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GST Advance Ruling – Impact on Services by Employees

This is to update you with a recent Judgement which can have a far-reaching impact on most of the companies that have its operation across various states in India.

The Authority for Advance Ruling (‘AAR’) in Karnataka in the case of Columbia Asia Hospitals Pvt. Ltd has given a Judgement on one of the most contentious issues with respect to GST Law i.e.- Services by Employees at the corporate office to units located in other states is to be treated as supply or not?

Facts of the case

In the given case, M/S Columbia Asia Hospitals Private Limited (‘applicant’) is an international healthcare group and is currently operating in 6 states. The applicant has its Corporate office in Karnataka and some of the activities for all the units like accounting, administration, and maintenance of IT system is carried out by the employees from the Corporate office itself.
Applicant has highlighted that since supply between distinct entities is treated as supply under GST, certain expenses (such as rent, consultancy, communication etc.) which are availed at corporate office but used for the entity as a whole are recovered from other units.

However, the applicant has stated that since services by an employee in course of employment is not treated as supply under GST, he does not recover the employee cost incurred for the provision of said service from the other units.
In the light of the above background, the applicant has filed an application to determine whether activities performed by employees of the corporate office for other units would be treated as supply under GST.

Findings, Discussion, and ruling

Applicant has insisted that word ‘employee’ shall not be restricted to employment with the unit where the employee is located, as the relationship of the employee exist with the legal entity as a whole and not with the unit where the employee is located. Therefore, since the services rendered by an employee for other units retain the character of services by an employee to the employer in the course of employment, the same shall not be treated as supply.
The Authority for Advance Ruling while examining the application has mentioned that any supply of goods or services from the corporate office to separately registered units would amount to supply under GST even if the said supply is made without consideration. AAR has further highlighted that since corporate office and other units are distinct persons under GST, there is no such relationship between the employees of one distinct entity with another distinct entity even if they are belonging to the same legal entity.
AAR has further insisted that valuation for supplies between distinct entities shall include all cost and thus employee cost also needs to be taken into consideration for valuation of goods or services provided by one distinct entity to other distinct entities. Accordingly, AAR has ruled that activities performed by employees at the corporate office for other units shall be treated as supply under GST.

Our Comments:

This ruling opens a Pandora’s box, 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.” In sectors that are exempt or not within the ambit of GST, such as healthcare, education, petroleum, and liquor, such inter-office activities should ideally not be considered as a service subject to GST and an exception should be carved out. There is also the issue of valuation of the service for levying the tax.

AAR is a quasi-judicial body that allows assesses to get guidance on their potential tax liabilities in a transaction beforehand. Its rulings are case-specific but they have a persuasive impact on tax assessment in the cases of other firms under similar circumstances.
We hope and expect that Government of India/GST Council provides clear guidelines or needed clarification on above issue in near future.

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