P&G And HUL Face Cross Charge Scrutiny — BQ Explains

The cross-charge mechanism under the goods and services tax has provoked varying opinions among businesses and authorities on the tax liability.

The issue recently surfaced in news after Procter & Gamble Hygiene and Health Ltd. and Hindustan Unilever Ltd. came under investigation over unpaid GST dues under the provision.

The Director General of GST Intelligence had issued notices to both the consumer goods makers over unpaid taxes, CNBC had reported.

Both HUL and P&G majors have deposited some payment in connection to the enquiry, the companies said in response to BQ Prime's queries.

BQ explains what cross-charge is and what's the bone of contention.

Under the provisions of the Central GST Act, tax is imposed on the supply of goods and services among distinct entities or persons. That also applies to two branches of the same business located in two separate states but registered under the same PAN.

When a business entity has units at multiple locations registered under the same PAN, head offices tend to handle administration services and other operations for all of them, according to tax service provider Clear.

Such services provided by the head office are considered separate and are invoiced accordingly. The law allows a company to claim appropriate input tax credit. The head office can also register itself as a taxpayer that receives invoices for services used by its branches. In that case, it would be known as an 'input service distributor'.

That allows the head office to distribute the tax paid (input tax credit) to such branches on a proportional basis.

In response to BQ Prime's queries, HUL and P&G said there were no allegations of tax evasion.

"In an enquiry by GST authorities last week, we were asked to provide some information and data, which was fully and transparently provided. The enquiry was general in nature and not linked to payments between branches...," HUL's spokesperson said. "No allegation of tax avoidance on any issue whatsoever was made. The payment of GST made at the end of the enquiry was routine in nature and would have been made before the due date by the company.

The P&G spokesperson maintained that no tax evasion had been alleged against the company. "In fact, we have determined and deposited additional taxes in good faith."

While the companies did not reveal the subject of enquiry, a GST official said on the condition of anonymity that they were related to cross-charge mechanisms. Though the companies see themselves as a single entity, the GST law sees them as independently registered linked entities, the official said.

The cross-charge mechanism has been an area of confusion and litigation across board, according to the official. In the last two to three years, the law has been very categorical about the provision, the official said.

Because they are independently registered linked entities, any financial transaction or services across branches has to be accounted for. Any cost sharing has to be properly invoiced, indicated and duty payment has to happen, they said.

There is also a limitation on taking input tax credit at one place, which is where companies have an issue.

Companies perceive this as a revenue-neutral subject, according to Bipin Sapra, partner indirect taxes, Ernst & Young Pvt. "There is no intention to evade taxes...what the government needs to do is clarify that it is optional to register for ISD."

“From a company’s perspective, they have incurred a cost and credit is an asset to them. Whether it (credit) is in Haryana or Mumbai or in Karnataka, it is immaterial as it is within their company only,” Sapra said. “But when money has gotten stuck in one of the places (despite the company having credits in another location) and they are not able to do payments, then it’s an issue.”

Since GST is a destination based tax, the final payment of dues would affect the state the payment is made in. If more credits are utilised in one state, it would impact a particular state's ability to generate revenue.

Tarun Jain, Supreme Court advocate and tax expert, said the difference of opinion emerges from two appellate rulings.

In 2018, an appellate advance ruling from Karnataka said companies have to cross-charge among all units. "At that time, it created a furore and was based on the interpretation that each one of them is a different unit or you have to cross charge the unit," Jain said.

However, in December 2022, an appellate advance ruling in Maharashtra stated that ISD is the right procedure to be followed.

"In all, however, the issue remains a procedural one as the substantive entitlement to credit is likely not under the question and it is only the procedure for its attribution to different units of an entity which remains the point of inquiry," Jain said.

Last year, pharmaceutical companies faced scrutiny from the Directorate General of GST Intelligence in similar cases.

The department is likely to look across all sectors and almost all who function in this format will be held liable, the GST official quoted earlier said.

For newspapers, hospitals, financial services firms and banks, there is a larger issue of working capital as the output includes exempt and non-exempt supplies. And since they don't get full credits, they must value supply according to the open-market value, Sapra said.

Ultimately, he said, it needs to be ensured that the federal structure of a policy does not come in the way of ease of doing business.