A business with operations in multiple States must obtain separate GST registrations in each State. When goods or services move between these registrations, the transaction is treated as a supply even though the legal entity is the same. This is one of the most misunderstood areas of GST.
Distinct Persons Under Section 25
Section 25(4) of the CGST Act requires a person with business operations in more than one State or Union Territory to take separate registrations in each State or Union Territory.
Section 25(5) provides that 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 be treated as a distinct person in respect of each such registration.
This means a head office in Mumbai and a branch in Delhi are distinct persons for GST purposes, even though they belong to the same legal entity.
Taxability of Branch Transfers
Schedule I of the CGST Act deems supply of goods or services between distinct persons, when made in the course or furtherance of business, as supply even without consideration.
Therefore:
- Transfer of goods from a Mumbai warehouse to a Delhi branch is a supply.
- Provision of management or IT services from head office to a branch is a supply.
- Transfer of machinery or other capital goods between branches is a supply.
- Even transfer without any payment is taxable.
The nature of tax depends on whether the branches are in the same State or different States:
- If in different States or Union Territories, the supply is inter-state and IGST applies.
- If in the same State but separate registrations, the supply may be intra-state with CGST and SGST or UTGST, subject to place of supply rules.
Valuation Under Rule 28
Because there is often no transaction value in a branch transfer, value must be determined under Rule 28 of the CGST Rules:
- Open market value of the goods or services.
- If open market value is not available, the value of supply of goods or services of like kind and quality.
- If that is also not available, 110% of the cost of production, acquisition or provision of services.
For goods transferred from a manufacturing unit, the cost of production includes raw material, labour and overheads. For stock transfers, businesses often use cost plus 10% or open market value. Documenting the valuation methodology is important to withstand scrutiny.
Invoicing and Documentation
The supplying distinct person must issue a tax invoice under Section 31 even though no commercial sale is involved. The invoice must contain all particulars under Rule 46.
The recipient distinct person must receive the goods or services and record the inward supply. Proper documentation, delivery challans, inventory records and valuation worksheets must be maintained.
E-Way Bill
Movement of goods above the prescribed threshold requires an e-way bill. For branch transfers, the e-way bill must be generated even if there is no sale. The document type should reflect the nature of the movement.
Input Tax Credit
Since branch transfers are taxable, the recipient distinct person can claim input tax credit of the IGST or CGST/SGST charged, subject to Section 16 conditions.
In many domestic branch transfer situations, the transaction is revenue-neutral because the tax paid by the supplying branch is available as credit to the receiving branch. However, this is not always true if the receiving branch makes exempt supplies or if there are restrictions on credit utilisation.
Practical Example
A Mumbai unit transfers finished goods costing Rs 1,00,000 to its Delhi branch. Since no open market value is available, value is taken at 110% of cost, i.e. Rs 1,10,000. IGST at 18% is Rs 19,800. The Mumbai unit issues a tax invoice and pays IGST. The Delhi branch claims ITC of Rs 19,800 when goods are received and invoice is uploaded by the Mumbai unit.
Common Mistakes
- Treating branch transfers as non-taxable because no consideration is paid.
- Not issuing tax invoices or e-way bills.
- Using a nominal value without documentation.
- Not reporting the supply in GSTR-1 of the supplying unit.
- Failure to include branch transfer values in aggregate turnover for registration and turnover tests.
How Anuj Desai & Associates Can Help
We help multi-state businesses structure branch transfer processes, determine correct valuation, issue compliant invoices, manage e-way bills and reconcile inter-branch ITC so that compliance remains clean and audit-ready.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
LinkedIn: linkedin.com/in/ca-anuj-desai-122547230