As each office is regarded as a distinct entity under the GST, providing common services are considered as supply of services between two offices.
Income from salary is taxed under the provisions of the Income Tax Act, 1956. So, there was thorough confusion after media reports suggested that the government is working on a proposal to impose 18 per cent Goods and Services Tax (GST) on salaries paid to the CXOs of companies.
A media report also revealed that the tax department has already started questioning companies whether they start apportioning, among its branches, common costs of services like legal, HR, IT, audit etc that are provided by the company Head Office, but also benefit the branches, so that salary paid to providers of such services may be cross charged in order to impose GST.
As each office is regarded as a distinct entity under the GST, providing common services are considered as supply of services between two offices. If two such offices of an organisation are situated in separate states, supply of such services will be considered as cross charges and will be taxed as nothing is free under GST.
The move, however, generated outrage due to thorough confusion about identifying services for cross charge.
“Such a move would be opening a Pandora’s box. The meaning of ‘providing services’ has several ramifications and would lead to unnecessary compliance challenges. We are awaiting more clarity on this from the government,” said Archit Gupta, Founder and CEO, ClearTax.
“Even if one was to pay GST for such cross charges to avoid litigation, there are no clear guidelines as to what percentage of the salary / costs / value should be attributed to each branch. Also, the exercise seems revenue neutral inasmuch as the branch office in different state would be entitled to input tax credit of the GST collected,” said Jigar Doshi, Executive Director, Indirect Tax, SKP India & UAE.
“Moreover, it would be prudent to note that employee-employer relationships have been kept outside the ambit of GST, similar to erstwhile service tax regime. Thus, it seems unreasonable to expect the Head Office to cross charge the branches for the salaries paid to the CXOs,” he added.
Explaining the move, Doshi further said, “The notices of tax authorities stem out of the advance ruling delivered by Karnataka AAR in the case of Columbia Asia Hospitals Pvt Ltd. It needs to be noted that as per the GST law, an advance ruling is binding on that particular applicant and the jurisdictional authority alone. Ironically, the Appellate authority too has affirmed this view of the AAR, which certainly has wide ramifications for companies with branches in multiple states, as is evident from the questions being raised now.”
“It must be borne in mind that the legal fiction of “distinct persons” has been created for the specific purposes of the Act, i.e. CGST Act. An employee, even if working at the Head Office (HO), was considered to be under employment of the entity as a whole and was considered to be governed by the Contract Law and other specific laws relating to such employment however, it appears that the intent of the AAR authority as well as government is to consider the employee qua the HO or the branch and not qua the company,” he added.
“For the common expenses such as statutory audit fees, incurred by the Head Office whose benefit is attributable to all the branches, the GST law prescribes a mechanism to distribute the credit to such branches. Question is whether the HO can be construed to be rendering services to the branches or vice versa and how to cross charge each other,” Doshi further said.
“Given the above, a clarification from the Government is the need of the hour, to put this issue to rest once and for all,” he concluded.
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Naresh Sheth, Partner, NA Shah Associates also said, “It is highly debatable whether salaries can be taxed under GST especially when services provided by employee to employer is out of GST domain. The person is an employee of the legal entity and not that of head office. Executives provide services to branch in their capacity as an employee only. The judiciary has often held that it is not permissible to tax an activity indirectly when it cannot be taxed directly. The position taken by department will not find favor from the judiciary.”
“Taxing such employee cost will have harsh effect on entities (engaged in health care, power generation, liquor manufacturing, charitable activities etc.) which are either exempt or non-taxable under GST legislation. It will be unfair to burden such industries by taxing the notional transaction without any economic consideration,” he added.
“In order to avoid long drawn litigation and to provide real ease of business, government should clarify that executive’s salaries should be excluded from value of services to be cross charged by head office to branches in other states,” said Sheth.