According to a recent judgement by the Appellate Authority for Advance Ruling (AAAR), the allocation of a head office employee’s salary to a branch, as well as the recovery of that income from the branch, will be “subject to GST.”
Cummins India had petitioned the AAAR with several queries, including whether the head/corporate office’s allotment of staff wage costs to a branch would be subject to GST. It also wanted to know if GST will apply to the allocation and collection of wage costs for head office personnel from branch offices.
Both will be subject to GST, according to the Maharashtra AAAR. According to the judgement, the head office is not eligible for a tax credit on taxes paid on common services.
The input tax credit is a way for partially offsetting GST paid on a specific raw material or input service against future tax liability.
Companies must register separately in each state and share all expenses under the GST framework. Certain expenses are shared by the entire company, such as advertising, hiring lawyers, and even travel expenses made by the CEO or other top executives. According to tax specialists, the dilemma for various companies is how to separate them and in what percentage.
There is a system called input service distribution in the GST framework (ISD). Companies can use this registration and split the cost or tax credit among all of their employees.
According to tax experts, this is the second judgement on the subject that will set a precedent.
Last year, the Authority for Advance Ruling (AAR) ordered that corporations must “value” the services provided by CXOs and subsequently charge them to subsidiaries across India (with separate GST registration). Companies were compelled to “cross charge” common expenses such as top management wages across branch offices as a result of the judgement.
In November 2019, ET reported on the topic, stating that indirect tax agents had begun scrutinizing several corporations and banks regarding CXO compensation. The government quickly responded by stating that it would clarify the situation.