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CROSS CHARGE UNDER GST

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CROSS CHARGE UNDER GST
VISHAKA GOYAL By: VISHAKA GOYAL
September 10, 2021
All Articles by: VISHAKA GOYAL       View Profile
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Definition of cross charge:

Cross Charge has not been defined in the GST law. However, Cross Charge generally refers to one person providing services or goods to another person and for providing such services or goods the first person raises / charges amount from the second person in case of distinct persons.

As per Section 25(4) of the CGST Act, “A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.”

Why Cross Charge?

As per schedule 1 of CGST Act, any supply between different GST registrations having the same PAN (distinct persons) shall be treated as “supply” even when made without consideration.

The said provision reads as follows:

Schedule 1: ACTIVITIES TO BE TREATED AS SUPPLY EVEN IF MADE WITHOUT CONSIDERATION 1…

2… Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business

It is the combined reading of Schedule 1 and the concept of distinct persons that gives rise to the need to cross charge. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity shall be termed as a supply and shall attract GST. In line with the said provisions, every supply between distinct persons results in cross charge between such entities. Such supply shall be undertaken by issue of appropriate documents. Further, the receiver of the supply shall be entitled to GST credit subject to conditions.

In view of this entry when one performs services or supplies goods to others within a company it is termed as cross charge. This mechanism also leads to passing of input tax credit between the distinct persons and avoids unnecessary blockage of credit and working capital in the head offices or other offices which do not require the same. Also, for the purpose of determining the profit of each cost centre of the company the mechanism of cross charge becomes useful.

For example, when a head office allocates common expenses to its branches then this can also be termed as cross charge, where they are specifying that head office is incurring expenses for branches / units and as a result head office is allocating the cost to the respective units / branches.

We can also say that Cross Charge is a type of sharing of services and goods between two or more Branches / Offices where one branch / office charges from other branches / offices for such sharing of services or goods.

Value of supply between distinct persons in case of cross charge

For valuation in case of cross charge reference needs to be made to Section 15(4) of the CGST Act read with Rule 28 of the CGST Rules, 2017.

As per Rule 28 of the CGST Rules:

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall- 

(a) be the open market value of such supply;

(b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

(c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order:

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person: 

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

Rule 30 and 31 have been reproduced below for a ready reference:

30. Value of supply of goods or services or both based on cost-Where the value of a supply of goods or services or both is not determinable by any of the preceding rules of this Chapter, the value shall be one hundred and ten percent of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

 31.Residual method for determination of value of supply of goods or services or both. Where the value of supply of goods or services or both cannot be determined under rules 27 to 30, the same shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter:   Provided that in the case of supply of services, the supplier may opt for this rule, ignoring rule 30

From the above-mentioned provisions, it is clear that in case of supply between distinct persons the value of supply will be the open market value of such supply, where the open market value is not available the value shall be value of goods or services of like kind and quality and if by both the ways the value is not determinable it shall be determined by the application of rule 30 or rule 31, in that order.

However, in case of goods, where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.

It has been further mentioned that in case where the recipient distinct person is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services (i.e. the value can be decided by the organization in this case and the same will be considered as the open market value.)

Whether the Salary of Employee will also be included for the purpose of Cross Charge?

In companies and other business organizations as well, it is seen that the head office incurs salary of various employees such as centralized accounts team, top managers, marketing employees and other administrative employees etc which benefits the company as a whole.

Now the question that arises it that, “whether the activities performed by the employees at the head office in the course of or in relation to employment be treated as supply by the head office to the other units in accordance with entry no 2 of schedule I of the CGST Act as discussed earlier or will it not be treated as a supply as per Entry 1 of Schedule III of the CGST Act?”

Entry no. 1 of Schedule III of the CGST Act has been reproduced below for a ready reference:

SCHEDULE III

ACTIVITIES OR TRANSACTIONS WHICH SHALL BE TREATED

NEITHER AS A SUPPLY OF GOODS NOR A SUPPLY OF SERVICES

  1. Services by an employee to the employer in the course of or in relation to his employment.

From entry no. 1 of Schedule III of the CGST Act it can be clearly seen that the services by an employee to the employer is treated neither as a supply of goods and nor as a supply of services and since the employee is for the company as a whole and not for one branch or head office of the company the salary portion should not come within the ambit of entry no. 2 of schedule I of the CGST Act and hence should not be taken into account for the purpose of cross charge.

However, in the  judgment of IN RE : M/S COLUMBIA ASIA HOSPITALS PRIVATE LIMITED [2018 (12) TMI 1604 - APPELLATE AUTHORITY FOR ADVANCE RULING, KARNATAKA] given by the Karnataka advance ruling authority a contrary view was taken which in my opinion is not correct and suitable clarification in this regard should be given. Hence, in my opinion as the salary of the employee is covered under Entry no. 1 of Schedule III of the CGST Act there is no need to cross charge the same.

 

By: VISHAKA GOYAL - September 10, 2021

 

Discussions to this article

 

Very informative. Well written

VISHAKA GOYAL By: charan sr
Dated: September 11, 2021

 

 

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