The term “cross charge” is not explicitly defined in the GST Act, but it generally refers to the invoicing of goods supplied between distinct entities or persons.
What Are Cross-Charge Transactions?
Under the CGST Act, tax is levied on the supply of goods and services between distinct persons, even if no consideration is exchanged. Distinct persons refer to business units with separate GST registrations. When goods or services are supplied between branches of the same business located in different states, the transaction falls under GST’s purview, as it is a destination-based tax. This creates cross-charge transactions, requiring the Head Office to issue invoices to branch offices, thereby ensuring proper input tax credit transfer.
Handling Cross-Charge Transactions Pre-GST
Before GST, cross-charge transactions were dealt with differently under VAT and Central Excise. In VAT, tax on stock transfers was exempt if Form F was furnished, while under Central Excise, excise duty was paid on goods manufactured. Additionally, the input tax credit system under VAT resulted in cascading effects, as part of the ITC was added to product costs. We provide many services like GST registration, GST refund services, GST return filing, & GST Cancellation Services.
Taxability of Cross-Charge Transactions
Cross-charge transactions are treated as supplies even if made without consideration, as outlined in Schedule 1 of the CGST Act. Section 15 and Rule 28 specify that the value of such supplies can be determined through various methods, such as the open market value or the cost of the goods or services.
For transactions involving Special Economic Zones (SEZ), cross-charges are treated as zero-rated supplies, classified as exports either with or without payment of IGST.
Input Tax Credit on Cross Charge Transactions
Cross charge is not considered an additional cost. Hence, the GST paid on such transactions is eligible for input tax credit, ensuring no blockage of credit.
Reporting Cross-Charge Transactions in GST Returns
There is no specific field for cross-charge transactions in GST returns. These transactions should be reported as regular supplies, with the classification depending on whether they are inward or outward supplies. For inward supplies, they are reported in GSTR-3B, while outward supplies are reported in both GSTR-3B and GSTR-1.
Cross Charge vs Input Service Distributor (ISD)
| Cross Charge | Input Service Distributor (ISD) |
| Mandatory | Optional, based on business needs |
| Ideal for deemed supply of services between distinct persons | Ideal for corporate or head offices without outward supply |
| Suitable for multiple state operations without dedicated cost centers | Best for facilitating smooth business functioning |
Legal Considerations on Cross Charge in GST
In a ruling by the Appellate Authority for Advance Ruling (AAAR), it was decided that salaries allocated to branches will be subject to GST. The decision clarified that a head office cannot claim input tax credit (ITC) on such costs and must register as an ISD to distribute ITC to the branch offices.
Frequently Asked Questions (FAQs) on Cross Charge Transactions under GST
1. What is a cross charge transaction under GST? A cross charge transaction refers to the invoicing of goods or services between distinct entities or persons, such as branches of the same business with separate GST registrations. It typically occurs when there is supply without consideration between business units or branches in different states.
2. How are cross charge transactions reported in GST returns? Cross charge transactions are reported as regular supply transactions in the GST returns. If the transaction is an inward supply, it should be reported in GSTR-3B. For outward supply, the reporting is made in both GSTR-3B and GSTR-1.
3. Can I claim input tax credit (ITC) on cross charge transactions? Yes, input tax credit (ITC) on GST paid for cross charge transactions is available. Since cross charge does not add additional costs, businesses can claim the ITC to avoid any blockage of credit.
4. How is the value of a cross charge transaction determined? The value of a cross charge transaction is determined by either the open market value of the goods or services, the value of similar goods or services, or 110% of the cost of goods or services. If the value cannot be determined through these methods, any reasonable means can be used.
5. What is the difference between cross charge and Input Service Distributor (ISD)? Cross charge is used for transactions involving deemed supply of services between distinct entities. In contrast, an Input Service Distributor (ISD) is a mechanism where businesses can distribute input tax credit (ITC) across branches or offices. While cross charge is mandatory in certain cases, ISD registration is optional and used primarily for centralized credit distribution.
6. What happens if cross charge transactions involve Special Economic Zones (SEZ)? For transactions involving Special Economic Zones (SEZ), the supply is treated as zero-rated. As a result, the cross charge will be considered an export, either with or without payment of IGST, depending on the circumstances.
7. What was the treatment of cross charge transactions before GST? Before GST, cross charge transactions were handled differently under VAT and Central Excise. VAT exempted tax on stock transfers when Form F was submitted, while Central Excise duty was levied on goods manufactured. The input tax credit system under VAT led to cascading effects, and excise duty involved a 100% plus 10% payment on manufacturing costs.
8. How are cross charge transactions taxed under GST? Cross charge transactions are taxable as they fall under Schedule 1 of the CGST Act, which covers supplies made between distinct persons. Even if no consideration is exchanged, these transactions are treated as taxable supplies.
9. Is cross charge applicable when goods or services are supplied within the same state? Yes, cross charge transactions can occur even within the same state if the business units are registered under different GST registrations. This ensures that GST applies even when services or goods are supplied between business entities within a single state.
10. What are the penalties for non-compliance with cross charge reporting? Failure to comply with the reporting requirements of cross charge transactions could result in penalties. It’s essential for businesses to ensure accurate reporting of such transactions in the appropriate GST forms to avoid fines or legal complications.
