Why This Topic Demands Attention: A company’s head office in Delhi pays ₹50 lakh annually for a software licence that is used by its branches in 12 states. Who gets the ITC? How is it split? In the same company, HR in Delhi recruits for every branch, the CFO sits in Delhi but manages finance for all states, and the IT team supports everyone — does any of this create a GST liability? These questions sit at the intersection of GST’s most ambiguous provisions — Schedule I deemed supplies, ISD distribution, and cross-charge valuation. And after Finance Act 2024 made ISD mandatory from 1 April 2025, the compliance landscape shifted fundamentally. This guide explains everything — with the 2024-2026 changes fully incorporated.
📋 Table of Contents
- Who Are “Distinct Persons” and “Related Persons” Under GST?
- Schedule I — Why HO-Branch Transactions Are Taxable Even Without Payment
- ISD vs Cross Charge — The Fundamental Distinction
- Input Service Distributor (ISD) — Complete Mechanism
- Cross Charge — Complete Mechanism
- ⚡ Finance Act 2024 — ISD Made Mandatory from 1 April 2025
- Revised ISD Framework — April 2026 Update
- CBIC Circular 199/11/2023-GST — Full Summary
- Branch Stock Transfers — Schedule I and E-Way Bill
- Foreign Parent → Indian Subsidiary Transactions
- Valuation Framework for Related Party Transactions
- SEZ Units and ISD — Special Considerations
- Common Disputes, Notices and Litigation
- Practical Case Studies
- Frequently Asked Questions
1. Who Are “Distinct Persons” and “Related Persons” Under GST?
Understanding GST on inter-company and intra-company transactions begins with two critical definitions:
Distinct Persons § 25(4), CGST Act
A person who holds multiple GST registrations (GSTINs) under the same PAN is treated as a “distinct person” for each registration. Each branch/unit in a different state = a separate “distinct person” for GST purposes — even though they are part of the same legal entity.
Example — Distinct Persons
TechCorp Ltd. is one legal entity (one CIN, one PAN) but is registered under GST in Delhi, Karnataka, Maharashtra, and Tamil Nadu — four GSTINs. Under GST, these four GSTINs are four “distinct persons.” Any supply (goods or services) between Delhi-GSTIN and Karnataka-GSTIN is a taxable supply — even though it is within the same company, the same bank account, and the same legal entity.
Related Persons § 2(84), CGST Act
Persons are “related” if any of the following applies:
- Officers or directors of each other’s businesses
- Legally recognised partners in business
- Employer and employee
- Sole agent, sole distributor, or sole concessionaire of the other (regardless of description)
- Member of the same family
- One directly or indirectly owns, controls, or holds 25%+ of outstanding voting stock/shares of the other
- One directly or indirectly controls the other
- Third person directly or indirectly controls both
- Together they directly or indirectly control a third person
- Members of the same family controlling any person
| Relationship | Distinct Person? | Related Person? |
|---|---|---|
| TechCorp Delhi GSTIN ↔ TechCorp Karnataka GSTIN | ✅ Yes — same PAN, different GSTINs | Also related — same legal entity |
| Parent company ↔ Subsidiary (51% owned) | ❌ No — different PANs | ✅ Yes — control relationship |
| Sister companies (both owned by same promoter) | ❌ No | ✅ Yes — common control through promoter |
| Indian subsidiary ↔ Foreign parent | ❌ No | ✅ Yes — parent-subsidiary relationship |
2. Schedule I — Why HO-Branch Transactions Are Taxable Even Without Payment
Schedule I, Entry 2, CGST Act — Deemed Supply (Without Consideration):
“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.”
This creates a deemed supply — a taxable transaction — even when:
(a) No invoice is raised
(b) No money changes hands
(c) The parties are different GSTINs of the same company
“Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business.”
This creates a deemed supply — a taxable transaction — even when:
(a) No invoice is raised
(b) No money changes hands
(c) The parties are different GSTINs of the same company
Without Schedule I Entry 2, a company could entirely avoid GST on inter-GSTIN services by simply not invoicing internally. Schedule I closes this gap by treating every flow of goods or services between distinct persons as a taxable supply requiring GST treatment — regardless of whether actual payment occurs.
