The government is set to make it clear that services provided by an office of an organisation in one state to another office in another state will face goods and services tax, or GST.

A circular to this effect, endorsed by the GST Council, will be issued soon, a government official told ET.

This is in line with the view taken by Karnataka Authority for Advance Rulings (AAR) that in-house functions such as human resources and payrolls, if carried out from a centre in one state for offices in other states, will face GST, for which invoice will have to be issued.

The circular will also lay down that emoluments offered to service personnel will have to be included under this, the official said. Companies can claim input tax credit for this, but for certain exempt sectors such as power, healthcare, liquor, and education, it will become a cost as credit of tax charged would not be available, the person said.

The circular follows representations from the industry, seeking clarification on taxability of activities performed by an office of an organisation in one state to office of the same organisation in another state, regarded as distinct persons under the GST law and treated as supply of services between distinct persons.

The law committee under the GST Council has sought to clarify via the circular the issues dealing with distribution of input tax credit in respect of input services provided by the head office, but attributable to head office or various branch offices, treatment of expenses incurred by the head office on the procurement, distribution and management of common input services, treatment of services provided by head office such as common administration or common IT maintenance to its branch officers and their valuation.

The circular, which is in the form of frequently asked questions, will lay down as to how the input tax credit will be distributed between head office and branch officers as also that value of service will be equal to employee cost and establishment cost of supplying that service, said the official cited earlier.

Expenses will need to be apportioned using valuation principles laid down under the GST Law and generally accepted accounting principles.

Experts said the government needs to treat employee of a company as employee of a single company irrespective of their location.

“It would be good if the government also looks at the intent behind the transactions and adopts a pragmatic approach to recognise that an employee is an employee of an organisation as a whole and not of any particular location, hence there may not be need to cross charge the salary costs between head office and branch office transactions,” said Harpreet Singh, partner at KPMG in India.

Experts also said the issue of cross charge is leading to a lot of confusion on the ground and avoidable paperwork.

“In most cases, it's a revenue neutral exercise except where the output is either exempt or not within GST, where GST charged becomes a cost,” said Pratik Jain, national leader, indirect taxes at PwC.

The government should ideally make it optional where input tax is getting blocked in a particular state, Jain said, adding that employee salary should not be included as employee is of an organisation and not of a particular state or branch.

Case file
The ambiguity over whether central administrative services provided by employees located at one location would tantamount to services being provided one location to another under the GST regime has led to litigations.

AAR, in a case pertaining to Columbia Asia Hospitals, had said such activities would qualify as a service provided by head office to other locations and hence companies are required to be cross charged and levy GST on the same. The matter has now been admitted in the Karnataka High Court and notice has been issued to the government.