Introduction
Group companies often allocate employee costs — salaries, benefits, and other expenses — between entities. The question arises: How is inter-company employee cost allocation treated under GST?
This guide explains the taxability, valuation, and compliance obligations.
Legal Framework: Taxability of Cost Allocation
Cost Allocation as a Supply
Where one group company provides services to another, the cost allocation is consideration for a supply of services under GST.
Related Party Transaction
Where the transaction is between related persons, Schedule I mandates that it is a supply even without consideration.
GST Rate on Cost Allocation
Inter-company cost allocation attracts 18% GST.
Valuation of Cost Allocation
Cost-to-Cost Reimbursement
Where the cost is allocated on a cost-to-cost basis without any markup, the value of supply is the actual cost.
Markup
Where a markup is charged, the value of supply includes the markup, and GST applies to the full amount.
Pure Agent Exception
Where the allocating company acts as a pure agent and the conditions under Rule 33 are satisfied, the allocation may be excluded from taxable value.
Documentation Requirements
- Cost Allocation Agreement: Documentation of the allocation terms.
- Cost Allocation Invoice: Invoice for the allocated costs.
- Supporting Records: Documentation of the costs.
- GSTR-1 Reporting: Report the allocation income.
Best Practices
- Determine the Nature of Allocation: Assess whether it is a supply of services.
- Apply Correct GST Rate: Apply 18% GST where applicable.
- Maintain Records: Document the allocation arrangement.
- Seek Professional Assistance: For complex allocation structures.
Conclusion
Inter-company employee cost allocation is a supply of services under GST, attracting 18% GST. Proper documentation and valuation are essential.
Allocating employee costs between group companies? Anuj Desai & Associates provides expert guidance on GST compliance. Contact us today.
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