The GST Council will charge tax on inter-state services between offices of a single entity. That means if your company is hiring personnel or preparing payrolls for offices located in other states they will have to pay a GST on such supplies. The order for the same was recently passed by the Karnataka Authority of Advance Rulings.
The order says that companies that have offices in multiple states will have to raise tax invoices and pay GST even for service functions performed between in-house offices. In most cases, the receiving party can claim an input tax credit paid on such services, however, it is expected to increase the compliance cost and time for the companies that have offices in different states.
The invoice for such supplies will need to be raised only by the main office or the one from where the supplies originated. Then, the respective receiving offices can claim ITC of these taxes in their next returns.
The GST would also be applied in cases where a particular item or service is exempt from tax such as school supplies or hospital services, which will surely increase the cost.
According to the AAR, the GST law considers separate entities of a business as separate businesses for tax purposes, and therefore any transactions between these entities will be constituted as taxable supplies. The order was issued in response to a query filed by Bengaluru-based Columbia Asia Hospitals.
The AAR further added that a company must include the cost per employee incurred at the main office while calculating the final value of taxable supplies made by these offices to their other locations.
“This ruling opens a Pandora’s box, especially for those businesses that are into exempt or non-GST supplies, as these companies, with this Advance Ruling, may need to charge GST on notional head office employee costs as well, with credit of such GST not being available to the recipient branch or company,” said Abhishek Jain, tax partner at EY.