Introduction
Group companies often share enterprise software licences — ERP, CRM, and other applications — to reduce costs. The question arises: How are shared software licences treated under GST?
The answer depends on the arrangement. This guide explains the legal framework and the practical implications.
Legal Framework: Cross-Charge and ISD for Software
Cross-Charge
Where one group entity procures software licences and shares them with another entity, the sharing constitutes a supply of services under GST.
ISD Mechanism
Where the software is procured centrally and used by multiple GSTINs, the entity can distribute the ITC through the ISD mechanism without a cross-charge.
ISD Registration Mandatory
From April 1, 2025, ISD registration is mandatory for distributing ITC on common services, including software subscriptions.
GST Treatment
Cross-Charge
The procuring entity charges GST on the allocated software cost, and the receiving entity claims ITC.
ISD Distribution
The ISD distributes ITC to the recipient GSTINs without charging GST.
Documentation Required
- Software Licence Agreement: Documentation of the licence terms.
- Cost Allocation Agreement: Documentation of the sharing arrangement.
- Tax Invoice: For cross-charge transactions.
- ISD Invoice: For ISD distributions.
Best Practices
- Determine the Correct Mechanism: Assess whether cross-charge or ISD is applicable.
- Register as ISD: Register as ISD where software is procured centrally.
- Maintain Records: Document all software sharing arrangements.
- Seek Professional Assistance: For complex group structures.
Conclusion
Shared software licences across group companies are treated as cross-charge supplies or ISD distributions. ISD registration is mandatory from April 1, 2025. Proper documentation is essential.
Sharing software licences across group companies? Anuj Desai & Associates provides expert guidance on GST compliance. Contact us today.
Contact us:
- Email: office@anujdesaiassociates.com
- Phone: 9619456656
- Website: https://anujdesaiassociates.com
- LinkedIn: linkedin.com/in/ca-anuj-desai-122547230