To simplify the indirect taxation system and provide a uniform system of taxation, the Goods and Services Tax (GST) regime in India was introduced. Nevertheless, there are various issues that many big establishments with many activities across states struggle to use the Input Tax Credit (ITC). As GST requires individual GST registration in every state, businesses face the tendency to end up with unutilized ITC balances in one State and make cash outlays in another.
This is where the concept of cross charge under GST comes into a practical solution. Cross charge is provided to ensure that anywhere the input tax credits can be redistributed across states, registration of the same entity, resulting in improved cash flow management and compliance. This blog will justify reasons why cross charge is necessary, its working, its process, its benefits and the results of not implementing cross charge.
Why do Multiple GST Registrations Generate ITC Issues?
In the case where a company operates in various states, it will have to get GST registration in each state. Every registration is considered as a separate individual according to the GST law, despite the fact that they may be the same company.
To use an example: when the head office in Delhi acquires specific services (such as audit service, HR consultancy, or software license) the input tax credit on GST paid is available in the Delhi GST registration. These services can, however, actually be beneficial to the branch offices in Maharashtra, Karnataka or Tamil Nadu.
As GST credit cannot be transferred directly between various state registrations, ITC that is built up in one state may be under-utilised. This causes inefficiency and cash crunches in the business.
What is Cross Charge under GST?
Cross charge is a process through which one GST registration of a company charges another registration of a company to supply services or goods. In simplistic terms, the head office charges its branch offices with a tax invoice for the common input services they are using.
This is so that ITC is shared across various GST registrations. The head office GST is claimable by the branch office, thus maximising the total ITC usage.
Procedure for Cross Charge
Under GST, cross-charge is done in the following manner:
1. Determination of Common Services
These services that the company needs to find include those services that are purchased by one GST registration and consumed by others, including legal and consultancy services, audit, IT software, and human resource services.
2. Allocation of Expenses
The ratio of cost shared between the head office and the branch office must depend on a logical and defendable approach, which could be the turnover ratio, number of employees or any particular application.
3. Raising Tax Invoice
The branch office should be issued with a tax invoice by the head office (or procuring unit) for the portion of the services that is allocated. GST has to be levied as per.
4. Branch Office input Tax Credit
Input Tax Credit of GST paid under cross charge can then be acknowledged by the branch office against its output liability.
5. Reporting in GST Returns
To comply, both units have to declare the transactions in their GST returns (GSTR-1, GSTR-3B).
Cross Charge Vs Input Service Distributor (ISD)
Cross charge and input service distributor (ISD) is something that businesses are usually confused with. The two mechanisms are different in their application, although both are concerned with the distribution of ITC:
- ISD: A separate registration made with respect to a particular purpose of assigning ITC of common services to other units.
- Cross Charge: GST registrations that are in existence invoice one another to share ITC.
In practice, cross-charge is more popular with companies because they do not have to do extra registration of ISD, and have greater flexibility.
Benefits of Cross Charge
- Efficient ITC Utilisation: The cross-charge is used to ensure that ITC is not blocked in this state. The credit is transferred to branches in which the liability of the output tax is on the books, resulting in less cash outflow.
- Conformance with GST Provisions: Under GST, a cross-charge is required in case services are consumed by more than one state registering. Failure to comply may bring punishment.
- Better Financial Planning: Companies can maximize the working capital by eliminating avoidable cash payments to the tax authorities and utilizing the available ITC.
- Avoids Litigation: Effective cross charge under GST reduces the chances of conflict when performing the GST audits and brings transparency to the whole process.
- Simplified Internal Costing: Cross charge also serves to allocate the costs between the branches and the head office in the right manner and makes internal cost reporting more accurate.
Consequences of Not Implementing Cross Charge
- Blocked ITC – ITC can not be used in another GST registration without a cross-charge, and as a result, it leads to increased taxes.
- Cash Outlay- Branch offices can find themselves paying cash in GST even though ITC can be found in a different state.
- Penalty and Interest – The failure to comply with the provisions of the cross charge is subject to penalty and interest under the GST law.
- Audit Issues – In GST audits or departmental queries, failure to do cross-charging can be considered a breach and hence litigation.
- Increased Compliance Cost – Businesses can also be required to justify discrepancies in ITC usage, and need updated time to reconcile.
Cross-charge Examples
Assume that a company whose headquarters is in Delhi engages the services of a legal consultant and pays GST on the value of services of Rs. 10,00 000. Its branches in Delhi and Mumbai equally find the services helpful.
- The invoice is billed, and ITC Rs. 1,80,000 is availed by Delhi HO.
- In order to record ITC to Mumbai, Delhi HO drafts a cross-charge invoice for Rs. 5 00 000 plus GST to the Mumbai branch.
- Branch Mumbai pays the invoice, but gets an ITC of Rs. 90,000 against its output liability.
In this way, ITC is effectively disbursed, making sure that there is compliance and less tax.
Key Points to Remember
- Cross charge is compulsory when services are used by more than one GST registration.
- It needs the right recording and distribution procedures.
- Cross-charge invoices are to be reported in GST returns.
- Depending on the form of the business, they should acknowledge the option of either a cross-charge or an ISD mechanism.
- It is recommended that professional advice be used in order to comply smoothly.
Conclusion
ITC optimisation is important to cash flow and compliance for businesses with more than one GST registration. The cross-charge mechanism in GST is a sure way out since it facilitates effective use of credit in various states. This is how, by designing the usual services, distributing the expenses equally, and adhering to the documentation, the companies can save the blocked credits, decrease the tax charges, and remain in line with the GST regulations.
Cross-charging not only helps in the management of finances but also helps businesses to avoid penalties and audit problems. The adoption of a cross-charge compliance tool should be a high priority for establishments facing issues with ICT inefficiency.
