Large corporates with corporate offices and regional offices face the challenge of allocating common costs across multiple GST registrations. The GST regime provides two mechanisms: the ISD mechanism for ITC distribution and the cross-charge mechanism for cost allocation.
This article explains the cost allocation framework.
The Distinct Persons Principle
Under Section 25(4), establishments of the same person in different states are treated as distinct persons. Transactions between them are supplies for GST purposes.
ISD Mechanism for ITC
From April 2025, the ISD mechanism is mandatory for distributing ITC on common input services. The corporate office obtains ISD registration and issues ISD invoices to the branches based on the turnover ratio.
Cross-Charge for Cost Allocation
For costs that are not ITC (such as employee salaries), the cross-charge mechanism applies. The corporate office issues a tax invoice to the branch for the allocated cost. Where the branch is eligible for full ITC, the value can be nil under the second proviso to Rule 28.
Compliance Steps
- Obtain ISD registration if you have multiple GSTINs.
- Route all common input service invoices through the ISD.
- Issue ISD invoices based on the turnover ratio.
- File GSTR-6 monthly.
- For non-ITC costs, use the cross-charge mechanism with proper documentation.
Conclusion
Cost allocation between corporate and regional offices requires compliance with the ISD and cross-charge mechanisms. Businesses must implement the ISD mechanism by April 2025.
At Anuj Desai & Associates, we provide expert advisory services on cost allocation and ISD compliance. Our team can help you structure your inter-office transactions.
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.