How should firms prepare to deal with intra-company services under GST?

Why is corporate India in a tizzy over the ruling by the Authority for Advance Rulings, Karnataka, in the Columbia Asia Hospital case? Sudipto Dey finds out.

What is the case all about?

The case was about the applicability of GST on the transactions/services provided by the head office to manage its branch offices located in other states. Bengaluru-based Columbia Asia Hospitals sought advance ruling on whether the activities performed by its employees at the corporate office — such as accounting, IT or other administrative duties — for the units located in other states shall be treated as supply or not. 

The Authority for Advance Rulings  held that such activities shall be treated as “supply” and that GST may be levied on the salary cost of employees working at the head office.

Is this ruling in line with existing provisions of the GST Act?

Under the GST Act, a head office and a branch office are treated as distinct legal entities. So, technically, the ruling is in line with provisions of the GST Act. However it is not in keeping with the “spirit” of GST, says MS Mani, partner, Deloitte India. There is a provision in the law that says services by an employee to the employer in the course of or in relation to his employment is outside GST. The ruling appears to contradict that provision. 

The issue that needs to be resolved, says Sumit Bansal, associate director, indirect tax practice at PwC, is whether non-applicability of GST on services by an employee to an employer should prevail over the provision of supplies between distinct persons. 

How do other jurisdictions treat such intra-company transactions?

Globally, B2B business transactions within a legal entity as well as between separate legal entities within a ‘Tax Group’ are disregarded for VAT/GST purposes, says Pune-based GST expert Pritam Mahure. However, in India the rationale for recognition of intra-company transactions under GST seems aimed to transfer the state GST to respective consuming states, point out experts. There is limited international precedence on this matter.

How should companies arrive at the value of stewardship services between a headquarter and a branch office? 

In a FAQ issued by the Central Board of Indirect Taxes and Customs clarifying various issues faced by the financial services sector, it was stated that management oversight or stewardship activities performed in relation to business operations by the head office for a branch should be considered as supply of service by the head office. To value such supply, the branch office can obtain a certificate from the head office providing estimated cost of providing that services. This may be supported by a certificate from a chartered accountant as well.

The GST law prescribes that the value of services between a head office and a branch office should be the ‘open market value’. Experts however point out that there are challenges to arriving at this value. 

What are the likely challenges in arriving at the value of intra-company services?

Where the branch office is entitled to claim full input tax credit of tax so charged, arriving at the value for raising GST invoice is more of a compliance requirement. Further, there are sectors and services, that are not covered under the GST regime like petroleum, liquor etc. In such cases, GST so paid would become a cost for the receiving office. There could be disputes related to valuation adopted by a company of such inter-office services as the authorities may seek to consider a higher value for the purpose of levying GST.

What if there is a dispute? How should firms prepare to deal with intra-company services under the GST regime? 

Major challenges could be faced by entities that cannot claim input tax credit such as entities engaged in hospital, liquor, electricity supply. The only way to address the dispute would be through substantiation of the value on which GST is charged. Further, business entities will have to be cautious as dispute could mean payment of GST demanded along with interest and penalty after dispute is resolved.  

Ideally, companies should wait and see if this decision is challenged and the outcome from the appeal process. It is advisable to set up specific cost centres for various activities performed for branches, which will enable a more accurate estimation of the amounts to be charged.