In line with recommendations made by the GST Council in its 50th GST Council meeting, CBIC has issued circulars to clarify on various issues suggested by the GST Council such as taxability of services provided by one office to another office within same organization and manner of valuation, e-invoices of supplies made to government entities, applicability of GST on shares held by holding company for its subsidiary company.
Following is the detailed analysis of clarification provided by CBIC:
1. Clarification of taxability of services provided by one office to another office of same organization in different states
- CBIC has received various representations regarding taxability of services provided by one office to another office of the same organization based out in different states as both the offices are considered as distinct persons for GST purpose.
- Head office is located in one state
- Branch Office is located in another state.
- The HO procures some common input services, e.g. security service, for the entire organization from a security agency (third party).
- HO provides some internal services to branch offices as well.
- Considering the same, CBIC has provided a detailed clarification vide circular No. Circular No. 199/11/2023-GST dated 17th July, 2023 on following issues:
1.1 Distribution of ITC of common services through tax invoice Mechanism or ISD mechanism
Issue: Can HO avail the ITC in respect of common input services procured from a third party attributable to both HO and BOs or exclusively to one or more BOs and in turn issue tax invoices to such BOs for such input services and Branch office can avail ITC for the same or Is it mandatory for the HO to follow Input Service Distributor (“ISD”) mechanism for distribution of ITC of common Input Services?
- Clarification on Selection of method for distribution of ITC:
- CBIC has clarified that the Head office has an option to distribute ITC of common Input services by following ISD mechanism.
- However, as per provisions of the CGST Act and Rules, it is not mandatory to distribute the common ITC through ISD mechanism.
- Distribution of ITC through issuance of tax Invoice
- HO can also issue tax invoices as per CGST Act to concerned BOs in respect of common ITC.
- Branch offices can avail ITC on the same subject to the provisions of section 16 and 17 of CGST Act.
- However, HO can issue tax invoices to the BOs only if the said services have actually been provided to the concerned BOs.
- Distribution of ITC through ISD mechanism:
- However, if HO wishes to distribute common ITC through ISD mechanism, then HO is mandatorily required to register as an ISD.
- Further, ITC can be distributed to a BO through ISD mechanism only if the said input services are attributable to the such BO or have actually been provided to the said BO
1.2 Valuation of services provided internally when recipient is entitled to claim full ITC
Issue: With respect to internally generated services provided by Head office to Branch Office, for which full ITC is available to concerned BO, following are the issues:
- In some cases, HO do not raise tax invoice to the concerned BOs;
- In some cases, HO does not include the cost of all services used in providing such internally generated service such as salary cost of employees involved in such services.
Accordingly, whether the HO is mandatorily required to issue invoice to BOs and whether
the cost of all components, including salary of HO employees, is mandatorily required to include in value of services provided by HO to BOs?
a. Manner of Determination of Value of Supply between distinct person:
- The value of supply of services between distinct persons is determined as per Rule 28 of CGST Rules read with Section 15(4) of CGST Act.
- As per Rule 28(4), value of supply of goods or services between distinct persons shall be the open market value of such supply.
- However, where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value.
- Therefore, value of services declared in the invoice by HO shall be deemed to be open market value as Branch office is entitled to claim the ITC.
b. Where Value of all services is not included in Invoice value
- In case where branch office is entitled to claim full ITC, the value declared on the invoice by HO shall be deemed to be the open market value of such services whether value of all services are included or not.
c. Where no invoice is raised by Head Office
- Further, if HO does not issue a tax invoice to the branch office the the value of such services may be deemed to be declared as Nil by HO to BO.
- Accordingly, same shall be considered as open market value.
1.3 Valuation of services provided internally when recipient is not entitled to claim full ITC
Issue: If the branch office is not entitled to claim the ITC, whether the Head office is mandatorily required to include cost of salary of employees of the HO involved all cost while determining value of service?
Clarification: CBIC has clarified that the salary cost of HO employees, involved in providing services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services even in cases where ITC is
not available to the concerned BO.
2. Clarification on E-invoices for supplies made to Government Departments or PSUs (Circular No. 198/10/2023-GST dated 17th July, 2023)
Issue: Whether e-invoice is required to be mandatorily generated for supplies made to Government Departments or establishments/ Government agencies/ local authorities/ PSUs which are registered solely for the purpose of TDS deduction under section 51 of the CGST Act?
Clarification: CBIC has clarified that Government Departments or establishments/ Government agencies/ local authorities/ PSUs, which are required to deduct TDS, are liable for compulsory registration under GST.
