Don’t tax intra-firm service supply–Economic Times

The Karnataka Authority of Advance Rulings (AAR) has erred in ruling that services by an office to branches in other states will be treated as ‘supply’ that attracts goods and services tax. The claimed rationale that these services are being rendered for furtherance of business, is absurd. There is no payment attached to intra-firm supply of services and, hence, charging a levy is illogical. Imagine a sugar factory that straddles the border between two states: the sugar is crushed in one state and the juice is piped to and boiled and converted to sugar in the part of the factory that lies in the other state. Would this constitute supply that attracts goods and services tax? A tax on intracompany supply of services will lead to valuation challenges, transfer pricing disputes, raise the compliance burden needlessly and yield little tax. Besides, India would sink so low in the ease-of-doing-business index as to drop out of it altogether.

AAR rulings are case-specific. But they have a persuasive impact on tax assessment in the cases of other firms. The Karnataka AAR ruling must be contested. It says the employer-employee relationship in the corporate office exists only there and not with other office units, even if they are part of the same legal entity. This means that companies with offices in many cities will have to raise invoices for in-house service functions — such as the human resource department that hires people for offices in other states or a finance department that prepares payrolls for employees in other centres — and pay goods and services tax. The tax can be claimed as an input credit by the receiving location in most cases, but it would prove to be a compliance nightmare for businesses.

It will also raise tax costs in a sector like real estate with incomplete GST chains. Companies in such sectors cannot claim credit for taxes paid on inputs across the value chain. Retail prices would go up. The simple solution is to accept that no tax is due when there is no sale within a company. The final product or service sold by the company will attract GST, capturing the value added till then.

via Don’t tax intra-firm service supply

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