Services by one office to branches in other states will be treated as “supply” and attract goods and services tax (GST), according to an order by the Karnataka Authority of Advance Rulings. 

The ruling implies that companies with offices in many cities will need to raise invoices for inhouse service functions and pay GST. Although the tax can be claimed as an input credit by the receiving location in most cases, it would substantially increase the compliance burden for businesses spread across states. 

According to the ruling, a large business with its head office, say, in Mumbai, where the entire finance, IT and HR functions are centralised for its offices across states, would be deemed to be providing support services to other locations and hence need to raise invoices charging GST. 

In cases where goods or services are fully or partially exempt from GST — such as hospitals and schools — this would be an incremental cost.

The AAR, in a ruling sought by Bengaluru-based Columbia Asia Hospitals, held that 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, as far as the GST law is concerned. 

“The activities… shall be treated as supply as per Entry 2 of Schedule I of the CGST Act,” the AAR said. It also held that the employee cost incurred at the corporate office should be considered while arriving at the value of goods or services provided by such offices to other locations. 

Tax experts said the ruling has wide ramifications for businesses, especially large ones with offices in various cities, especially for those businesses that are into exempt or non-GST supplies, as these companies, with this Advance Ruling, may need to charge GST on notional head office employee costs as well, with credit of such GST not being available to the recipient branch or company.