ISD and Cross Charge under GST: Complimentary or Supplementary

[Amia Singh]

Indian taxation is one of the most difficult legislature and possess a long association with entanglements and confusions. Herein, under GST- The Input Service Distribution and Cross charge also have become victims of this. Vide this article, we will dwell upon the factual and circumstantial meaning of the ISD and Cross charge.

Legislative Meaning:

Input Service Distributor: As per clause 61 of section 2 of CGST Act, 2017 “Input Service Distributor” means:

• An office of the supplier of goods or services or both;
• Which receives tax invoices issued under section 31 towards the receipt of input services, and
• Issues an ISD Invoice for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same PAN as that of the said office

Let’s dissect the above provision line by line, as we can observe from the above definition ISD is a mechanism to distribute the input tax credit of service invoices between the registered persons (the recipient of ISD Credit) having the same PAN. Perusing this definition only, one question is bound to arise that ‘can an ISD distribute ITC of any service invoice, whether or not it pertains to the intended recipient.

Now let’s move to section 20 of the CGST Act, which provides the manner of distribution of Credit by an ISD. As provided in sub-section 2(c) of section 20, the credit of tax paid on input services attributable to a recipient of credit should be distributed only to that recipient. So, a recipient should be given that credit only for which it is entitled to.

In the backdrop of above discussion, one will notice that the word ‘common credit’ is not defined, though commonly interchanged with the ISD. Hence, we can deduce that the ISD is a different concept and does not deal with the mechanism of distribution of common credit.

Cross Charge: The word ‘cross charge’ is not defined under the GST Act. As per the general meaning of cross charge it means ‘charging a value or cost to a person towards whom it has been actually incurred’.

Drawing reference to Sub-section 4 of Section 25 of CGST Act, we understand that a person who has obtained or is required to obtain more than one registration, whether in one State/UT or more than one State/UT shall, in respect of each such registration, should be treated as distinct person.

Further, schedule 1 of the CGST Act entails a deeming fiction, wherein any supply between distinct persons shall be treated as supply even though made without any consideration.

Hence, all the transactions between the registered persons (having the same PAN) having separate registrations in one state or more than one states, would be treated as a taxable transaction under GST.

To put in simple words the Head Office (HO) is liable to pay GST on all the services including management services, IT services, staff services etc, provided by it to it’s Branch Offices (Bos).

Hence, HO needs to cross charge the expenses to all Bos, for which HO has incurred the expense via issuing a GST invoice.

The next aspect to be analysed, is the value to be adopted for cross charging the expenses incurred by HO on behalf of BO. GST Rules provide that if the recipient (BO) is eligible to take full input tax credit, the supplier can adopt any value for issuing the GST invoice.

Summarizing Table:

Sr. No	Point of difference	ISD	Cross Charge
1	Meaning	Distribution of ITC for the input services received by the HO to the branches it pertain/s to	Charging the common expenses incurred by the HO in lieu of service supplied by said HO to its branches without consideration
2	GST Provision	Mandatory requirement by the GST law, separately considered in law	IT arises from a deeming fiction of law
3	Input Services/ Inputs/Capital goods	Mechanism to distribute the ITC on Input Services	ITC can be transferred paid on Input Services, Inputs and Capital goods
4	ITC can be transferred to one or more branches	ITC is to be distributed to that particular branch for which input service pertains	Expenses to be cross charged to all branches for whom HO is operating
5	Distribution basis	ITC to be distributed on Turnover basis	Basis could be the turnover, count of employees or any other reasonable basis
6	Separate Registration	A separate registration needs to be obtained for ISD	No such requirement

The Issue:

In the above backdrop, we deduce that the ISD and Cross charge are separate concepts, that is ISD is towards distribution of input tax credit to one or more branches for the input services received by the HO and incurred for BO and the other one Cross charge provides the mechanism to charge the cost to BO for which HO is incurring the expense.

This gets further fortified from CBIC vide FAQs no 17 on Banking, Insurance and Stock-Brokers, which clarifies that ITC availed on services procured at a registration which are used for business in more than one State, should be appropriately invoiced or distributed through ISD mechanism to other States. Giving an option between Cross Charge and ISD, which ultimately goes to the root cause of the contention.

 Conclusive Remarks:

Hence one can conclude that, ISD and Cross charge are separate concepts having their separate requirements. Accordingly, CBIC must clarify the ambiguity and bring uniformity in the understanding of Law. Interestingly, it came to know that CBIC had proposed a circular which was deferred during the GST Council meeting in view of some observations made by States.

 

Discussions to this article

[Ashok Patil]

Nicely drafted, clarifies all the doubts on the subject

Thanks a lot for sharing

[RAJESH ADVANI]

Article correctly articulates differences between the two concepts.Very well written article

[Hiren Pathak]

Sir, What about multi location exempt industry ? can such type of industry obtain ISD registration and distribute 100% INELIGIBLE ITC to thier branches?