Therefore, these entities are to be treated as registered persons under the GST law. Accordingly, e-invoice is required to be issued for supplies made to such entities.
3. Clarification on taxability of shares held in subsidiary company (Circular No. 196/08/2023-GST dated 17th July, 2023)
Issue: Whether the activity of holding shares of the subsidiary company will be treated as a supply of service and shall be subject to GST?
Clarification: CBIC has clarified that securities are considered as neither goods nor services as per definition of goods or services under CGST Act. Further, securities include ‘shares’ as per Securities Contracts (Regulation) Act, 1956.
Therefore, shares held by the holding company in the subsidiary company are neither goods nor services. Accordingly, purchase or sale of shares or securities is neither a supply of goods nor a supply of services. For a transaction to be treated as supply of services, there must be a supply as per Section 7 of CGST Act.
SAC entry “997171” is for “the services provided by holding companies, i.e., holding securities of (or other equity interests in) companies and enterprises for the purpose of owning a controlling interest.” CBIC has clarified that it cannot be said that a service is being provided by the holding company to the subsidiary company, solely on the basis that there is a SAC entry ‘997171’ unless there is a supply of services by the holding company to the subsidiary company.
Therefore, the activity of holding of shares of subsidiary company per se cannot be treated as a supply of services by a holding company to the said subsidiary company and cannot be taxed under GST.
4. Interest on wrong availment of IGST Credit and reversal thereof (Circular No. 192/04/2023-GST dated 17th July, 2023)
CBIC has received various applications on applicability of interest under section 50(3) of CGST Act where IGST credit has been wrongly availed by a registered person. Clarification is required as to whether such wrongly availed IGST credit would be considered as utilized in case IGST available balance in the electronic credit ledger falls below the amount of such wrongly availed IGST credit. However, total balance of ITC in the electronic credit ledger under the heads of IGST, CGST and SGST taken together remains more than such wrongly availed IGST credit, at all times, till the time of reversal of the such wrongly availed IGST credit.
- ITC wrongly availed: INR 1,00,000
- Balance in Electronic Credit Ledger of IGST: INR 20,000
- Balance in Electronic Credit Ledger of CGST: INR 70,000
- Balance in Electronic Credit Ledger of SGST: INR 50,000
- Whether interest is payable on balance INR 80,000, which has been utilised in IGST Credit Ledger.
- In the cases of wrong availment of IGST and reversal thereof, for the purpose of calculation of interest, whether the balance of ITC available in electronic credit ledger under the head of IGST only needs to be considered or total ITC available in electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has to be considered.
- CBIC has clarified that amount of ITC available in the electronic credit ledger, under any of the heads of IGST, CGST or SGST, can be utilized for payment of liability of IGST.
- Therefore, total ITC available under all heads, taken together, shall be considered for calculation of interest under rule 88B of CGST Rules.
- Combined balance of all heads shall be considered to determine as to whether the balance in the electronic credit ledger has fallen below the wrongly availed ITC of IGST, and to what extent the balance in electronic credit ledger has fallen.
- Thus, in the cases wrong availment of ITC and subsequent reversal, no interest shall be payable if during the time period starting from availment and up to such reversal, the ITC balance in electronic credit ledger, total of all head, has never fallen below the amount of such wrongly availed ITC.
- However, when the balance of ITC, under all the heads taken together, falls below the ITC wrongly availed, then it will amount to the utilization of such wrongly availed IGST credit and the extent of utilization will be the extent to which the total balance in electronic credit ledger under heads of IGST, CGST and SGST taken together falls below such amount of wrongly availed IGST credit, and will attract interest.
- Therefore, in the above mentioned example, ITC wrongly availed is INR 1,00,000. However, the balance in all electronic ledgers is INR 1,40,000. Therefore, no interest shall be payable.
Issue: Whether the ITC balance under head compensation cess available in electronic credit ledger shall be taken into account while considering the balance of electronic credit ledger for the purpose of calculation of interest in case of wrong availement and utilized IGST, CGST or SGST credit.
- As per Goods and Services Tax (Compensation to States) Act, 2017, ITC under head compensation cess can be utilised only towards payment of compensation cess.
- Thus, credit of compensation cess cannot be utilized for payment of any tax under head CGST, SGST or IGST or for the purpose of reversals of credit under these heads.
- Accordingly, credit of compensation cess available in electronic credit ledger cannot be taken into account while computing interest