Inter-state office services to attract GST as per Karnataka AAR
Is your human resource department hiring for your offices in other states? Or your finance department preparing payrolls for employees in other centres? These services by one office to branches in other states will be treated as “supply” and attract goods and services tax (GST), according to an order by the Karnataka Authority of Advance Rulings.
The ruling implies that companies with offices in many cities will need to raise invoices for in house service functions and pay GST. Although the tax can be claimed as an input credit by the receiving location in most cases, it would substantially increase the compliance burden for businesses spread across states.
Businesses need to obtain registration in each state where they have an establishment from where any business activity takes place, even if the activity is only provided to the head office of such businesses.
According to the ruling, a large business with its head office, say, in Mumbai, where the entire finance, IT and HR functions are centralised for its offices across states, would be deemed to be providing support services to other locations and hence need to raise invoices charging GST.
In cases where goods or services are fully or partially exempt from GST — such as hospitals and schools — this would be an incremental cost.
In other words, the employee’s salary or cost at the head office when providing services or supervising other offices will attract (goods and services tax) GST.
According to the AAR, the interpretation has been made as per Entry 2 of Schedule I of the CGST Act.
The above ruling by the Karnataka AAR was made in the case of Columbia Asia Hospitals, which is headquartered in Bangalore.
The AAR stated that the ‘employer-employee relationship’ at the hospital chain’s Bangalore head office exists in that office alone – and not in other branches – even if they are part of the same corporate entity.
The AAR, in a ruling sought by Bengaluru-based Columbia Asia Hospitals, held that the employeremployee relationship in the corporate office exists only there and not with other office units, even if they are part of the same legal entity, as far as the GST law is concerned.
“The activities… shall be treated as supply as per Entry 2 of Schedule I of the CGST Act,” the AAR said. It also held that the employee cost incurred at the corporate office should be considered while arriving at the value of goods or services provided by such offices to other locations.
Inter-state office services to attract GST as per Karnataka AAR
It can never be negated that GST authorities have up to now reworked the laws and provisions under the Goods & Service Tax regime with regard to GST registration and GST return filing procedure as to make them more opportune to the trade & commerce. Nevertheless, the government is very keen on making the system totally flawless for the tax assessees as well as the authorities themselves by periodic modifications and amendments in the GST provisions.
Recently, the Karnataka Authority of Advance Rulings (AAR) has notified that the services provided by a branch of an organization to its branches in other states will now be treated as ‘supply’, and they will attract GST.
IMPLICATION OF THE NOTIFICATION
The recent ruling by the Karnataka AAR suggests that companies that have their branches in multiple cities in other states will need to raise GST invoices against the in-house services and thus, will have to incur GST liability against such services.
Pros & Cons of the Ruling :
Although the GST paid on the services provided to the branches of other states can be claimed as an input credit by the recipient branch, this would substantially raise the burden of compliance on various businesses spread across different states.
- For the time being, this will also spread the time-lag in compliances such as GST return filing procedure, especially for various businesses that have GST registration under the composite scheme.
- Among those entities that will be most affected by this ruling, are the hotel businesses, resorts, health clinics, accommodation businesses, schools, colleges & institutes that have their chains spread across different cities.
Impacts :
While there has been clarity that cross-charge of expenses would be liable to GST, the challenge lies in its valuation. As the cross charge is between the same entity, such expenses are cross-charged at cost without any mark-up. It would be interesting to see whether such valuation is acceptable to the tax authorities,”
According to the experts, the new ruling regarding treatment of interstate services under GST is likely to increase the cost of services in the following sectors-
- Healthcare
- Education
- Entertainment
- Food Business Operators
- Spa & Beauty
This is so because the GST liability on the businesses will, in turn, result in the tax burden on the consumers of such services, which will raise the cost of these services.
GST applicability on core management functions
The ruling by the Karnataka AAR could have wider ramifications, triggering GST liabilities for those enterprises that currently do not have to pay GST on their core activities and thus do not qualify for tax credits / refund schemes.
It is also troubling for businesses that supply goods and services that are either GST-exempt, or not within its ambit – healthcare, education, petroleum, and liquor.
Overall, the tax interpretation significantly escalates the costs for enterprises with multi-state operations.
This is because the core functions of any large or multinational firm, such as human resources, IT maintenance, marketing, and accounting – executed from the corporate head office – could be treated as a supply of service to other offices / units.
Hence, the ruling also has tax implications for the salaries of a firm’s C-suite employees – chief executive officer, legal head etc.
Tax experts in India are now waiting to see if the federal government issues a clarification with regards to the validity of the Karnataka AAR interpretation and if it will apply across industry.
Treatment
The ruling has been passed after the application was filed by Columbia Asia Hospitals. This is a Bengaluru-based Healthcare institution that had inquired about the possibility on an advance ruling regarding services rendered by its employees at the corporate office in its chains located in other States— viz. accounting, IT or other administrative functions. They had sought clarification on whether such activities shall be treated as supply under GST.
Non-Taxable Services
Some experts have suggested that this ruling can have unpleasant consequences. Notably, the GST will be applicable to even those entities that are not supposed to incur GST liability on their core activities.
As per a suggestion by an economist, the situation can become worse if a recipient branch is involved in the supply of exempted goods & services. The branch office will have to incur GST liability even in case of supply of exempted services from the supplier unit. It won’t be able to avail input of GST levied by the supplier unit.
Principally, the GST Council in its 28th meeting had exempted several services from GST. the new ruling by Karnataka AAR is likely to put adverse impact on its policy.
Analysts have pointed out that this Advance Ruling on interstate services can be really perplexing as the companies now may need to impose GST on even employee costs in notional head office, and ITC of such GST won’t be available to the recipient branch of the company.
These inferences point out that the GST authorities need to carefully consider the issue and propose a solution accordingly.
Its rulings are case-specific but they have a persuasive impact on tax assessment in the cases of other firms under similar circumstances.
Source : Press Reports
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