31 Aug 2018Posted By: Mudit Handa

Inter-state office services to attract GST as per Karnataka AAR

It can never be negated that GST authorities have up to now reworked the laws and provisions under the Goods & Service Tax regime with regard to GST registration and GST return filing procedure as to make them more opportune to the trade & commerce. Nevertheless, the government is very keen on making the system totally flawless for the tax assessees as well as the authorities themselves by periodic modifications and amendments in the GST provisions.


Recently, the Karnataka Authority of Advance Rulings (AAR) has notified that the services provided by a branch of an organization to its branches in other states will now be treated as ‘supply’, and they will attract GST.


#1. What does this new notification imply?

The recent ruling by the Karnataka AAR suggests that companies that have their branches in multiple cities in other states will need to raise GST invoices against the in-house services and thus, will have to incur GST liability against such services.

#2. How will the new advance ruling affect the businesses?

Although the GST paid on the services provided to the branches of other states can be claimed as an input credit by the recipient branch, this would substantially raise the burden of compliance on various businesses spread across different states.

  • For the time being, this will also spread the time-lag in compliances such as GST return filing procedure, especially for various businesses that have GST registration under the composite scheme.
  • Among those entities that will be most affected by this ruling, are the hotel businesses, resorts, health clinics, accommodation businesses, schools, colleges & institutes that have their chains spread across different cities.


#3. What impact will the new ruling on interstate services impact the economy?


According to the experts, the new ruling regarding treatment of interstate services under GST is likely to increase the cost of services in the following sectors-

  • Healthcare
  • Education
  • Entertainment
  • Food Business Operators
  • Spa & Beauty

And many more

This is so because the GST liability on the businesses will, in turn, result in the tax burden on the consumers of such services, which will raise the cost of these services.


#4. Why has the Karnataka AAR given the new ruling for treatment of interstate services?


The ruling has been passed after the application was filed by Columbia Asia Hospitals. This is a Bengaluru-based Healthcare institution that had inquired to the GST Council about the possibility on an advance ruling regarding services rendered by its employees at the corporate office in its chains located in other States— viz. accounting, IT or other administrative functions. They had sought clarification on whether such activities shall be treated as supply under GST.


#5. How will it affect non-taxable services?

Some experts have suggested that this ruling can have unpleasant consequences. Notably, the GST will be applicable to even those entities that are not supposed to incur GST liability on their core activities.

As per a suggestion by an economist, the situation can become worse if a recipient branch is involved in the supply of exempted goods & services. The branch office will have to incur GST liability even in case of supply of exempted services from the supplier unit. It won’t be able to avail input of GST levied by the supplier unit.


Principally, the GST Council in the 28th GST meeting had exempted several services from GST. the new ruling by Karnataka AAR is likely to put adverse impact on its policy.

#6. How far can be the impact of the Advance Ruling on interstate services?


Analysts have pointed out that this Advance Ruling on interstate services can be really perplexing as the companies now may need to impose GST on even employee costs in notional head office, and ITC of such GST won’t be available to the recipient branch of the company.


These inferences point out that the GST authorities need to carefully consider the issue and propose a solution accordingly.


If you need any other guidance related to GST registration in India or GST return filing process, feel free to contact us at 8881-069-069.

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