Corporate groups often centralise procurement to negotiate better prices and streamline vendor management. When one entity procures goods or services on behalf of the group, GST implications arise for the distribution of costs and ITC.
This article explains the GST treatment of centralised procurement.
The Procurement Entity
The entity that procures the goods or services receives the invoice and claims ITC. If the goods or services are for the benefit of other group entities, the cost and ITC must be distributed.
Distribution Mechanisms
- ISD: For common input services, the ISD mechanism is mandatory from April 2025.
- Cross-Charge: For goods or services that are not common input services, cross-charge applies.
- Direct Procurement: Where each entity procures directly, no distribution is required.
Valuation
For cross-charge transactions between related parties, the value must be at arm’s length under Section 15(4) read with Rule 28. Where the recipient is eligible for full ITC, nil-value invoices are acceptable.
ITC Distribution
The ISD distributes ITC based on the turnover ratio of each distinct person. The recipient claims the ITC in its GSTR-3B.
Compliance Steps
- Determine whether the procurement is for a single entity or multiple entities.
- Use the ISD mechanism for common input services.
- Use cross-charge for other allocations.
- Apply Rule 28 valuation correctly.
- File GSTR-6 for ISD distributions.
Conclusion
Centralised procurement requires careful GST structuring. The ISD mechanism is mandatory for distributing ITC on common input services, and cross-charge applies for other allocations.
At Anuj Desai & Associates, we provide expert advisory services on GST for centralised procurement structures. Our team can help you optimise your procurement and tax position.
For a confidential consultation, contact us at office@anujdesaiassociates.com or call 9619456656. Visit our website at https://anujdesaiassociates.com or connect with our founder on LinkedIn at linkedin.com/in/ca-anuj-desai-122547230.