If you are among the top executives of your company in India be ready to take a hit on your income as the new rule the government is seriously considering to roll out soon will make a big hole in your pocket.

Economic Times recently reported that the tax department of India is inquiring into the cross charging practices of companies to determine whether cross charges are being passed from head office to branches.

Cross charges, also known as common costs, refer to costs incurred by a company for the basic functioning of the firm. It includes the cost of running essential units of the company such as the HR department, the legal team, the IT department, etc. The salary of CEOs and CXOs also constitute cross charges.

Up until now, GST wasn’t levied on a company’s common costs, but the tax department is now pushing for this to change. According to the aforementioned report, the tax department has now proposed that common costs be distributed equally among the different branches of a single company. In other words, the cost of running a firm, which was previously seen simply as a set of resources in the hands of the head office, is now to be circulated among various different offices.

Under this pattern, the distribution of common costs will be seen as “supply” from head office to branch offices and will become eligible for the imposition of GST. The GST on this supply is likely to be 18% of the total cross charges incurred and will be payable by the head office.

Unclear terms causing panic and uncertainty

The initial terms of the proposal were unfavourable in the eyes of many as the salary of CEOs and CXOs wasn’t spared from this suggested change. Thus, even though only a part of chief executives’ annual incomes were proposed to be distributed as part of common costs, a GST would still have been levied from the sum.

Rohit Jain, one of ELP law firm’s partners criticized this for being legally and factually misleading.

“The interpretation adopted by the tax authorities is that an employee of an organisation should be considered as an employee of a particular office only (not the organisation as a whole) for GST-related purposes. Such an interpretation is legally and factually incorrect,” he told the Economic Times

The tax department was quick to fix its stance on the matter and told CNBC TV18 about plans to issue a circular clarifying the issue. An official told the news platform,

The government is working on a circular to soon clarify that no GST will be considered on salaries paid to CEO/CXO. A fresh view has been taken by the government despite the fact that earlier tax authorities had argued that salaries are subject to 18 percent GST. Clarification circular is likely to be issued by the end of November or early December.

Gst cross charge can increase the cost for companies

Another criticism of the proposed amendment is its tendency to increase the common costs for companies in industries using non-taxable supplies, or, industries whose supplies aren’t tangible goods or materials. The medical and education sectors are examples of such industries.

While the change in GST collection patterns wouldn’t necessarily affect the overall cost incurred by industries using traditional supplies, those that don’t follow that pattern will suffer.

Anita Rastogi from PwC India told CNBC TV18:

The challenge is more on exempt sectors like education, healthcare, electricity where there are no taxable output supplies and hence tax on a cross charge which includes salaries becomes a complete cost. Ideally, a clarification should be issued that salaries should not be a part of a cross charge

Thus, it seems that the proposal is still a few steps away from properly coming into action as the tax department remains open to constructive criticism and makes efforts to fix any big setbacks the bid could lead to.

The government is already facing severe criticism for rolling up unstable GST system. This has not only caused trouble in filing GST, but also delayed GST refunds from the government side. Just 2 months back the Finance Minister had to release the statement which assured all the business entities in India of getting their refund back within 30 days. However, there is enough number of complaints, still, about the delay in GST refund.

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