GST: Clarity On Employee Costs Will Reduce Litigation

The Central Board of Indirect Taxes' recent circular granting flexibility in the valuation of inter-branch services provides clarity on the valuation mechanism and would substantially reduce litigation, according to experts.

Inter-branch services refer to services provided by one branch of an entity to another.

According to the latest clarification issued by CBIC on Monday, the value of such services shall be deemed to be the value provided in the invoice, regardless of whether the cost of certain components, such as employee costs, has been included or not.

However, in cases where the head office has not issued an invoice, the value shall be determined based on the value of goods and services of similar kind and quality. This value shall be considered for availing of the input tax credit.

Under the GST law, such services are taxable as it treats different registrations as distinct persons. However, there was no clarity on the valuation of these services as different authorities for advance ruling treated the cost of employees differently.

The debate mainly revolved around the status of employees, whether they are employees of a particular branch or of the company as a whole and thus need to be included in the costs of service.

The present clarification settles the debate. According to Asish Philip Abraham, partner at Lakshmikumaran and Sridharan Attorneys, this will help reduce unnecessary litigation.

“The circular provides much-needed clarity on the interpretation of deemed supply under GST.”

GST is payable on services provided by the head office to a branch office and vice versa, even if they are provided without consideration, as the law considers them deemed supplies. This means each branch has to charge the other for any service provided for the purpose of GST. However, the difficulty arose in the valuation of such services, said Abraham.

The clarification is useful for situations where a full input tax credit is not available, as valuation in such cases is done based on the open market value of the service, said Abishek Rastogi, founder of Rastogi Chambers.

A branch office may not be able to avail full ITC on the services rendered by the head office if they include items that are ineligible under the GST law, such as travel expenses or expenses towards insurance.

Earlier, the department through several show cause notices had mandated the addition of costs to employees over and above the open market value for determining the value of service. This meant that companies had to pay GST on a value above the market value of the said services. The present clarification, by omitting such a requirement, reduces the GST liability of such entities, said Rastogi.

Besides this, the GST department has also provided clarity on the input tax credit for common services availed of from third parties for the head office as well as branch offices. The companies can either opt for an input service distributor mechanism provided under the Central GST Act or issue tax invoices to branch offices for the common service availed.

Under the input service distributor mechanism, a head office registered as an input service distributor pays for a common service availed of by the company for all of its branches. The charge is later transferred to individual branches through ISD invoices so that branch offices can avail ITC. This is because a head office cannot claim ITC for a service not availed by them.

With improved flexibility, the clarification is expected to improve the compliance of companies, said Rastogi.

This is in pursuance of the decision taken in the 50th GST Council meeting, which said the input service distributor mechanism wouldn't be made mandatory. Under the system, a head office registered as an ISD can receive invoices on behalf of its branch offices. The ITC on such services is later distributed on a proportional basis by issuing ISD invoices.