Clarifications from the GST Council The GST Council has
recommended the following clarifications on ISD and cross charge:
1. The ISD mechanism is not mandatory for distributing ITC of
common input services procured from third parties to the distinct persons as
per the present provisions of GST law.
2. The taxability of internally generated services provided
by one distinct person to another distinct person will be clarified in the future.
3. The GST law may be amended to make the ISD mechanism
mandatory prospectively for distribution of input tax credit of such common
input services procured from third parties.
Hence, Businesses that currently use cross charge to
distribute ITC of common input services will not need to change their practices
immediately. However, they should be aware that the ISD mechanism may become
mandatory in the future. In light of such recommendation, the Government
of India has issued Circular No 199/11/2023- GST dated 17 July 2023 which
clarified the following:
·
In
case where the Head Office (‘HO’) distributes or wishes to distribute ITC to
Branch Offices (‘BOs’) in respect of such common input services through the ISD
mechanism, HO is required to get itself registered mandatorily as an ISD in
accordance with Section 24(viii) of the CGST Act
·
Distribution
of the ITC in respect a common input services procured from a third party can
be made by the HO to a BO through ISD mechanism only. 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 Section 15(4) of CGST Act
(i.e. Open Market Value)
·
In
case where full ITC is eligible to the recipient, then the value declared in
the Tax Invoice would be deemed to be the Open Market Value 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
·
In
case where full ITC is not eligible to the recipient, then 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 value of such
services
·
Below is the summary on Circular No. 199/11/2023-GST
dated: 17th July, 2023 tabulated for easy reference:
|
Sl no |
Issue |
Clarification |
|
1 |
ITC availed by Head office on common input services
provided from 3rd party (Attributable to HO and BO both or
attributable to one or 2 BO) |
1) HO has option to distribute
ITC in respect of common services by way of ISD Mechanism However as per current provisions, ISD is not mandatory 2) HO Can issue invoice to BO
and BO can claim ITC sub to provisions of Sec 16 and Sec 17 of CGST Act 3) If HO wish to distribute
through ISD mechanism then regn of ISD is mandatory and Distribution of the
ITC in respect a common input services procured from a third party can be made
by the HO to a BO through ISD mechanism only |
|
2 |
In respect of internally generated services, there may be
cases where HO is providing certain services to the BOs for which full input
tax credit is available to the concerned Bos -
HO
may not be issuing tax invoices to BO -
HO
may not be considering cost of a particular component such as salary cost of
employees involved in providing services while issuing tax invoice Question here is : is it mandatory to issue invoice for
internally generated service? Is it mandatory to include salary cost of
HO employees When full ITC is available to BO |
Value of Supply b/w distinct persons needs to be
determined as open market value of such supply. Rule 28 clause (a) Proviso to Rule 28: where the recipient is eligible for
full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods
or services (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.) 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 input
tax credit. If HO has not issued invoice to BO where full ITC is
available to BO, then 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.
|
|
3 |
In respect of internally generated services provided by
the HO to BOs, in cases where full input tax credit 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? |
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 It is not mandatorily required to be included while
computing the taxable value of the supply of such services, even in cases
where full input tax credit is not available to the concerned BO. |
For reference:
Meaning of Distinct person, ISD Mechanism and Cross charge
is as under:
a) Distinct persons Under GST
law, entities with separate GST registrations under the same PAN will be
treated as distinct persons. This means that two or more branches of the same
company that are located in different states would be considered distinct
persons. Taxability of supplies between distinct persons Supply between
distinct persons is taxable even if there is no consideration involved.
This means that if one branch of a
company provides services to another branch, the supply would be taxable and
GST would be payable.
b) ISD mechanism : The ISD
mechanism is a way to distribute ITC of common input services to distinct
persons.
An ISD is a taxable person who is
appointed by a group of distinct persons to distribute ITC of common input
services to those persons.
c) Cross charge: Cross charge is
a mechanism where a taxable person invoices the supply of goods or services to
another distinct person who is part of the same group. The invoice for cross
charge is typically issued at a zero rate of tax.
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