A clutch of recent rulings — many mutually contradictory — by the benches of the Authority for Advance Ruling (AAR) on the goods and services tax (GST) has raised questions on the how mature the fledgling state-wise set-up is and is threatening to inflate the tax and compliance costs of a cross-section of Indian industry. The latest in the series of such odd AAR orders is one by its Karnataka bench, which said in a case involving Columbia Asia Hospitals, a healthcare service provider, that the firm with a presence in multiple states must pay GST on salaries paid to employees at the central unit as they provide (supply) services to its units in other states.
Tax experts have almost unanimously found the ruling not just bad in law but difficult to implement and onerous for businesses to comply with. The GST-AAR benches can’t speak in one voice, even on what tax rate would apply to a particular good/service. While the Maharashtra AAR had said the process of installing solar equipment (which includes the supply of goods and services) would attract 18% GST, the Karnataka bench ruled that a 5% rate would apply.
Another AAR ruling that made the headlines recently was one by its Delhi unit, which altered a long-held precedent to rule that GST applies on goods sold in an airport duty-free shop. Sales at such shops, which are deemed export units, have been the beneficiaries of the policy of zero-rating of exports.
While the enforceability of AARs orders are usually limited to the assessees involved in the relevant cases, these could set precedents, causing hardships to the taxpayer and leading to avoidable litigation.
In the Columbia Asia Hospitals case, the the Karnataka AAR held that employees of a company working in the central unit of a firm but providing services to states units wouldn’t come under the employee-employer relationship, which is exempt from GST. Instead, their services would be considered as supply between distinct units, triggering GST applicability. Abhishek Jain, tax partner at EY, said: “With this ruling, companies may need to evaluate the various support or other services being provided by one office to another and determine the value of these services (inclusion of employee cost, cost of usage of assets for providing these services, etc).”
So a company with operations in many states would need to figure out the proportion of salaries coming to its senior executives (CEO, CFO, MD, etc) from different state-level subsidiaries/units of the firm, since these executives render services to all the units. The salaries would need to be apportioned in the ratio of sales made by subsidiaries in each state. Further, the same exercise might need to be carried out for managers of different verticals and even sales persons in charge of more than one state.
“The entire structure could get complicated when incentives or bonuses to these employees are to be divided among state units,” said Rajat Mohan, partner at AMRG. He added that since there was no approved methodology for the process, businesses fear that the tax department could always find one violation or the other.
“Charging GST on services rendered by employees of one office to another office of the same legal entity would lead to a manifold increase in compliance levels without any significant benefit to the business or any revenue to the government,” said MS Mani, partner, Deloitte India.
Earlier this year, the tax department had released frequently asked questions on financial services sector, which had clarified that GST would be levied on services rendered from the headquarters of a bank to its state units. But experts said that the latest AAR ruling extended the rules to entities other than banks as well.
According to Section 7(2) of the GST Act, the supply of goods and services “when made in the course or furtherance of business” shall be treated as a supply even if no money is charged for it. While AAR used this section to rule as above, it appears to have glossed over a specific relaxation in Entry 1 of Schedule III that said “services by an employee to the employer in course of or in relation to his employment shall be neither treated as a supply of goods nor a supply of services”.
“Corporates and professionals are facing multiple challenges in identifying, computing and assigning values to the deemed services so provided under the garb of the word ‘supply’. Mechanics of quantification and assignment of GST across states is expected to fuel tax litigation,” Mohan said.
One reason for the conflicting AAR orders in the GST regime is believed to be the fact that these bodies lack judicial members (unlike the centralised benches at the excise/service tax regime) and are manned by joint commissioner-level officers. “While the whole scheme of an AAR is quite a welcome one for businesses in India, varied interpretations by different AARs have in general been a cause of concern. A resolution to this problem seems to be on the government’s agenda — the possibility of a National Appellate Authority for Advance Ruling or a National Advance Ruling Authority,” EY’s Jain said.