GST impact: Multistate entities in a soup over cross charge

Goods and Services Tax implementation in India was the biggest indirect tax change that no democratic federal structure country has ever perceived in the last five decades around the globe. This tax dismantled all the inter-state barriers allowing free flow of trade and with a single stroke, converted India into a unified market of 1.3 billion citizens.

With the implementation of GST, the country’s tax structure witnessed several revolutionary modifications, one of them being the concept of 'distinct persons'. Though GST was introduced with the objective of 'One nation one tax',  it became 'one state one tax' as GST recognised the states in which a legal entity operate as distinct persons. This notion of ‘distinct persons’ has wide ramifications for companies with offices in multiple states, adding to their transaction costs and compliance burden even though there is a seamless adjustment of taxes paid in ideal circumstances.

Once the legislation recognises the entities as distinct persons, then any transaction between these persons even without consideration becomes ‘deemed supply’ leading to a fictional flow of transactions chargeable to actual tax. This actual tax on fictional flow of transaction was destined to hurt several sectors which are exempt from GST like alcohol, petroleum, milk distribution network, power companies, and residential real estate developers. However, in the last two years, the dust has settled on this issue and all the sectors of the economy are generally at peace with this fictional tax.

There was a massive concern that taxpayers were confused regarding costs incurred at the head office of a business entity which is related to or, in other words, incurred for the units of the business entity/organisation located all over the country. Every company maintains a central nervous system of the company in a particular office whereby decisions with regard to centralised procurements, human resources, finance, marketing, IT department, etc. are taken and executed. Till recently professionals were toggling with the idea of whether head offices need to charge a fee for performing such centralised functions for all such units? But now it seems that the government has reached the cusp of logical reasoning for illogical provisions.

Authority for advance ruling in the case of Columbia Asia Hospitals Private Limited has ruled that the activities performed by the employees at the corporate office in relation to centralised functions such as accounting and other administrative and IT system maintenance for the units located in the other states shall be treated as supply and GST would chargeable on all such services. This view has been confirmed by the appellate authority in entirety. This has added a new tangent to the problem of credit accumulation due to the fact that now departmental acceptance has also been given to the charge of GST on salaries paid to employees working in the head office performing centralised functions.

This position of cross charging salaries paid to employees at head office on account of centralised functions has sent shockwaves across conglomerates in India as many of them are looking at massive non-compliance for the financial year 2017-18 and 2018-19, which may lead to payment of tax without credit and imposition of a hefty penalty.

In the month of June 2019, it has been reported by several news agencies that GST policy wing is working on a circular devising the modus operandi of calculation of cross charge of salaries by head office to all the units operating in different states. This circular is expected to open a Pandora's box and would add massive inconvenience for taxpayers operating in multiple states. There is a basic logic that employees are hired by an organisation and not by a state GST registered entity, going by which when employees are not controlled by head office only, where is the need for cross charging such salaries. The government shall also look at the intent behind the transactions and adopt a pragmatic approach rather than a revenue-biased pessimist approach.

Even though we assume that there has to be cross charge of salaries, still there are multiple practical problems in this approach namely, employees sent on deputation to another state, employees sitting at branch offices but performing centralised functions, frequent change in job description of employees, management performs centralised functions but time spent on each location can never be known, operational revenue from units would not always justify the use of common resources, would regional managers also necessitate the cross charge across specific states.

To conclude, we can say that this cross charge of salaries seems to be illogical but not illegal. Corporates with multi-state registration shall plan to charge all common expenses including salaries paid at head office across to all states. Also, it is the responsibility of the government to come out with a detailed circular on this issue ensuring a fair application of the law, keeping in view the practical aspects of the business. Any wrong move by the government on this aspect could lead to spur of litigation in the country which would yield enough burden on the corporates for the next 20 years.