GST on Inter-State Office Services: Karnataka AAR Makes Companies in India Nervous

Posted by Written by Dezan Shira & Associates Reading Time: 2 minutes

India-Briefing-GST on Inter-State Office Services - Karnataka AAR

Last week, the Karnataka Authority of Advance Rulings (AAR) issued an order stating that employee services in the corporate office to manage offices located in other states in India will be treated as ‘supply of service’.

In other words, the employee’s salary or cost at the head office when providing services or supervising other offices will attract (goods and services tax) GST.

According to the AAR, the interpretation has been made as per Entry 2 of Schedule I of the CGST Act.

The above ruling by the Karnataka AAR was made in the case of Columbia Asia Hospitals, which is headquartered in Bangalore.

The AAR stated that the ‘employer-employee relationship’ at the hospital chain’s Bangalore head office exists in that office alone – and not in other branches – even if they are part of the same corporate entity.

GST applicability on core management functions

The ruling by the Karnataka AAR could have wider ramifications, triggering GST liabilities for those enterprises that currently do not have to pay GST on their core activities and thus do not qualify for tax credits / refund schemes.

It is also troubling for businesses that supply goods and services that are either GST-exempt, or not within its ambit – healthcare, education, petroleum, and liquor.

Overall, the tax interpretation significantly escalates the costs for enterprises with multi-state operations.

This is because the core functions of any large or multinational firm, such as human resources, IT maintenance, marketing, and accounting – executed from the corporate head office – could be treated as a supply of service to other offices / units.

Hence, the ruling also has tax implications for the salaries of a firm’s C-suite employees – chief executive officer, legal head etc.

Tax experts in India are now waiting to see if the federal government issues a clarification with regards to the validity of the Karnataka AAR interpretation and if it will apply across industry.

As India looks to improve its climate of doing business and attract greater foreign investment, a clear rejection of such a literal reading of the GST law will be necessary, lest it be another case of tax terrorism.

Authority of Advance Rulings

The Authority of Advance Rulings or AAR is an independent adjudicatory body, and its rulings ascertain an assessee’ total and potential tax liabilities in a transaction, beforehand.

Companies are then able to plan their tax affairs in a way so as to avoid future tax-related disputes or long, drawn-out litigation.

While the AAR’s rulings are case-specific, they can impact the tax assessment of other firms in similar circumstances.

The scheme of advance rulings was introduced by the Finance Act, 1993.

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