In this article/blog, we will learn important aspects of GST which is a Goods and Service Tax charged on the supply of Good and Services. These important aspects are cross charge and GST implications.
What is the meaning of Cross Charge?
Basically we have to pay GST on the supply which is base on assumption or we can say GST is to be paid on deemed Supply of service and such service is deemed to be taking place between the employee of Head office and that of the branch office.
We will learn even more about our topic Cross Charge as we progress in our topic.
What is the guideline provided by any of the case laws in regards to Cross Charge?
We have our GST law which is implied on the whole country of India and with the help of GST law we will try to understand even better as in what is Cross Charge and what are the actions of sequence if such cross charge comes into practically. Also we will take up facts and figures traced from the GST law and case law that has happened and try to justify our explanations.
Going as per the CGST Act what states that “Services by an employee to the employer in the course of or in relation to his employment” is not at all treated as a supply but if the same sort of relationship exist between the employees of Head office of an entity with the employees of branch office, which is in another state, then such service rendered, even in the context of employee, is deemed to be supply of service and GST will be applicable on the same.
We will try to take one case which provided us with the guideline stating/ expressing that since the HO and other Units are located in different States but also belong to the same entity, then such HO and units are different or distinct persons. Also the employees of HO are not employees of the Unit in different States and hence, the transaction is covered by the provisions provided in the relevant schedule of CGST Act and hence GST is payable.The referral for the above is of the Authority for Advance Ruling (AAR) which has held in the case of Columbia Asia Hospitals Pvt Ltd- 2018-TIOL-113-AAR-GST.
In the above context, it is also expressed that suppose if once the units of the same entity in different states are deemed as “distinct /different persons”, then the question arises as to whether the Head Office is supplying the services of its employees to its other units, warranting payment of GST for such deemed supply.
Are the services supplied by Head Office to its units warranties payment of GST of such deemed supply?
The answer to our question lies in many facts which we will take up in the explanations below. Firstly we will start by understanding that by all means the employees of an entity are employees of the entity as a whole as the entity is a single entity.
We have Schedule I of the CGST Act which is implied in the case of cross supply. Now this schedule will give us brief idea of cross charge. Thus if we look at its fact then as per Schedule I, Supply of goods or services or both between “distinct or different persons”, even if it is made without consideration are treated as supply. Schedule I further says that such supply creates deeming (based on assumptions) fiction. Here we have to ask ourselves why such deeming fiction needs to be created at all and so the answer given by the Schedule I is that such supply without consideration is considered as deemed and all this provisions are set up for maintaining the Input Tax Credit chain is intact. Here comes another important question as in how Input Tax credit is co related in this. We will take up this explanation of Input Tax credit little latter, First we will try and understand the term deemed supply even better.
Further we see Schedule I property then we get started getting queries that the purpose would have been well achieved if only supply of goods without consideration alone are thus deemed to be supply, but knowingly or unknowingly, supply of services without consideration are also deemed to be supplies, which has led to insurmountable difficulties to the trade.
It was existing partially under erstwhile tax laws.
Now we continue with our understanding of how Input Tax Credit came in the picture of Cross Charge under GST
We have further explanations to Cross charge which is governed or regulated by proviso or conditions provided under Rule 28 of the CGST Act 2017.
As per second proviso under Rule 28 of the CGST Rules, 2017, if the recipient is entitled for full Input Tax Credit, then whatever value is declared in the invoice, even a nominal value could be adopted. But many of the recipient units may be involved in making exempt supplies also. Here comes another twist of exempt supplies. For this explanation of exempt supplies we have guidelines or provisions or conditions provided by Rule 42 of CGST Rules, 2017.
As per Rule 42 of the CGST Rules, 2017, where the recipient is entitle for Input Tax credit and also simultaneously the recipient is involved in making exempt supplies also, then they would be entitled only for proportionate ITC and hence the benefit of the second proviso under Rule 28 cannot be claimed in the matter of valuation.
Based on all the above facts and relevant rules and sections, the following two options are available for all assesses to follow.
• Do not pay any GST for any such inter unit supply of services and litigate the issue.
• In order to avoid litigation, pay GST for such cases and avail ITC at the recipient end.
Here looking at both the options above we can conclude that if option (II) above is chosen, the following factors have to be kept in mind.
If the receiving unit is entitled to avail full ITC (receiving unit not making any exempt supply and hence Rule 42 of CGST Rules, 2017 is not at all applicable), then valuation of the deemed supply of various services by HO to this units is not at all an issue and a consolidated, nominal value can be assigned for all services provided by HO to its units, as per second proviso to Rule 28 of the CGST Rules, 2018.