The Goods and Services Tax (GST) was introduced as a levy consolidating various indirect taxes such as Excise, services tax, VAT, entry tax etc imposed by states and the central government.
In order to make law simple and litigation-free, policymakers introduced inclusive definitions in the legislation, triggering various rulings from the Authority of Advance Rulings (AAR), on imposing tax on a transaction that was historical and globally out of the tax net.
One such ruling was given by Karnataka Authority for Advance Rulings in the case of Columbia Asia Hospitals, which imposed GST on the salary component paid by corporates. This view was recently affirmed by the Appellate Authority for Advance Ruling (AAAR) also.
In this case, the appellant had its corporate office in Karnataka performing common activities such as accounting, administration and maintenance of IT system, benefit of which flows across the units located in other states. Now the issue before the authority was whether services provided by the corporate office to other units would be treated as a supply and salary component paid in corporate office needs to be charged across all states with GST? To this AAR and AAAR both upheld the levy.
This ruling implies that businesses with multi-state offices are required to raise invoices and charge tax on in-house centralised service functions including overall management, policy decisions and execution thereof. For example, if the functions of human resources and payrolls are carried out from a corporate office in one state for offices in other states, the said transaction will attract GST. Thereby, it becomes important for any multi-state business entity to identify all the transactions between their distinct entities, which may or may not be apparently identifiable. This ruling and its sound technical footing would lead to a tsunami of litigations, which may be difficult for taxpayers to contest.
Here are the top 5 immediate ramifications of this order: Tax demands for the 2017-18 financial year GST was a new law in July 2017 and there was not much clarity on numerous basic concepts. Charging GST on the salary component is a technical jargon unimaginable to most. This ruling would undoubtedly be picked up tax authorities in various states and pursued vigorously to award tax demands and tax litigations to innumerable taxpayers. Methodology for emolument apportionment
Every corporate is run by a hierarchy of people, including managers, HODs, presidents, chief executive officers and chief financial officers, performing centralised functions. This ruling mandates a cross-charge for all such emoluments across all units.
Now the issue would be all such executives manage the functions across the company irrespective of the location, however their focus / involvement for each state keeps on changing according to need-based irrespective of the turnover of any such state.
The big question is what should be the methodology for apportionment of such salaries being paid, whether it should be a straight-jacketed formulae like turnover or it should be more precisely carved out formulae based on “use-test”. The law is silent on this aspect and both the formulae could be easily litigated by tax authorities.Besides this, calculating the cost apportionment of such salaries for a huge conglomerate like the Tatas, which is headed by multiple overlapping layers of management operating thousands of registered taxpayers, is beyond reasonable comprehension.
High tax cost for exempt sectors The cost apportionment for centralised functions across all state registered entities would result in high tax cost for exempt sectors like petroleum, alcohol, secondary realtors, restaurant chain, electricity companies, water distribution companies and government contractors. Cascading effect of taxes would push the prices of such commodities leading to imbalance in domestic competition of supplementary items. Monthly menace of high compliance GST is a simplistic law with a complex web of monthly compliance. Even a minor error could lead to heavy penalties and interest cost for an organisation. With this background adding multiple taxable transactions would further multiply the futile tax transactions. Monthly invoicing, adjustment of tax credit and payment of taxes would be a regular feature post this ruling. Valuation of in-house functions
The law mandates any transaction between two related entities would be chargeable to tax at open market value. Valuation and computation of open market value for such in-house functions is one tough road, resulting in unnecessary complications for trade and industry. Any incorrect valuation would lead another set of tax trials stealing away peace of mind for the top executives of the company.
This ruling is going to open doors to various litigations if suitable clarification on exact scope of inter-company supply of services is not clarified immediately. Undoubtedly, any inter-company supply of goods or services is under the tax net of GST but extending the same to cover employee cost has created chaos in multi-state companies.
Ideally speaking, employee costs should neither be treated as supply of goods nor supply of services in terms of an entry in Schedule III (
services by an employee to the employer in the course of or in relation to his employment). As employment contract is executed with the legal entity as a whole and not with particular unit of a company, any services provided by an employee to any of the units of the company is to a company itself and should be kept out of the reach of GST authorities.
I would say this ruling is utterly illogical but not illegal. The effect of this ruling needs to be annulled at the earliest, power for which lies with the GST Council only.
Rajat Mohan is a partner at AMRG & Associates.
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