Group companies often centralise functions like finance, HR, IT, legal and management at one entity, which then allocates costs to other entities. Under GST, such cross-charges are taxable supplies, especially between distinct persons under the same PAN.
What Is Cross-Charge?
Cross-charge refers to the practice of one entity (often head office or a central services company) providing services to another group entity and recovering the cost, either with or without a markup. Under GST, if the entities are distinct persons under Section 25, the supply is taxable under Schedule I even without consideration.
Distinct persons arise when a single legal entity has multiple GST registrations in different States or Union Territories. Section 25(4) requires separate registration for each State, and Section 25(5) treats each registration as a distinct person.
For separate legal entities within a group, they are related persons under the explanation to Section 15. Supplies between them are taxable under Schedule I even if no consideration is charged.
Cross-Charge vs Input Service Distributor (ISD)
Cross-Charge
The head office or central entity raises a tax invoice on the branch or group company for services provided, charging GST. The recipient can claim ITC if eligible.
Input Service Distributor (ISD)
An ISD is a distinct person that receives invoices for input services and distributes the credit to branches. The ISD does not supply services; it only distributes credit. ISD is not a cross-charge.
The choice between cross-charge and ISD depends on the nature of services and compliance preferences. Cross-charge is often more straightforward when services are identifiable.
Taxability Under Schedule I
Schedule I deems supply of services between distinct persons as supply even without consideration, if made in the course or furtherance of business. Therefore, if a head office provides IT support, HR, finance, or management services to a branch, GST is payable even if no charge is made.
Similarly, between related companies, supply of services without consideration is taxable.
Valuation
Since cross-charge often has no transaction value or a value not at arm's length, valuation under Rule 28 applies:
- Open market value.
- Like kind and quality.
- 110% of cost of provision of services.
- Cost plus reasonable profit.
For many cross-charges, the cost plus 10% method is used.
Practical Example
A Mumbai head office provides IT support services to its Delhi branch. The total cost of the IT team, software, and infrastructure for the branch is Rs 50,00,000. The head office issues a cross-charge invoice to Delhi branch for Rs 55,00,000 (110% of cost) plus GST at 18% = Rs 9,90,000.
Delhi branch claims ITC of Rs 9,90,000 if it makes taxable supplies. The transaction is revenue-neutral if full ITC is available, but compliance is mandatory.
Invoicing and Reporting
- Issue a tax invoice from the supplying entity to the recipient entity.
- Mention GSTINs, description of service, value, GST rate and tax.
- Report in GSTR-1 of the supplier.
- Pay tax in GSTR-3B.
- Recipient claims ITC in GSTR-2B.
Input Tax Credit
The recipient can claim ITC on cross-charge, subject to Section 16 and Section 17. If the recipient makes exempt supplies, ITC may be restricted.
Common Mistakes
- Not issuing invoices for cross-charges, assuming no consideration means no GST.
- Using ISD incorrectly instead of cross-charge.
- Valuing cross-charge at cost without adding 10% where Rule 28 applies.
- Not documenting the nature of services and cost allocation.
- Ignoring cross-charges for shared senior management time.
How Anuj Desai & Associates Can Help
We help group companies implement cross-charge frameworks, value services under Rule 28, issue compliant invoices and manage ITC.
Contact Anuj Desai & Associates
Email: office@anujdesaiassociates.com
Phone: 9619456656
Website: https://anujdesaiassociates.com
LinkedIn: linkedin.com/in/ca-anuj-desai-122547230