Tax Optimisation through Cross-charge under GST

Goods and Services Tax (GST) has been portrayed as One Nation – One Tax, the said connotation holds good from the consumer’s point of view inasmuch as the consumer has to pay a unified GST all across the nation for procuring any given goods or services or both. However, if GST is seen from the businessman’s (supplier’s) point of view then it is virtually One State – Three Taxes, this is because a supplier is required to take registration under GST Law in every State or Union Territory from where the business is being carried out and such supplier is treated as distinct person inter-se registrations in different States or Union Territories and accordingly, the supplier is liable to pay three types of taxes viz. IGST, CGST and SGST in every state separately. In addition to the liability to pay IGST, CGST and SGST separately for every state, the input-tax credit corresponding to the goods or services or both procured by the supplier in a given state shall also be available for utilisation only with respect to the discharge of liability of tax on outward supplies of that particular state.

Given the above provisions of GST Law, if a Company’s business activities are distributed evenly across various states both on input side and output side i.e., the Company is procuring goods or services or both in every state and it is also making outward supplies from each such state then the company shall be able to utilise the input-tax credit on inward supplies of goods or services or both procured by the Company in each such state while paying tax on outward supplies made from each such state. However, in many cases, a Company’s business activities are unevenly distributed such as (i) A Corporate Office, having no outward supplies of its own, is incurring various expenses for providing support services to branches from where the outward supplies are carried out; (ii) Branches such as Marketing Offices etc., having no outward supplies of their own, situated across various states are procuring goods or services or both at various locations, for promoting/facilitating outward supplies from a particular office.

In the above-mentioned situations, the Company shall not be able to effectively utilise the input-tax credit while paying the tax on outward supplies. In order to overcome such challenges, the GST Law provides the facility of Input Service Distributor (ISD) mechanism wherein the input-tax credit pertaining to services received by one office (having ISD registration under GST Law) can be distributed to the locations for which such services were procured by the Company. However, the Input Service Distributor (ISD) mechanism involves cumbersome compliances such as:

(i) An Input Service Distributor (ISD) is required to file a separate monthly return in Form GSTR-6

(ii) An Input Service Distributor (ISD) is required to distribute credit on monthly basis

(iii) An Input Service Distributor (ISD) is required to follow prescribed manner of credit distribution and maintain documentary evidence to substantiate the basis of credit distribution

(iv) An Input Service Distributor (ISD) cannot pay tax under reverse-charge mechanism

In the above matrix of facts and legal provisions relating to Input Service Distributor (ISD) under GST, one may resort to the mechanism of cross-charging of expenses by way of issuing tax-invoice which has been discussed in detail below.

Cross-charging of expenses by way of tax-invoice

Under the GST Law, units of a Company (i.e., units having same PAN) registered under GST Law in more than one state, shall be considered as distinct persons for the purposes of GST and as per deeming fiction given under Schedule I to CGST Act, any supply of goods or services or both between distinct persons, even without consideration, shall be leviable to GST. Accordingly, any support service given by the Corporate Office to branches (or vice versa) shall be construed as supply of services, even though there shall not be any monetary outflow among branches of a business under same PAN i.e., one legal entity.

In view of the above provisions of GST Law, one unit of a Company shall raise tax-invoice on another unit with respect to the support services given to such unit. Accordingly, in the case where a Corporate Office, having no outward supplies of its own, has incurred various expenses for providing support services to branches from where the outward supplies are carried out, shall raise tax-invoice on every such branch. The Corporate Office shall be able to offset its output tax liability arising due to raising tax-invoice for support services on various branches with the pool of input-tax credit accruing to it upon procuring inward supplies of goods or services or both procured by it for providing support to the branches. Let us take an example to understand this scenario, a Company ABC Limited is engaged in manufacturing of edible oil, has its Corporate Office, having no outward taxable supplies, located in Delhi and manufacturing units in 10 different states. The Corporate Office incurs total expenditure of Rs. 100 lakhs (plus Rs. 18 lakhs GST thereon) quarterly for procuring various external services for smooth running of operations of business as a whole and provides business guidance in terms of management support and other operational areas including finance, taxation, HR, payroll, IT, legal, negotiation of contracts, logistics management etc. to the manufacturing units spread across 10 states. In this case, the Corporate Office shall raise a tax-invoice on each of the 10 units spread across different states for the supply of support services on the basis of turnover or any other reasonable basis. Assuming that all the 10 units are having equal turnover, the Corporate Office may raise an invoice of Rs. 10 lakhs (plus Rs. 1.80 lakh GST thereon) on each unit. In this way, the pool of input-tax credit accumulated at the Corporate Office, having no outward supply to utilise the same, shall get distributed to the units having taxable outward supplies and the same may be utilised therefrom while paying the tax on outward supplies of edible oil.

