CBIC’s argument that that there will be a tax credit Available at the recipient location, and thus, the company won’t incur extra costs, may not always hold.
By Tarun Jain
the recent media reportage of an alleged plan to levy GST on C-suite and other corporate salaries, and an immediate clarification by the Central Board of Indirect Taxes (CBIC) has focussed much attention on the issue. The debate necessitates introspection, owing to the consequences of such a decision, were it to be taken. At its heart, lies conferment of a distinct entity status, under GST law, to branches of a business entity that are deemed to be ‘distinct persons’, and the belief that their inter se supplies are taxable.
One of the axioms of the GST is that it is a destination-based consumption tax. In other words, the tax revenue should accrue to that jurisdiction within whose geography the taxable supplies are consumed, irrespective of the location of the service provider. This concept is accentuated in its dimensions in the context of GST as it has evolved on the basis of subsumation of the taxing-entitlement of the states. The Indian GST must, therefore, protect fiscal sovereignty and revenue buoyancy of the states by ensuring that tax revenues flow to the state where consumption occurs.
As a corollary, GST must be given its full play even in the context of supplies where the legal recipient is located in one state, but the consumption happens across branches located in other states. In such instances, the GST applicable to such supplies must be apportioned to ensure the tax revenue is equitably distributed. This conceptual tenet is effectuated under GST laws through the concept of distinct persons. The GST laws provide that, ordinarily, one person shall be granted a single registration for each state. Such person, however, would be granted separate registration in each state where an office or branch is engaged in making supplies. Each such branch is, thus, deemed to be a separate entity for the purpose of GST laws. To illustrate, a company with branches in 18 states will have 18 distinct GST-personalities.
The consequence of such an arrangement is that any transaction between the branches, subject to application of GST regulations, is considered a taxable supply upon which the appropriate tax must be paid. Furthermore, an inward supply received by the head office, the benefit of which supply is shared by various branches, must be proportionately distributed across the branches. In effect, thereby, each branch represents a distinct taxing unit for GST purposes, and appropriately discharges the GST liability in the state of its presence, notwithstanding that the supply made has been made or consumed within the same legal entity. This mechanism is understood to ensure each state its GST entitlement without there being any inequitable accrual of tax proceeds in the state where the registered head office, that pays for entirety of the inward supply, is located.
In practical terms, the effect of this framework is that the business entity is not just obliged to prepare separate accounts for each of its branches located in different states but also must carry out GST compliances for each. The tax authorities, conversely, would also expect such entity to proportionately bifurcate the costs and revenues across such branches in a manner that the corresponding credits and tax-share are transferred to the concerned state where the branch is located.
The root of the debate perhaps lies in the failure to appreciate and imbibe the effect of these legal changes that have been in vogue for over two years. Thus, the business community gasped with each successive ruling of the GST Authority for Advance Rulings (AAR) when it opined on the business dynamics at the intersection of GST framework. To illustrate, in the case of a crane-leasing business (Sanghvi Movers) having its branches in multiple states, the AAR concluded that each inter-state movement of the cranes across branches constituted a distinct supply, rendering it liable to GST even if there was no flow of consideration on such movement. In another illustration, the AAR answered in the affirmative (Cummins India) the question of whether allocation of costs to other locations for the common input supplies received by one location qualified as supply and attracted levy of GST.
This implies that a company with multi-state presence must proportionately distribute the audit cost across locations (and also charge GST thereon) where the head office engages an accounting firm to undertake an audit, irrespective of the fact that the invoice for such services is issued on the head office. This is exactly what the CBIC has stated in its clarification. It rules out the levy of GST on CFO salaries, which is an out-of-scope supply, being an employer-employee transaction. However, the clarification goes on to add, invoking the distinct person concept, that the component of the CFO salary distributed to its branch offices is nonetheless subject to GST. For that matter, earlier, the AAR (Columbia Asia Hospital) had concluded that services by employees housed under the corporate office provided to branches in other states are, without exception, liable to GST.
The CBIC seeks to play down the consequence by stating that GST charged on such distribution would be available as credit to the recipient location, and thus, there “is not any additional cost to the organisation”. As a proposition, this statement, though correct, is not an imperative reality. For illustration, one of the branches may be engaged in rendering partly- or wholly-exempted services. In such a case, the complete credit would not exist. Going further, even if the credit is available, it does not necessarily imply a tax-neutral position for the branch. For illustration, the credit available with the branch may be far in excess of its liability to pay GST. In such eventuality, colloquially referred to as inverted duty structure, the credit only accumulates over time, and is, thus, a mere book asset without any practical significance.
The purpose of this discussion is to ensure that businesses are not overwhelmed by the din and criticism, but come alive to pragmatic realities by playing out the consequences of this seemingly inviolable tenet of GST law. Given that the conferment of a distinct identity to the inter-state branches of an entity aims to ensure inter se equities between the states, it is doubtful that either the concept or the concomitant statutory provisions will be revisited. Thus, if the organisational processes need to be realigned to factor the consequences, so be it. Without delay, businesses must adapt to these obvious and natural consequences of conceptual changes in the indirect tax regime which GST represents.
Partner, BMR Legal Views are personal