Goods and Services Tax (GST), one of the biggest tax reforms, was implemented in India on 1st July 2017. Importantly, the seamless flow of input tax credit was one of the major aims behind the implementation of GST. Article described on Cross charge under GST vs Input Service Distributor, advance ruling related to cross charge.
However, the provisions, conditions and restrictions revolving around the input tax credit availment and utilization are constantly hindering the said purpose of GST implementation.
In the current era, most of the companies are having their principle place of business in one State and carrying out their business in various different states/ union territories. It is obvious that goods and services would be transferred from one such business unit to another.GST is a destination-based tax. Accordingly, the transfer of goods and services amongst one business unit to another of the same person/ company comes under the purview of GST. The treatment of the same is taken up and explained in the present article along with the implication of the same on the input tax credit.
What is multiple registrations under GST
Firstly, let us check why multiple registrations is needed to be obtained under GST by the same person/ company having different units (i.e. place of business) in the same or different states/ union territories.
As per section 25(1) of the Central Goods and Services Tax Act, 2017, every person who is liable to obtain GST registration needs to obtain separate registration in each operational State/ union territory. Meaning thereby that separate GST registration for each place of business established in a different state/ union territory.
Further, as per the proviso to section 25(2) of the Central Goods and Services Tax Act, 2017, the person having multiple place of business in a single State/ Union territory can also obtain separate registration for each such place of business.
Accordingly, the provisions regarding multiple GST registrations can be summed up in the following manner –
- Person having multiple place of business in different state/ union territory is mandatorily required to obtain separate GST registration for each such place of business;
- Person having multiple place of business in the same state/ union territory can optionally opt for separate GST registration for each such place of business.
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Multiple registrations from GST perspective
Now, let us check, how the multiple registration of the same company is to be treated under GST.
As per provisions of section 25(4) of the Central Goods and Services Tax Act, 2017 –
- A person who has obtained more than one registration (whether in the same state/ union territory or in a different state/ union territory);
- Then, all such establishments of the person will be treated as establishments of ‘distinct persons’.
It is important to note that the supply of goods and/ or services between distinct person is treated as supply under GST and accordingly the transaction attracts GST (provisions of the same are explained below).
Notably, the transfer of goods and services between such units is termed as a ‘cross charge’ under the common trade parlance. The same is explained hereunder.
What is cross charge under GST
Basically, the concept of ‘cross charge under GST’ originated from GST law as
- Two separate entities of a legal person are deemed as ‘distinct persons’; and
- Supply between such ‘distinct persons’, even without consideration, is deemed as supply between such distinct person and accordingly GST is payable on the same.
GST law doesn’t define ‘cross charge under GST’ and also there are no specific provisions in GST Act and rules made thereunder relating to the levy of GST as ‘cross charge’.
Importantly, it is quite easy to identify the supply of goods, whereas, it is rather complex in the case of a supply of services. Services like accounting, finance, legal, human resources, etc. are generally performed by employees in common for all business locations.
Treatment of ‘cross charge’ transaction under GST
Treatment of ‘cross charge’ transaction under GST –
Coming to provisions of entry 2 of Schedule 1 of the Central Goods and Services Tax Act, 2017, it states that any supply of goods or services or both between the ‘distinct persons’ will be treated as ‘supply’ even if the same is made without consideration.Concluding thereby that any supplies of goods or services or both between different GST registration of the same entity/ unit will be treated as ‘supply’ and accordingly attract GST. The effect of the same is highlighted hereunder
- GST will be applicable when goods are transferred, even without consideration, from one distinct person to another distinct person (eg. Stock transfer invoice format in GST).
- GST will be applicable when services are provided, even without consideration, by one distinct person to another distinct person.
Valuation of ‘cross charge’ transaction under GST –
Provisions of section 15(4) of the Central Goods and Services Tax Act, 2017 read with rule 28 of the Central Goods and Services Tax Rules, 2017 deals with the valuation of ‘cross charge’.
Accordingly, the value of the supply of goods/ services between the distinct person shall be –
- The open market value of such supply;
- Value of supply of goods or services of similar kind and quality (if the open market value of such supply is not available);
- Value determined by application of rule 30 or rule 31 (if the value cannot be determined as per any of the above options) i.e. –
- 110% of the cost of acquisition of such goods or cost of provision of such services (Rule 30 of the Central Goods and Services Tax Rules, 2017); or
- Using any other reasonable means (Rule 31 of the Central Goods and Services Tax Rules, 2017).
Availability of ITC on GST paid on ‘cross charge’ transactions-
As seen above, the transfer of goods or services or both between different units of the same entity/ company is treated as supply and accordingly GST is leviable on the same. Accordingly, GST so levied is eligible as an input tax credit for the unit paying the same.
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Advance ruling on cross charge under GST
While going through the concept of ‘cross charge’ it is important to go through one of the important advance rulings pronounced by the Appellate Authority for Advance Ruling (AAAR), Karnataka in the case of M/s. Columbia Asia Hospitals Private Limited.
The gist of the judgement is highlighted hereunder-
Question put forth before the Advance Ruling
Whether the activities performed by the employee at the corporate office in the course of/ in relation to employment such as accounting, other administrative and IT system maintenance for units located in other states i.e. distinct persons as per section 25(4) of the Central Goods and Services Tax Act, 2017 –
- Shall be treated as supply as per Entry 2 of Schedule I of the Central Goods and Services Tax Act, 2017; or
- Shall be treated as a supply of services as per Entry 1 of Schedule III of the Central Goods and Services Tax Act, 2017?
Appeal against advance ruling under GST | Karnataka Judgement
- The activities performed by employees at the corporate office in the course/ in relation to employment, the employees employed in the Corporate Office are providing services to the Corporate Office. Hence, there is an employer-employee relationship only in India Management Office (IMO).
The other offices are distinct persons and hence the employee in IMO have no employer-employee relationship with other offices.
- Held that the activities performed by the employee at the corporate office in the course of/ in relation to employment such as accounting, other administrative and IT system maintenance for units located in other states i.e. distinct persons as per section 25(4) of the Central Goods and Services Tax Act, 2017 shall be treated as supply as per Entry 2 of Schedule I of the Central Goods and Services Tax Act, 2017.
Cross Charge Vs Input Service Distributor
What is Input Service Distributor?
As we are aware, under GST, ISD full form in GST is ‘input service distributor’. In simple terms, ‘input service distributor’ means an office of the supplier of goods/ services which receives tax invoices towards receipt of input services and accordingly issues a prescribed document for the purpose of distribution of input tax credit to its different units/ branch.
Concept of cross charge and ISD, even though look alike, are two different concepts. Ironically, both the cross charge as well as input service distributor relates to the distribution of input tax credit to distinct persons.
Accordingly, it is critically important to understand the difference between cross charge and input service distributor. The same is explained hereunder –
- In cross charge, GST is charged on goods or services to distinct persons. Whereas, in input service distributor, there is a transfer of input tax credit attributable to the specified beneficiary distinct person.
- In cross charge, goods or services is transferred/ provided by unit to another (not involving a third party). Whereas, in the input service distributor, the services are provided by a third party.
- Cross charge refers to the transfer of both goods and/ or services. Whereas, ISD refers to only services.
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