The Central Board of Indirect Taxes and Customs (CBIC) has issued GST Circular 199/11/2023 dated July 17, 2023, providing clarification on the taxability of services provided by an office of an organization in one state to the office of the same organization in another state, i.e. inter-office supply of services in different states. This clarification addresses the concerns raised by various entities regarding the tax implications when both offices are considered distinct persons under section 25 of the CGST Act.
The CBIC has examined the representations received on the taxability of services provided by one office to another office of the same organization, i.e. inter-office supply of services, where both offices are located in differet states and are treated as separate entities under Section 25 of the CGST Act. In order to ensure consistent implementation of the law across different field formations, the CBIC has clarified the issues in the following paragraphs.
To illustrate the situation, CBIC has given an example of a business entity with Head Office (HO) located in State-1 and branch offices (BOs) located in other/different states. The HO procures certain input services, such as security services, for the entire organization from a third-party security agency. Additionally, the HO provides other services internally to the branch offices.
Issue #1: Input Tax Credit (ITC) Distribution for Common Input Services
The first issue pertains to whether the HO can avail input tax credit (ITC) for common input services procured from a third party that are attributable to both the HO and the BOs. Can the HO issue tax invoices to the BOs for these input services, allowing the BOs to claim ITC? Is it mandatory for the HO to follow the Input Service Distributor (ISD) mechanism for ITC distribution?
Clarification: The CBIC has clarified that the HO has the option to distribute ITC for common input services, whether attributable to both the HO and the BOs or exclusively to one or more BOs. The distribution can be done by following the ISD mechanism laid down in Section 20 of the CGST Act and Rule 39 of the CGST Rules. However, it is not mandatory for the HO to distribute such input tax credit using the ISD mechanism.
Alternatively, the HO can issue tax invoices to the BOs for common input services procured from a third party. The BOs can then claim ITC for these services, subject to the provisions of section 16 and 17 of the CGST Act.
If the HO chooses to distribute ITC to BOs using the ISD mechanism, it must register as an ISD in accordance with Section 24(viii) of the CGST Act. The distribution of ITC can only be made through the ISD mechanism if the input services are attributable to the BO or have actually been provided to the BO. Similarly, the HO can issue tax invoices to the concerned BOs, under section 31 of the CGST Act, for any input services procured by the HO from a third party on behalf of a BO, only if these services have actually been provided to the BOs.
Issue #2: Valuation of Internally Generated Services
The second issue relates to internally generated services provided by the HO to the BOs. In cases where the BOs are eligible for full input tax credit, is the HO required to issue tax invoices for these services? Should the cost of all components, including employee salaries, be included in the computation of the value of services provided by the HO to the BOs?
Clarification: The value of services provided by a registered person to a distinct person should be determined as per rule 28 of the CGST Rules and subsection (4) of section 15 of the CGST Act. According to clause (a) of rule 28, the value of goods or services supplied between distinct persons should be the ‘open market value’ of such supply. The second proviso to rule 28 specifies that when the recipient is eligible for full input tax credit, the value mentioned in the invoice shall be deemed as the open market value of the goods or services.
Therefore, in the case of services provided by the HO to the BOs, the value declared in the invoice by the HO will be considered as the ‘open market value’ of such services, if the BO is eligible for full input tax credit. The inclusion or exclusion of specific components, such as employee salaries, in the invoice value does not impact the determination of the ‘open market value’ when the BO is eligible for full input tax credit.
In instances where the HO has not issued a tax invoice to the BO for a particular service provided by the HO to the BO, and the BO is eligible for full input tax credit, the value of such services may be deemed as nil (zero). This treatment aligns with the second proviso to rule 28 of the CGST Rules, considering it as the open market value.
Issue #3: Cost Inclusion for Internally Generated Services
The third issue pertains to the cost of salary for HO employees involved in providing internally generated services to the BOs. In cases where the concerned BOs are not eligible for full input tax credit, is the cost of salary mandatorily required to be included in the taxable value of the services?
Clarification: The CBIC has clarified that in the case of internally generated services provided by the HO to the BOs, the cost of salary for HO employees involved in providing these services is not mandatorily required to be included in the taxable value of such services. This applies even when the concerned BOs are not eligible for full input tax credit.
CBIC GST Circular 199/11/2023 dated 17/07/2023: Clarification on Taxability of Inter-office Supply of Services in Different States
The CBIC’s clarification provides guidance on the taxability of inter-office services provided by an office of an organization in one state, to the office of the same organization in another state, where both offices are considered distinct persons under GST. It addresses issues related to input tax credit distribution, valuation of internally generated services and cost inclusion, like salary, etc., for such services. Businesses with presence in different states can refer to this circular to ensure compliance with the GST law when dealing with these scenarios.
CA Abhinav Aggarwal is a qualified Chartered Accountant and ICAI member since 2010. He holds vast experience in Audit, Income Tax & GST and is a passionate writer on the CA profession and related topics.
Disclaimer: While reasonable efforts have been made to ensure the accuracy and reliability of the information presented in this article, it should not be considered as professional tax advice or guidance. For compliance, the readers are advised to directly refer to the relevant laws, regulations and notifications issued by the appropriate authorities.