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April 19, 2023

Intra-Co services GST is difficult with no input tax credit

Intra-Co services GST is difficult with no input tax credit

The Tamil Nadu bench’s recent advance judgement in the matter of Profisolutions, a private corporation, underlines that intra-company services are subject to GST. In this instance, the head office in Bangalore, which was registered in Karnataka under the GST Act, was supported by the branch office in Chennai (Tamil Nadu), which offered support services including engineering services, design services, and accounting services.

There must be a’supply’ of goods or services for GST to be activated. The Authority for Advance Ruling (AAR) was asked a moot question about whether the providing of services by a branch office in one state to its head office in another state through workers who are shared by both offices counts as a “supply” of services.

A unit must register for GST if it has a physical presence, such as the main office or branch offices. In other words, each state has its own registration requirements. Each registered unit is a “distinct person,” according to the AAR. Even in the absence of consideration, a transaction between different individuals is regarded as a supply and is subject to taxation. When workers employed at one registered location deliver services to another registered location of the same firm, the transaction is regarded as a supply and is liable to GST at a rate of 18%.

This is in agreement with earlier advance rulings issued, such as one issued by the Karnataka bench of the Appellate Authority for Advance Rulings in the Columbia Asia Hospitals case.

The question of whether a firm has allowed for a cross-charge for intra-company services and if GST has been collected frequently comes up for inspection during assessments, according to tax specialists and industry experts.

“Identifying employees and determining the value of the cross-charge in respect of services provided by them, across various registered units in a company, is a challenge,” says Abhishek Jain, partner and head (indirect tax) at KPMG-India. Additionally, the entire cross-charging of pay procedure itself may result in additional legal action.

The worst affected businesses, according to Jain, are those in industries that are not subject to GST (like the oil and gas or alcohol industries), are exempt from GST (like hospitals), or don’t have access to input tax credits (like the real estate industry). He uses a hospital as an example to show how, even if delivering medical services (the output) is free from GST, the cross-charge for within-company services is not. The GST paid on cross-charges would prevent the hospital from claiming an input tax credit.

“Under service tax, there was a single registration, and only the company was required to be registered,” explains the CFO of a pharmaceutical company situated in Mumbai. Therefore, intra-company services were not subject to tax. The GST has made performing intra-company services, which are necessary for the smooth operation of a firm, expensive and difficult.

A wide range of intra-company services are handled. Consider the services offered by a CEO with a headquarters in one state to branches located around the nation in several states. Or, conversely, back-office services like billing or accounting offered by a branch located in a tier-2 city in a state other from where the head office or other branches are situated.

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