With effect from July 1, 2017, India implemented a landmark tax reform in the form of GST, bringing about a paradigm shift in the way businesses are conducted. The idea was simplifying indirect taxation to make doing business easier. But this has not come without its set of challenges. We observed inadequate preparation, lack of clarity/awareness and huge variation in procedures under GST as compared to earlier practices. This, in turn, saw the business fraternity, tax professionals and people at large encountering a plethora of challenges, which added to their difficulties in comprehending the tax reform.
A major area that warrants the attention of trade and industry is the number of registrations to be obtained and the levy of tax on inter-branches. The taxable event under GST is ‘supply of goods or services’. Hence, manufacturing, provision of services or trading can all be carried out by a business under one GST registration, unlike in the erstwhile tax regime, where businesses had to obtain separate registrations (central excise, service tax and state VAT).
Though the requirement for obtaining different indirect tax registrations has been abolished under GST, the practice has not been simplified. On the contrary, as India adopted a ‘dual GST model’ of levy of tax on the supply of goods and services, businesses need to obtain state-wise registrations of their establishments.
In this regard, GST provisions indicate that if a supply is made from a state, then state registration is needed if the aggregate turnover exceeds the prescribed threshold. Thus, every business whose turnover exceeds the prescribed threshold is required to obtain registration in each of the states, if they have establishments in such states from where taxable supplies are effected by them.
This has proven difficult for service providers who earlier had the option of obtaining centralised registration under service tax and conducting operations on a pan-India level under a single registration. In other words, accounting and invoicing in respect of all the services rendered nationwide (i.e. from branch offices/business premises located in various states) were carried out from one main office (head office) of the entity. These businesses now need to obtain registration in each state where they have a place of business/branch office, and maintain state-wise records, issue invoices and discharge GST in the corresponding states for services rendered from those states.
Further, under erstwhile law, manufacturing/trading entities had marketing offices in different states, which were usually unregistered as these offices provided marketing support to the head office in another state. A similar practice was carried out in service entities as well, wherein branch offices in different states acted as back office support providers to the head office.
Such support activities were not subject to tax under the erstwhile regime, owing to the fact that these offices are part of the same legal entity and cannot be considered as rendering service to themselves, and that there is no consideration earned by these offices from the head office. However, under GST, offices of the same legal entity in different states are regarded as ‘distinct persons’, and any supply of goods or services or both, between distinct persons, made in the course of furtherance of business, even without any consideration, are subject to GST.
Summing up, businesses need to obtain registration in each state where they have an establishment from where any business activity is undertaken, even if such activity is only provided to head office of such businesses. Also, businesses are required to maintain records, issue invoices (including invoice to be raised on head office for support activities), file returns and discharge taxes from each such registration, adding to administrative costs and increased manpower requirement for the purpose of compliance with the law.
The author is Partner & deputy head, Indirect Tax, KPMG in India.