Do you have multiple GST registrations and are not able to utilize ITC efficiently? Then this article is for you! When a company has its branches or business operating or running in more than one state, they will be treated as distinct persons with regard to the registrations taken in each state despite the ownership of these all being with the same person or under the same entity. Here the output tax and input tax (if any), should also be set off keeping in mind such points regarding the setting-off procedures which is set by the GST law, as the activities are happening in different states. This setting-off is important to avoid double taxation and take advantage of the output tax, which is paid by the taxpayer on the supply of goods and services through his or her entity. This setting-off is easy if the business operations are evenly distributed across all the states. But if the same is unevenly distributed, this setting-off of output, input tax or availing of the ITC, i.e., Input Tax Credit, becomes difficult.
Let’s understand the same through an example;
Say Mr Laxmi Singh owns and operates a textile business. The corporate office is situated in Karnataka, along with various branches, including manufacturing and retailing in different locations like Maharashtra, Delhi, and Tamil Nadu. The head office, which is located in Karnataka, approached a software developing company and developed a customized ERP (Enterprise Resource Planning) Software for the entity so as to integrate the activities ranging from manufacturing to retailing, due to which the software was equally implemented and utilized in every branch. The payment for the same was made from the head office while all other activities were taking place in other branches situated in other states, say major supply and purchases, along with payment of output tax and also other allied input taxes on payments made to suppliers. As the amount of GST involved in the payment for such software development was high and there was no major supply or outward services made by the head office, there was no output tax paid by the head office either. Thus, the ITC accumulates without being utilized, which actually adds cost to the company, reducing the working capital.
In order to overcome this problem, Laxmi Singh and his entity should be using the cross-charge mechanism.
What is Cross Charge?
As stipulated above, the units of a company, despite belonging to the same person or coming under the same ownership and holding the same PAN also, for GST law, shall be considered as distinct persons in each state in which they have taken registration. So, any supply of goods or services or both between these parties or units of the same business shall be considered as if it has taken place between distinct persons for the purpose of GST, even if the same is done with or without consideration. This shall also include any administrative, accounting, or other assistance given by the head office to other branches.
And this at times becomes a boon for the companies where the head office can raise invoices in the name of the branch for providing such services and thereby pass the ITC of the payment of tax made on such services to its other branches.
Say, taking virtue of the above example, Laxmi Singh’s head office situated in Karnataka raises an invoice to its branches in Delhi, Tamil Nadu, and Maharashtra for providing of the software along with the GST component which now they can set off with the ITC available with the entity in the accumulated manner in the electronic credit ledger.
The Valued of Supply under Cross Charge
The value of supply which is made between the distinct persons or the suppliers and recipient of service where they are related and not provided through an agent shall be computed by either;
– taking the open market value of such supply or
– comparing the value of the supply to similar ones or of similar quality or
– 110% of the cost of acquisition of such goods or
– the cost of provision of such services or
– such other reasonable means that the entity finds feasible and reasonable after considering the GST law and industry practice.
The GST law also states that where the recipient is eligible for full ITC, the value of such supply, which is declared in the invoice, shall be deemed to be the open market value of such goods and services. And the cross-charging of these expenses to different branches or units coming under the entity shall depend on the industry practice. Some of the bases that are often taken include the turnover made by each unit, the number of employees, production capacity, and utilization of each entity, or other bases on which the entity might feel fit as per the industry practice.
Cross Charge Vs ISD
ISD is nothing but an Input Service Distributor, which is defined under section 2(61) of the CGST Act as an office of supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues prescribed document to distribute tax credit of central tax, state tax, integrated tax or Union territory tax paid on the said services. This shall be issued to those units of the entity which are registered under the same PAN despite having different GSTINs as they are located in different states. As per section 24, ISD needs to obtain a separate registration.
But in cross charge, there are no expenses actually incurred by the other units or distinct persons for that matter but still, the accumulated ITC shall be distributed among the units on the basis of certain metrics so as to utilize the same against the output taxes made by them. And this does not need a separate registration.
Thus, we can conclude that for obtaining flexibility in assigning or transferring the ITC to other units coming under the same PAN, the cross charge would be the best option compared to ISD, as no separate registration is required.
Related Service
