AAAR ruling on salary to impact head office-branch GST dynamics
January, 17th 2022
Does the chief executive of a large corporation headquartered in Mumbai work for the whole company or just the head office?
Or, should certain common expenses such as salary, marketing, branding or legal expenses be distributed across branch offices or absorbed by head office alone?
A recent ruling by the Appellate Authority for Advance Ruling (AAAR) says allocation of salary of a head office employee to a branch, and its recovery from there, will be "subject to GST."
"Taxation of transactions between head office and branch office has been a contentious issue since inception of GST as the said transactions were not liable to any tax under the erstwhile regime," said Harpreet Singh, partner, indirect taxes at KPMG in India.
Cummins India had approached the AAAR with questions including whether allocation of the cost of employees' salary by the head /corporate office to a branch would attract GST. It had also sought clarity over applicability of GST on allocation and recovery of the salary cost of head office's employees from the branch offices.
The Maharashtra AAAR ruled that both will be subject to GST. The ruling also said the head office is not entitled to avail of tax credit on tax paid on common services.
Input tax credit is essentially a mechanism whereby GST paid on a particular raw material or input services can be partially set off against future tax liability.
Under the GST framework, companies have to take a separate registration in each state and split all expenses. For companies, there are certain expenses common to the whole organisation - such as advertising, or paying lawyers or even travel expenses incurred by the CEO or other top executives. The question for several companies is how to split them and in what proportion, say tax experts.
Under the GST framework, there is a mechanism called input service distribution (ISD). Companies can take this registration and distribute the cost or the tax credit across all registrations.
This is the second ruling on the issue that is set to create a precedent, say tax experts.
An Authority for Advance Ruling (AAR) last year ruled companies must "value" services provided by CXOs and then charge it to the subsidiaries (with separate GST registration) across India. The ruling meant that companies were required to "cross charge" the common expenses such as salaries of top management across branch offices.
ET had reported in November 2019 about the issue when indirect tax officials had started questioning some companies and banks about CXO salaries. Soon after, the government said it would provide a clarification.