Goods and Services Tax Council may revise norms for GST levy

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With companies complaining about the levy of tax on allocation of salary cost of head-office employees to branches under the so-called cross-charge mechanism, the Goods and Services Tax Council will likely refer the matter to its law committee to review its applicability.

The levy has increased the cost of firms in sectors currently exempt from goods & services tax (GST) and raised the compliance burden for most others.“References have come from many places, including some industry associations on the matter. It will be taken to the GST law committee,” a senior official told FE.

Industry sources said there has been a sudden surge in the Directorate General of GST Intelligence (DGGI) investigation where issues such as inclusion of salary in cross-charge is being raised. GST is 18% on supply of services under cross charge.

In December 2021, the Appellate Authority for Advance Ruling (AAAR), Maharashtra had ruled in the case of Cummins India that allocation and recovery of the salary of the employees of the head office from the branch office/units will be subject to GST. The company had sought a ruling on the applicability of GST on allocation and recovery of the salary cost of the head office’s employees from the branch offices in different states.

The objective of cross-charge was to pass on the input tax credit from head office to branch offices in different states seamlessly for GST paid on common services of a company such as rent, IT and advertisement, industry sources said. However, there are no specific guidelines on the manner and structure of cross charge or whether to include salary costs of head office staff or not in it for taxation purpose.

“The GST Council needs to examine whether cross charge mechanism should continue and in what form. The most important issue is as to whether salary of one office (typically head office) staff has to be included in this for levying GST,” said Pratik Jain, Partner, Price Waterhouse & Co LLP.

The most impacted sectors are those exempt from GST such as healthcare, education, electricity and petroleum as input tax credit is not available, Jain said. It is also adversely impacting sector such as restaurants and real estate which don’t get input tax credit on taxes paid on input services and it becomes an additional cost for them.

Companies in these sectors, which were already suffering from GST on cross charges for common services, will see further rise in operational cost due to inclusion of salary. For other companies, it is more sort of a compliance burden as taxes paid in supply of services to branches are recovered through ITC mechanism.

In the pre-GST regime, any supply of service between head office and branch office was not taxable. Hence, it has been a matter of dispute between companies and tax officials after the GST was rolled out in July 2017. Inclusion of salary in cross charges for GST has further complicated the matter as industry is of the view that employees work for the company as a whole and not employed for head office or branches.