GST ON EMPLOYEE’S SERVICES IN OTHER STATES

[Dr. Sanjiv Agarwal]

Whether GST should be levied on services provided by employees of an organization internally has become a subject matter of confusion with controversy creeping in from an advance ruling pronounced by Authority of Advance Rulings (AAR), Karnataka in Re: Columbia Asia Hospitals Pvt. Ltd.  2018 (8) TMI 876 - AUTHORITY FOR ADVANCE RULINGS, KARNATAKA.

Brief Facts and Advance Ruling

In the instant case, the applicant was a private limited company and is an international healthcare group operating a chain of modern hospitals across Asia.

In India, it operates across six different states, having eleven hospitals out of  which six units are in the state of Karnataka. The hospitals owned by the applicant  are engaged in providing secondary and tertiary healthcare services which in turn categorizes as ‘In patient (IP) and Out-patient (OP)’ services.

The applicant has its India Management Office (IMO), i.e., corporate office in Karnataka and some of the activities for all the units with respect to accounting, administration and maintenance of IT system are carried out by the employees from IMO which forms part of the registered person in Karnataka. Further, GST paid on certain expenses such as rent paid on immovable property and other equipments, travel expenses, consultancy services, communication expenses etc., which are incurred towards services used by the IMO are availed by the registered person in the state of Karnataka and subsequently, registered person in Karnataka is discharging IGST on the expenses proportionately attributable to the other units located outside the State of Karnataka treating the same as taxable supplies in this regards.

The applicant sought advance ruling on whether the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per section 25(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) can be treated as supply as Per Entry 2 of Schedule I of the CGST Act or it shall not be treated as supply of as per Entry 1 of Schedule III of the CGST Act?

The Authority for Advance Ruling ruled that corporate office and units are distinct persons under CGST Act and as such, activities performed by employees at corporate office in course of employment such as accounting, other administrative and IT system maintenance for units located in other States as well, shall be treated as supply as per Entry 2 of Schedule I of CGST Act.

Appellate Ruling

Being aggrieved, the assessee preferred an appeal before the Appellate Authority for Advance Ruling (AAAR) on the following grounds:

1. The activities carried out by employees at IMO in the course of or in relation to employment such as accounting, other administrative and IT systems maintenance which indirectly benefit units located in the other states as well i.e distinct persons as per Section 25(4) of the GST Act shall not be treated as supply as per entry 2 of Schedule I.
2. Entry 1 of Schedule III specifically which excludes ‘services by an employee to the employer in the course of or in relation to his employment suggest that it is neither a supply of goods or a supply of service.
3. In the instant case, the employee shall work as per the directions of the company whether he is located at the IMO in Karnataka or at any of the branch offices located in other  that the same is evident in the employment contract.
4. The functions/duties of the employee can’t be restricted to employment with the registered person as per Section 25(4) of the CGST Act merely on account of the location from where he renders his employment service; that the employment relationship exists between the employee and the legal entity and not confined to the location of the registered person from where the said employee renders services; that the employee is an employee for the legal entity as a whole and not for any one registered person, and that the functions of the head office are inherent basic stewardship functions of the legal entity. It is a central function necessary for all units and can be considered as an extended arm of all the units.
5. Under the CGST law, units in different States may be required to obtain separate registrations, but the existence of the company goes beyond the confines of GST laws. The multiple registrations under the Act are merely procedural aspects for the purposes of compliance of GST procedures/activities which is the responsibility of the entity as a whole. Employment is generally not confined to geographical boundaries of the State or to the registered person.
6. Strategic directions are given by the head/corporate office of the company to its units/ branches. Activities such as payment of salary to employees, income tax with holdings, provident fund deductions, legal strategic directions, technical support and shared knowledge base may be concentrated in one location (in the instant case, Bangalore where the IMO is located) which may indirectly benefit all the offices across the country and the employees performing the said activities are employed to benefit all the offices of the company and that disregarding employer-employee relationship merely to fasten GST liability is not correct.
7. The mere arrangement of hiring the employees in one employer-company and allocating the cost to other employer-companies without any margin, will not be treated as consideration for any Service.

The AAAR observed and ruled as under:

• Employees working at corporate office providing services to corporate office have employer – employee relationship only at such corporate office.
• Offices other than corporate offices are distinct offices and employees working in corporate offices have no employer – employee relationship with other offices.
• Such services shall be treated as taxable supplies as per section 7 read with Entry 2 of Schedule-I of CGST Act, 2017.
• Valuation of such employee’s services to other distinct offices shall be done as per section 15(4) of CGST Act, 2017 and Rule 28 of CGST Rules, 2017 applicable to supplies between distinct persons.
• In respect of common services availed by corporate office from third parties, ITC can be distributed to all units through Input Service Distributor (ISD) route.
• In ISD, there is no element of service at all, but a mere distribution of credit  certain expenses like rent paid on the immovable property, house-keeping services etc., incurred in maintaining and operating corporate will not be distributable under the ISD route, rather they are required to be allocated to the other units only by way of cross charge.
• In cross charge, there is element of service rendered by person who cross charges his other units even though they belong to same legal entity.
• It also held that taxable event under service tax law and under GST is vastly different. Ratio of decisions rendered in light of taxable event under service tax provisions cannot be applied to transactions under GST regime.

While the ruling on taxability of employer – employee services on cross charge basis is likely to create panic and confusion all over the country, given the present business arrangements as they are, the fear of taxability has been blown further by GST Council endorsing the view of taxability of such services on cross charge basis. It is understood that GST Council has approved a draft of Circular hinting out at such a decision. This will have adverse financial impact on multi-unit, multi state operating firms. The burden will be more on businesses exempt from levy of GST. Accordingly, where a taxpayer registered in different States is a distinct person, ‘an employee of a Head Office (registered as a separate entity) does not provide any service to a branch office, rather the Head Office provides service to the branch office.

With this, it is clear that it is not just the salary of an employee sitting in head office and providing services like accounting, IT, human resource, branch offices in other States that will attract 18 per cent GST, but overall cost incurred by the head office in providing the service, which includes salary, will have to be considered.

There is need to apportion expenses incurred by one office for provision of output services to another office by any reasonable means ‘consistent with the principles of valuation in the GST law and generally accepted accounting principles.’ Such apportionment or valuation of supply will have to be done on the basis of information maintained by the company in its normal course of working. There is no need to maintain additional records of activities undertaken by individual employees.

The only exception to this principle would be distribution of Input Tax Credit (ITC) in respect of input services procured by one office and distributed to the others for which Input Service Distributor (ISD) provisions apply as the taxpayer is expected to mandatorily obtain ISD registration. An input service distributor (ISD) is a business which receives invoices for services used by its branches. It distributes the tax paid, to such branches on a proportional basis by issuing an ISD invoice. The branches can have different GSTINs but must have the same PAN as that of ISD.

Over to more litigation as this would come via a circular, not amendment in law and as such, such an interpretation will be subject to judicial scrutiny.  [In Re: Columbia Asia Hospitals Pvt. Ltd. 2018 (12) TMI 1604 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA].