GST Rules Head Office Cross-Charge Must Include Employee Salary Costs
Head offices providing administrative services to branches in other states must pay GST on these services, including staff salary costs.
- Ruling
- Advance Ruling No. KAR ADRG 15 / 2018 dated 27th July 2018
- Dated
- 27 Jul 2018
- Authority
- Authority for Advance Ruling
This page was written by Patron Accounting’s AI from the official release and reviewed before publishing. It explains the document in plain language. It is not the document itself. Where this page and the original differ, the original governs.
The short version
- Columbia Asia asked if corporate office services to state branches are taxable.
- The company believed staff salaries were exempt under employer-employee rules.
- Authority ruled branch offices in different states are separate distinct persons under GST.
- Services provided by head office staff to other state branches attract GST.
- GST calculation for head office cross-charges must include staff salary costs.
In short
Columbia Asia Hospitals operated a head office in Karnataka and hospitals across six states. Staff at the head office provided centralized management, accounting, and IT support to these state branches. The company argued that staff salary costs should not attract Goods and Services Tax (GST) because services provided by an employee to an employer are exempt under GST law.
What has changed
How it worked before
Before this ruling, multi-state companies generally assumed that head office employees worked for the legal entity as a whole, making salary cost allocations between branches exempt from GST under employer-employee rules.
What has changed
The Karnataka Authority for Advance Ruling in order KAR ADRG 15 / 2018 decided that branch offices in different states are separate distinct persons under GST law. The employer-employee relationship exists only between the worker and the specific office that employed them. Consequently, head office support services sent to branches in other states are taxable supplies, and the value of those services must include employee salary costs.
Who this affects
Businesses operating in multiple states with a centralized head office that provides accounting, IT, or executive services to branches registered in other states.
An example
A software company based in Bengaluru has branch offices in Mumbai and Delhi. The HR and accounting staff in Bengaluru handle payroll and contracts for employees across all three offices. Under the principle in this ruling, the Bengaluru head office is providing a taxable support service to the Mumbai and Delhi branches. When generating internal GST invoices for these services, the company must include the salary costs of the HR and accounting staff in the invoice value.
What you should do
Multi-state businesses should evaluate how they bill head office support services across state lines. Note that an advance ruling strictly binds only the business that asked for it and its local tax officer. Businesses should consult a tax advisor to review their internal cross-charge mechanics rather than assuming this ruling automatically changes the law for everyone.
If you do nothing
If you do not include head office employee costs in cross-charges to state branches, tax officers may issue tax demands during an audit. This can lead to paying back-dated GST along with mandatory interest and penalties. Your branch offices might also permanently lose the input tax credit if the statutory deadline for claiming credit has passed.
The terms explained
- distinct persons
- Under GST law, separate state registrations or branch offices belonging to the same legal company are treated as independent entities.
- cross-charge
- An internal bill raised by one office of a company to another office to reallocate shared expenses or centralized service costs.
- input tax credit
- A mechanism that allows a registered business to reduce the GST it owes on sales by deducting the GST it already paid on purchases.
The ruling in detail
Authority for Advance Ruling
M/s Columbia Asia Hospitals Private Limited
Advance Ruling No. KAR ADRG 15 / 2018 dated 27th July 2018 · Karnataka
Questions before the authority
- Whether the activities performed by the employees at the corporate office in the course of or in relation to employment such as accounting, other administrative and IT system maintenance for the units located in the other states as well i.e. distinct persons as per Section 25(4) of the Central Goods and Services Tax Act, 2017 (CGST Act) shall be treated as supply as per Entry 2 of Schedule I of the CGST Act or it shall not be treated as supply of services as per Entry 1 of Schedule III of the CGST Act?
Facts
The applicant is a private limited company operating a chain of hospitals across six states, with its India Management Office (IMO) located in Karnataka. Employees at the IMO perform centralized management, administrative, accounting, and IT system maintenance services for all operational units across different states. While third-party expenses like rent and consultancy were cross-charged to other units, the applicant did not cross-charge employee salary costs, claiming protection under the employee-employer exclusion under GST.
Ruling
| Question | What the authority ruled |
|---|---|
| Activities performed by corporate office employees for distinct units in other states | Treated as supply as per Entry 2 of Schedule I of the CGST Act Employee-employer relationship exists only with the employing corporate unit, not with distinct units in other states. |
The AAR held that activities performed by employees at the corporate office for units in other states constitute a **taxable supply of services** between distinct persons under Entry 2 of Schedule I of the CGST Act. The authority ruled that the employee-employer relationship exists solely between the employee and the specific registered office employing them, not with distinct units in other states. Consequently, corporate office allocations to distinct entities must be treated as taxable supplies, and their valuation must explicitly include **employee costs**.
Reasoning
The authority reasoned that under Section 25(4) of the CGST Act, units of the same legal entity located in different states holding separate registrations are distinct persons. Under Section 7(1)(c) read with Entry 2 of Schedule I, any supply of goods or services between distinct persons in the course or furtherance of business constitutes a supply, even if made without consideration. While Entry 1 of Schedule III excludes services by an employee to an employer from being treated as a supply, this relationship exists strictly between the employee and the specific registered entity that hired them. The IMO employees have no direct employment relationship with the distinct registered units in other states, making the support services taxable cross-charges whose valuation under Section 15 must incorporate all overhead costs, including employee salaries.
Provisions relied on
- Section 7(1)(c) of the CGST Act, 2017
- Section 7(2) of the CGST Act, 2017
- Section 15 of the CGST Act, 2017
- Section 25(4) of the CGST Act, 2017
- Entry 2 of Schedule I of the CGST Act, 2017
- Entry 1 of Schedule III of the CGST Act, 2017
For the practitioner
This ruling established the principle that multi-state corporate entities must cross-charge administrative overheads, specifically including **employee salary costs**, to distinct registered units in other states. It settles that corporate employment cannot be extended across state lines to claim Schedule III immunity for inter-unit services. Tax practitioners must ensure that corporate office cross-charge mechanisms accurately factor in employee costs for GST valuation purposes.
Source
This is a summary prepared from the published order, which is a scanned document. It is a reading aid and not the authority: where the two differ, the order governs. Verify every provision against the original before relying on it.
Original order: https://www.gstcouncil.gov.in/sites/default/files/AAR/krntk_15_2018_cahpl.pdf
Legibility of the scan, as read: high.
Prepared 21-10-2026.
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