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In yet another judgment from Appellate Authority to Advance Ruling of Karnataka it has been established that the employee cost borne by the head office for rendering of services to the branches in other states shall be a taxable supply. For instance A company registered under GST has corporate office in Delhi and branch in Chandigarh. In such a case the employee cost borne by the head office at Delhi for assistance to Chandigarh shall be treated as supply chargeable to GST.


The authority held that two units which are separately registered shall be distinct person in terms of section 25(4) of the Central GST Act 2017. It further held that employee working in one unit shall be treated as an employee for that particular unit for the purposes of employer-employee exemption under Schedule III of the Act. In our above example the employee who is working for Delhi unit shall be treated as employee of Delhi Unit and not of Chandigarh for claiming exemption. The authority ruled out the fact that employees are engaged for a company as a whole. It said that employee shall remain specific to the unit he is working for and not for all the units collectively. Hence in such a case such employee salaries becomes the cost of provision of services to the units registered in other state. 

If this is held true, it is going to have far reaching repercussions:
1.
In most of the cases under healthcare and education industry, administrative activities pertaining to schools/hospitals are carried out from their central office. If the rendering of services from central office to these schools/hospitals are charged to tax, it will certainly lead to increase in the operational cost. Further since these hospitals/schools output services are exempted they shall not be eligible to claim input tax credit.

2.
The industry would now have to re-frame their employment agreement for their employees as to ensure that their costs are borne by the specific unit itself. At least this will save the additional GST burden which would come at present. The location of employee would not matter as far as the employer employee contract is earmarked to specific units.

3.
In case of multiple offices and employee rotation, the industry would have to re-frame the agreements every time the location of an employee is changed. The challenge would arise where an employee serves the company as a whole while being located at multiple office during a single period. The sharing of employee cost based upon turnover of the units can be a good idea. This will certainly lead to lots of confusion.

4.
Apart from Strategy Role, Co-ordination role and policy role no other function should be allotted to the head office. The authority has held that apart from these roles all other roles are in terms of rendering services to the units. It needs to be ensured that either the head office issue invoice to branches or the resources are allocated to the unit itself.

5.
The industry is not only required to ensure that the employment agreement is made with specific units but also ensure that the payments are also made through the funds of that unit itself. This might lead into finance issues in case the units are too small to have adequate cash flows. It looks like the branches and head offices will now be divided for all the functions.   


6.
The issues certainly arise where a common employee is working for both taxable and exempted supplies, it shall become a nightmare to bifurcate the employee cost amongst these two activities, Something similar to Rule 42 and Rule 43 of CGST Rules needs to be introduced to settle the never ending litigation on proportionate distribution of employee cost.


If the decision is accepted by the industry/department, it is certainly going to cause never ending chaos for them.

Regards

CA. Keshav R Garg
(B.Com, FCA, CS, ISA(ICAI))
Author: Bharat's GST Ready Reckoner
            A Handbook on GST

Member: Indirect Tax Committee of CII, 
Founder: MyGst.MyTax Foundation
Adviser: Industries Association of Chandigarh
Adviser: Chambers of Chandigarh Industries

Address: 3328, First Floor, Sector 27 D, Chandigarh, India - 160 019
Phones: +91-172-461-3328, +91-98880-90008
Mail: keshavgarg@kdai.in

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