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Cross Charge under GST


As per schedule 1 of the CGST Act, different GST registrations having the same PAN, which are termed as a distinct person and any supply made between these specific persons shall be treated as “supply” under the provisions of GST even if it is made with without any consideration.

In cross charge mechanism, expenses incurred by a distinct person to carry out activities that benefit other specific persons are required to be cross charged. The said provision can be read as follows:

Schedule 1: Activities to be managed as supply even if made without consideration
Supply of goods or services or both among the related persons or between the distinct persons as provided in Section 25 of the Act, when the supply is made in the course or furtherance of the business.

Further, Section 25 of the CGST Act specifies that “A person who has obtained or who is required to acquire more than one registration, whether, in one State or Union territory (UT) or more than one state or UT, they shall in respect of each registration be treated as a distinct person in respect of the provisions of the Act.”

The understanding of Schedule 1 of the Act and the concept of distinct persons stated under Section 25 of the Act gives rise to the need for a cross charge. Thus, in the light of the above provisions, any supply made between the different GST registrations shall be treated as the supply under the GST provisions and shall attract GST. As per these said provisions, every supply between distinct persons shall result in cross charge between the entities. The issue of proper documents shall undertake such supply. Further, the recipient of the supply shall be entitled to GST credit subject to conditions.

Valuation of supply of services between Head office and its different locations
As per section 15 of the CGST Act, in the case of a distinct person, value of supply shall be regulated as per Rule 28 of CGST Rules, which prescribes the methods to determine the value. 

  • Rule 28
    It specifies the value of supply of goods or services or both between the definite persons or where the supplier and recipient are related or in any other case where the supply is made through an agent shall be:

    • The open market value of such supply.
    • If the open market value is not available, be the value of supply of goods or service of like kind and quality.
    • If the value of supply is not definable under clause (a) or (b), it would be the value that shall be determined by applying rule 30 or rule 31, in that order.
  • Rule 30
    It provides the value of such goods or services as 110% of the cost of production or manufacture or the cost of acquiring such goods or providing such services.
  • Rule 31
    It provides value shall be determined using reasonable means by the principles and the general provisions of section 15. Further, provided that where the recipient is entitled to full ITC, the value declared in the invoice shall be considered to be the open market value of the goods or services.

By the above provisions, HO shall be required to discharge GST on the following value:

  • The open market value of such supply of goods or services
  • Value of collection of like kind or quality
  • 110% of the acquisition of such goods or cost of provision of such services or,
  • Any other reasonable means

Cross Charge/ ISD to SEZ units
A situation may arise where a location may require cross-charge to a unit located in the SEZ area. As supply to an SEZ is considered the zero-rated supply, the cross charge maybe need to be considered for export under both the options, i.e. export on payment of IGST or under the LUT scheme. An ISD may distribute the credit to the SEZ under an invoice, and SEZ shall be eligible to avail of the input credit. 

GST law requires state-wise registration and treats every registration as a distinct person. However, the everyday expenses may be distributed either via ISD or may be charged via cross charge. Both of these options shall attract the compliance of their respective provisions of the GST law, which may be challenging to comply with, especially regarding maintaining accounts and records and the audit provisions under GST law. However, for the supplies made between the distinct persons, the cross charge is the sole option. While ISD appliance brings in a lot of compliance structure in the distribution of credits, it also increases the compliance burden as taxpayer needs to file a return (GSTR 6) every month. Cross charge mechanism offers flexibility in the compliances. Both of the mechanisms have their pros and cons and must be evaluated carefully before making any decision.

At AJSH, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming & GST audits) by providing them adequate support and guidance from our end.  If you have any questions or would like to know more about GST under cross charge, kindly contact us.


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