All About GST on Cross Charge Transactions

There is no particular definition for a cross charge as per the GST Act. Ideally, when the supply of goods between distinct persons is invoiced, it is called a cross charge.

What are cross-charge transactions?

As per the provisions of the CGST Act, the tax will be imposed on the supply of goods and services without consideration amongst distinct persons.  Where two business units have obtained different registrations under GST, they will be considered distinct entities/persons. Where there is a supply of goods and services that has taken place between two branches of the same business located in two separate states, it comes under the purview of GST. This is because GST is a destination-based tax. Hence, every such supply between distinct persons will result in cross-charge transactions.

Where a business entity has multiple places of business registered under the same PAN, it is likely the set-up will be on the lines of the Head Office handling admin work, maintenance of accounts and IT systems and other operations for all the units present in India. Input services provided by the Head Office to the various branches are considered separate services and apportioned based on their turnover.  To ensure no blockage of credits, the Head Office will issue an invoice to the respective branch offices for such services and transfer the appropriate input tax credit to them.

How was cross charge dealt with in the pre-GST regime?

Prior to GST, the transactions with regard to cross charge were treated differently under VAT and Central Excise. Under VAT, as long Form F was furnished to the source branch by the recipient branch, tax on stock transfers was exempted. The assessing authority later furnished this to prove that it was a mere stock transfer and not a sale.

Input tax credit under VAT was also a complex structure that resulted in a cascading effect since part of the ITC would be added as product cost.

Under Central Excise, payment of 100% + 10% of the cost of manufacturing the goods was paid as excise duty.

Taxability of Cross-Charge Transactions

The scope of supply for cross-charge transactions falls under the activities specified in Schedule 1 (Activities to be treated as supply even if made without consideration). Under this Schedule, it is specified that any supply, even if made without consideration, between two distinct persons (different GST registrations, same PAN) will be treated as supply.

Section 15 of the CGST Act, read along with Rule 28, helps one determine the value of supply under cross charge. The value of supply of goods or services or both between two distinct persons shall be any of the following-

• Open market value of the supply
• Where the open market value is unavailable, the value of supply of goods or services of similar type and quality
• 110% of the cost of such goods or cost of provision of such other services
• Any other reasonable means.

Where a unit is located in a Special Economic Zone (SEZ) that requires cross charge to be applied on it, it is to be noted that supply in an SEZ amounts to a zero rated supply. As a result of this, the cross charge will be considered as an export under the following options-

• Under LUT without payment of IGST
• On payment of IGST

Availability of ITC on GST paid on cross charge transactions

Cross charge cannot be treated as an additional cost. Therefore, GST paid on cross charge transactions is available as input tax credit so as to avoid any blockage of credit.

Reporting of cross charge in GST returns

There is no separate row in the table that is exclusively meant for cross charge transactions. These transactions will be reported on the same lines as regular supply of goods or services.

The nature of the cross charge transaction, whether it is inward supply or outward supply, will form the basis for where they are reported in the relevant form.

In the case of inward supply, the reporting will be made in the GSTR-3B form as regular inward supply.

In the case of outward supply, the reporting will have to be made in both the GSTR-3B as well as the GSTR-1.

Cross Charge vs Input Service Distributor

Legal contentions on Cross Charge in GST

An Appellate Authority for Advance Ruling (AAAR) decision recently ruled that salaries apportioned to branches will be subject to Goods and Services Tax. The order passed by the AAAR in Cummins India ruled that head office salaries allocated to branches would be subject to GST. It further clarified that the Head Office could avail no Input Tax Credit on the same. The Head Office will have to register itself as an ISD and proceed to distribute the availed common ITC to the branch offices.