Similarly, in case where branches such as Marketing Offices etc., having no outward supplies of their own, situated across various states are procuring goods or services or both at various locations, for promoting/facilitating outward supplies from a particular office, shall raise their respective tax-invoice for rendering support or marketing services on the particular office having outward supplies and such office shall utilise the input-tax credit so received from various branches or marketing offices while paying the tax on outward supplies. Let us take an example to understand this scenario, a Company ABC Limited is engaged in giving coaching for engineering entrance exams in Delhi and, has its Marketing Offices, having no outward taxable supplies, located in Gurgaon (Haryana), Noida (Uttar Pradesh) and Bhiwadi (Rajasthan). The Marketing Offices are engaged in promotional activities in their respective states and each office is incurring Rs. 1 lakh (plus Rs. 18,000/- GST thereon) quarterly to meet its expenses. In this case, each of the Marketing Office shall raise a tax-invoice on the Delhi office for the supply of marketing services say Rs. 1 lakh (plus Rs. 18000 GST thereon) quarterly. In this way, the pool of input-tax credit accumulated at each of the Marketing Office, having no outward supply to utilise the same, shall get concentrated at Delhi office having taxable outward supplies and the same may be utilised therefrom while paying the tax on outward supplies of Coaching Services.

It can be seen that the cross-charging of expenses among distinct persons as indicated above shall result in efficient utilisation of input-tax credit for the company as a whole.

With regard to the above cases of cross-charging of expenses, an internal company policy should be formulated for documenting and specifically mentioning the following points:

1. With respect to Support Services by Corporate Office to other Branches:

(i) Corporate Office shall provide operational support, including Finance, Tax, Legal, Regulatory, Logistics, Information Technology, Human Resources support services to all branches.

(ii) Corporate Office may procure services of external service providers for achieving the end objective of smoothly running the operations of the Company and providing the adequate business guidance & operational support to various branches.

(iii) Corporate Office shall raise a tax-invoice to respective branches on a reasonable basis for providing the above-mentioned support services.

2. With respect to Support Services by various branches to a particular office:

(i) Branch Office (e.g., Marketing Office) may procure services of external service providers for promoting the business activities carried out from a particular office.

(ii) Branch Office shall raise a tax-invoice to the office from where business activities are carried out for providing the marketing services.

Advantages of Cross-charge Mechanism under GST

(i) As full credit of tax charged by units inter-se shall be available (assuming all supplies made by Company are leviable to GST) in view of proviso to Rule 28 of CGST Rules 2017, any reasonable valuation adopted by the Company for billing shall not be disputed by the Tax Authorities.

(ii) The Company may formulate any basis for arriving at cross-charging of expenses, which may be dependent upon turnover basis or head count basis or any other reasonable basis.

(iii) Unlike Input Service Distributor (ISD) Mechanism, no separate compliance is required under cross-charging mechanism.

(iv) Unlike Input Service Distributor (ISD) Mechanism wherein monthly invoicing is necessary, there is no prescribed frequency mandated for cross-charging mechanism. Accordingly, a Company may determine a monthly/quarterly invoicing model as per its convenience.

In view of the above discussion, a Company having its business activities unevenly distributed across various states may consider the option of Cross-charging or self-invoicing or inter-unit invoicing mechanism vis-à-vis Input Service Distributor (ISD) mechanism.