11^th July 2023 witnessed the 50^th Goods and Services Tax Council meeting under the Goods and Services Tax (‘GST') regime. The Council, from the very beginning, has considered the concerns raised by the industry from time to time and has come up with the recommendations to provide reliefs to businesses in India.

The theme of the 50^th GST Council meeting was no different, in which the Council has addressed several contentious issues being faced by industry and issued necessary clarifications. The subject matter of this article revolves around the recommendation of the GST Council and the clarification brought in by CBIC Circular No. 199/2023-GST, dated 17 July 2023 with respect to distribution of credit through Input Service Distributor (‘ISD’).

ISD vs. Cross Charge has been an area of ambiguity both for taxman and the taxpayer since the inception of GST. While ISD and cross charge are two different concepts with different purposes to cater, they have been confused as substitutes to each other from time and again as both essentially entail credit of common input services and apportionment of the same across branch offices (‘BO’) located in different States[1]. Further, considering the compliance and administrative challenges involved in following the ISD mechanism, many taxpayers have resorted to the route of cross charge from Head Office (‘HO’) to other locations for third party services, instead of distribution of credit via the ISD mechanism. Moreover, different practices have been prevalent in the industry for cross charge of internally generated services by HO, especially with respect to the inclusion of the cost of employees working in HO for providing services to other locations under the cross-charge mechanism.

The GST Council was aware of the hardships and confusions of the taxpayer from the very beginning and therefore, this issue was attempted to be dealt in the 35^th GST Council Meeting and a detailed circular was drafted to clarify that taxpayers were mandatorily required to follow ISD, and cross charge is required to be followed for support services provided by HO, including employee costs.  However, the Circular never saw the light of the day as it was observed by the Council that if it is held that ISD is mandatory, almost 90% of taxpayers might become non-compliant for their past practice as the statute itself never enforced distribution of credit via ISD.

However, authorities still raised demands on companies who were following the cross-charge mechanism, for the mandatory distribution of credit via ISD. Further, where in case the companies had opted for ISD, demands were being raised for cross charge of HO employee salaries to the other locations.

With this milieu, the latest Circular has been issued which inter alia clarifies that ISD registration is not mandatory and where an HO procures services from third party which are attributable to both HO and BOs or other BOs, HO has option to distribute credit through ISD or raise invoice for the cross charge. Further, the Circular also clarifies that employee cost need not be included for the purpose of cross charge of internally generated services and where the recipient is entitled to full input tax credit, any value including Nil value can be adopted for cross charge.

Thus, the Circular validates the practice which was adopted by industry in the past and gives a huge relief to the taxpayers who were facing many enquiries by the DGGI authorities.

At skim view, one may state that this Circular has put at rest all the disputes surrounding this issue, however, the authors wish to highlight some of the open issues and aspects which need to be addressed in view of the proposed amendment in law to make the ISD registration mandatory.

• The authors emphasize that though both the concepts appear to lead to similar consequences, there is a fundamental difference in both the concepts, and both serve different purposes. While on one hand, ISD mechanism is required for distribution of credit pertaining to services received by other locations, wherein the invoices are raised on HO. On the other hand, the cross charge is to be used for the charging for the cost of support services provided by HO to other locations while consuming various goods & services for providing such support services.
• It is to be further noted that while Central Goods and Services Tax Act, 2017 under Section 20 read with Rule 39 of the Central Goods and Services Tax Rules, 2017 provides for mechanism to distribute credit through ISD, the value of cross charge needs to be determined as per Rule 28 or Rule 30 of the CGST Rules i.e., open market value or cost of provision of services along with 10% markup.
• Therefore, for the companies where the recipient is entitled to take full credit, though any value may be taken for cross charge, distribution of credit would be mandatorily required for services covered under scope of ISD. Further, where the recipient is not entitled to take full credit, there would be a requirement to add a 10% margin to the cost of goods & services procured or manufactured, as the case may be, for cross charge, though there is no such requirement in case of distribution of credit through ISD. Therefore, one can easily determine that such different basis for valuation may not be revenue neutral.
• In addition to the above, attention is invited to one peculiar case where distribution of credit via ISD or cross charge can lead to different results if the recipient unit is a unit in SEZ, since in case of cross charge for the support services the head office can raise invoice without GST claiming it to be deemed export under LUT. However, no such option is available for distribution of credit via
• Further, at the time of receipt of service itself, the assessee would be required to indicate the ISD/ normal registration to the service provider so that invoices can accordingly be booked in the respective registration for the purpose of ISD distribution or cross charge. This is for the reason that credit on invoices booked in normal registration cannot be transferred to ISD registration, except in case of reverse charge.
• Therefore, to avoid any future disputes with the authorities, it would be crucial for industry to put a right system in place to identify the services on which credit has to be distributed via ISD and on which the cost needs to be included for the purpose of cross charge.
• The next issue that the authors intend to raise is that despite the Circular, there is still an ambiguity regarding the costs which need to be included for the purpose of cross charge of internally generated services i.e., support services provided by HO to other locations. There are certain services received by HO, for which credit is restricted under Section 17(5) of the CGST Act such as canteen services, car hire charges, etc. Further, there are some services received by HO, which do not attract GST such as financing services. Since no credit is availed by HO on these services, there may not be any need to include cost of such services as part of cross charge between distinct entities, which as a concept was introduced to avoid any breakage in the credit chain.

Therefore, before making ISD mandatory, it is important that government brings clarification around the manner of valuation of cross charge, to avoid confusion in the mind of the taxpayer. It is high time that the ninth head of Lernaean Hydra is addressed and removed so as to deal with this issue for once and all. At the same time, the taxpayer needs to be vigilant about deciding which credit is to be passed through ISD and which credit is to be passed through cross charge till the ISD becomes mandatory.

[The authors are Partner and Senior Associate, respectively, in the Indirect Tax practice at Lakshmikumaran & Sridharan Attorneys, New Delhi]

1. [1] FAQsONBANKING_INSURANCESTOCKBROKERS.pdf (kar.nic.in) ; Columbia Asia Hospitals Pvt. Ltd., 2019 (20) G.S.T.L. 763 (App. A.A.R. - GST)