applicant is required to register itself as an ISD for distribution of ITC on common inputs

Held that the Appellant is required to obtain registration as an ISD.

The Impugned Ruling has invoked the provision of Sec-24 of the CGST Act, 2017 to compel the Appellant to obtain registration as an ISD. Relevant portion of the Ruling is reproduced below:

ISD is a facility available to persons /businesses having a large share of common expenditure and where billing/payment is done from a centralized location. The concept of ISD has been introduced to simplify the credit taking process for various assesses/businesses etc. and the facility helps the concerned to have a smooth flow of ITC under GST.

We refer to provision of Sec-24 (viii) of the CGST Act which is as under:

Compulsory registration in certain cases – Notwithstanding anything contained in Sub-section (1) of Sec-22, the following categories of persons shall be required to be registered under this Act,-

(viii) Input Service Distributor, whether or not separately registered under this Act.

The applicant wants to distribute common ITC received by the HO for which payment billings are done by them. If they want to distribute such credit then they will be an Input Service Distributor. They must compulsorily obtain separate registration as an ISD. Hence, the Authority does not agree with the applicant’s contention that the provisions of Sec-24(viii) of the CGST Act merely refers to the necessity of an independent registration if a person intends to avail the facility of ISD and does not create any stipulation as to necessity of availing the ISD facility itself.

CIRCULAR NO-199/11/2023-GST:

CBIC has issued a circular vide Circular No-199/11/2023 dated 17^th July, 2023. Issues that may arise with regard to taxability of supply of services between distinct persons in terms of sub-section (4) of section 25 of the CGST Act have been clarified in this Circular. For understanding this Circular, Let us consider a business entity which has Head Office (HO) located in State-1 and a branch offices (BOs) located in other States. The HO procures some input services e.g. security service for the entire organisation from a security agency (third party). HO also provides some other services on their own to branch offices (internally generated services).

ISSUE NO 1:

Whether HO can avail the ITC in respect of common input services procured from a third party but attributable to both HO and BOs or exclusively to one or more BOs, issue tax invoices under section 31 to the said BOs for the said input services and the BOs can then avail the ITC for the same or whether is it mandatory for the HO to follow the ISD mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and BOs or exclusively to one or more BOs?

CLARIFICATION:

It is clarified that HO has an option to distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20 of CGST Act read with rule 39 of the CGST, 2017. In this case, HO is required to get itself registered mandatorily as an ISD in accordance with Section 24(viii) of the CGST Act.

However, as per the present provisions (therefore these are amended from a prospective date through budge 2024, which will be applicable from a future date) of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such ITC 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.

ISSUE NO 2:

In respect of internally generated services, there may be cases where HO is providing certain services to the BOs for which full ITC is available to the concerned BOs. However, HO may not be issuing tax invoice to the concerned BOs with respect to such services, or the HO may not be including the cost of a particular component such as salary cost of employees involved in providing said services while issuing tax invoice to BOs for the services provided by HO to BOs.

CLARIFICATION:

The value of supply of services made by a registered person to a distinct person needs to be determined as per rule 28 of CGST Rules, read with sub-section (4) of section 15 of CGST Act. As per clause (a) of rule 28, the value of supply of goods or services or both between distinct persons shall be the open market value of such supply. The second proviso to rule 28 of CGST Rules provides that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

Accordingly, 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 ITC, 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, 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.

ISSUE NO 3:

In respect of internally generated services provided by the HO to BOs, in cases where full ITC is not available to the concerned BOs, whether the cost of salary of employees of the HO involved in providing said services to the BOs, is mandatorily required to be included while computing the taxable value of the said supply of services provided by HO to BOs

CLARIFICATION:

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 ITC is not available to the concerned BO.

Now, amendments have been proposed in the provisions relating to ISD through this budget of 2024.

As Per Finance Act, 2024:

The Union Minister for Finance and Corporate Affairs Smt. Nirmala Sitharaman has presented the Interim Union Budget 2024-25 on 1^st Feb, 2024 in the Parliament and it got presidential assent on 15^th Feb, 2024 and become an Act i.e. Finance Act, 2024. The Key Changes in this Budget with respect to ISD is after taking into consideration the recommendations made by the GST Council in its 52^nd meeting held on 7^th October, 2023. It has recommended amendments in Sec-2(61) and 20 of CGST Act, 2017 as well as amendment in Rule 39 of CGST Rules, 2017 in respect of the same. Applicable rules shall be notified in due course.

Further, the GST Council in its 50^th meeting held on 11^th July, 2023 has recommended to clarify through a circular no-199/11/2023, that ISD mechanism is not mandatory for distribution of ITC of common input services procured from third parties to the distinct persons. The Council has also recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively for distribution of ITC of such common input services procured from third parties. Which makes it amply clear that ISD is not mandatory for previous periods already passed. Off course from 15 Feb 2024, after these provisions become law bill coverts into an Act, will be mandatory but still after introduction of the rules.

The two Amendments which are brought through Finance Act, 2024 are as given below:

1. Sec-2(61) of CGST Act, 2017, New Definition of ISD is replaced:

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;’.

2. New Sec-20 of CGST Act, 2017, Manner of Distribution of credit by ISD is replaced:

(i) Any office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, shall be required to be registered as Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices.

(ii) The Input Service Distributor shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under sub-section (3) or sub-section (4) of section 9 paid by a distinct person registered in the same State as the said Input Service Distributor, in such manner, within such time and subject to such restrictions and conditions as may be prescribed.

(iii) The credit of central tax shall be distributed as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit, in such manner as may be prescribed.”

CONCLUSION:

As per the present provisions of GST Law, ISD mechanism is not mandatory. Therefore, many registered taxpayers are not opting ISD mechanism and they were choosing to distribute ITC under Cross Charge. There was a lot of confusion about the taxability of activities performed by the distinct persons. To remove this confusion and to bring the clarity on these issues, CBIC has issued a Circular, mentioned above, confirming that ISD mechanism is an option and it is not mandatory to be followed. So, HO has the flexibility to distribute ITC for common Input Services either through the ISD Mechanism or through Cross Charge. This amendment through Finance Act, 2024 would also enable ISD to receive input which is paid by normal registration of the entity on reverse charge basis and passed to ISD.

Now, Finance Minister has proposed in the Budget for compulsorily registration under ISD provisions for distribution of common ITC. Therefore, in the considered opinion of the author, after Rules with respect to Section 20 above will be issued, ISD shall become mandatory to distribute input accumulated on services received on behalf of other GSTINs on the same PAN. With this amendment, recipients who are even entitled for full ITC will get some credit blocked due to non-availability of supply transactions at their level and consequently non adjustment of ITC passed through ISD.

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The author can be contacted at [email protected] His mobile number is +91-9891112120.

DISCLAIMER: This publication serves as a general guide for informational purposes only. The references and content provided are for educational purposes and should not be considered as legal advice. We assume no liability for any losses incurred directly or indirectly through the use or reliance upon the information or conclusions presented in this publication. Prior to taking any action based on this publication, it is recommended that you seek professional advice. This work is solely intended to contribute to the subject of GST and serves the best interests of the profession.