| Transaction | Without Schedule I | With Schedule I |
|---|---|---|
| Delhi HO HR team recruits for Karnataka branch | No GST (no invoice, no payment) | Deemed supply — GST applicable (cross-charge by Delhi HO to Karnataka BO) |
| Delhi HO pays for software used by all branches | No GST on distribution to branches | ISD required (post-April 2025 mandate) to distribute ITC |
| Mother company in Mumbai provides services to subsidiary in Chennai | If free, no GST | Related person deemed supply — GST at open market value or cost+ |
3. ISD vs Cross Charge — The Fundamental Distinction
This is the question that has generated the most litigation, most confusion, and most CBIC clarifications in GST. Understanding the distinction is essential:
| Parameter | ISD (Input Service Distributor) | Cross Charge |
|---|---|---|
| What it handles | Distribution of ITC on third-party services (invoiced by external vendor to HO/registered office, but consumed by multiple branches) | GST on internally generated services (HO’s own employees providing services to branches — HR, IT, finance, management) |
| What gets distributed/transferred | ITC (input tax credit) — the credit flows from HO to branches | The service itself is “supplied” — GST is charged on the value of internal service |
| Document issued | ISD Invoice / ISD Credit Note / ISD Debit Note (under Rule 54(1)) | Tax Invoice (normal GST invoice from HO to branch) |
| GST charged | No new GST — only redistribution of existing ITC | New GST on the cross-charge value |
| Return filed | GSTR-6 (monthly) by ISD | GSTR-1 (reported as B2B supply to another GSTIN) |
| Mandatory / Optional? | MANDATORY from 1 April 2025 (Finance Act 2024) for third-party services | Mandatory for internally generated services (no option to use ISD for these) |
| Examples | Software licence fee, audit fee, insurance premium, advertising paid centrally — vendor bills HO, HO distributes ITC to all branches | HR team salary (Delhi HO HR manages all branches), centralised IT team services, management oversight from HO |
| Effect on branch | Branch receives ITC credit in its Electronic Credit Ledger — uses it to pay its own output tax | Branch pays GST on invoice received from HO (or HO includes it as a charge) — branch claims ITC on that invoice |
The intuitive way to understand the difference:
ISD = “Splitting the credit bill”: The restaurant (third-party vendor) bills HO for a meal enjoyed by multiple branches. HO splits the bill and passes each branch’s share via ISD. No new tax — just redistributing existing tax paid.
Cross Charge = “Charging for your own work”: HO’s in-house chef (employee) cooks for all branches. HO charges the branches for this internal service — creates a new GST liability.
ISD = “Splitting the credit bill”: The restaurant (third-party vendor) bills HO for a meal enjoyed by multiple branches. HO splits the bill and passes each branch’s share via ISD. No new tax — just redistributing existing tax paid.
Cross Charge = “Charging for your own work”: HO’s in-house chef (employee) cooks for all branches. HO charges the branches for this internal service — creates a new GST liability.
4. Input Service Distributor (ISD) — Complete Mechanism
4.1 What Is ISD and Why Does It Exist?
Section 2(61), CGST Act (as amended by Finance Act 2024):
“Input Service Distributor means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for distribution of the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.”
Key addition (Finance Act 2024): RCM services are now explicitly included within ISD distribution — the phrase “including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9” was added.
“Input Service Distributor means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for distribution of the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.”
Key addition (Finance Act 2024): RCM services are now explicitly included within ISD distribution — the phrase “including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9” was added.
ISD exists to solve a practical problem: centrally-managed businesses receive vendor invoices at the head office (which has one GSTIN) but the services benefit multiple branches (each with different GSTINs). Without ISD, all the ITC would be “stuck” in the HO’s Electronic Credit Ledger — unavailable to branches that actually used the service.
4.2 ISD Registration and GSTR-6
- The HO must take a separate ISD registration — in addition to its regular GST registration in the same state
- ISD registration is a sub-registration — same PAN, same state, but separate GSTIN prefix with “ISD”
- Once registered as ISD, the HO’s regular registration cannot distribute ITC to branches — only the ISD registration can
- GSTR-6 (ISD return) is filed monthly by the ISD by the 13th of the following month
- GSTR-6 declares: Total ITC received, ITC distribution to each GSTIN (branch), basis for distribution
4.3 ITC Distribution Formula — How to Allocate
Rule 39, CGST Rules — ISD Distribution Formula:
Case A — ITC attributable to a specific branch:
If a service is exclusively for one branch → 100% of ITC to that branch
Case B — Common ITC (all branches benefit):
ITC to each branch = Total distributable ITC × (Turnover of that branch in the period / Total turnover of all branches in the period)
Turnover used: Turnover in the period for which credit is distributed; if unclear, use preceding FY’s turnover ratio
Case A — ITC attributable to a specific branch:
If a service is exclusively for one branch → 100% of ITC to that branch
Case B — Common ITC (all branches benefit):
ITC to each branch = Total distributable ITC × (Turnover of that branch in the period / Total turnover of all branches in the period)
Turnover used: Turnover in the period for which credit is distributed; if unclear, use preceding FY’s turnover ratio
ISD Distribution Example — Software License
ABC Ltd. HO (Delhi) pays ₹12,00,000 annual software licence + 18% GST (₹2,16,000) for ERP used by all 3 units. Monthly ITC = ₹18,000.
| Branch / Unit | Monthly Turnover | % Share | Monthly ITC Distributed |
|---|---|---|---|
| Delhi HO (own use) | ₹40,00,000 | 40% | ₹7,200 |
| Karnataka Branch | ₹35,00,000 | 35% | ₹6,300 |
| Maharashtra Branch | ₹25,00,000 | 25% | ₹4,500 |
| Total | ₹1,00,00,000 | 100% | ₹18,000 |
HO files GSTR-6 declaring ₹18,000 total ITC received and distributing ₹6,300 to Karnataka GSTIN and ₹4,500 to Maharashtra GSTIN. Each branch sees the ISD credit in their GSTR-2B and claims it in GSTR-3B Table 4(A)(4).
4.4 What ISD Can and Cannot Distribute
| Category | Can ISD Distribute? | Post Finance Act 2024? |
|---|---|---|
| Third-party service invoices (software, audit, insurance) received by HO | ✅ Yes — this is the core ISD purpose | ✅ Yes — MANDATORY post April 2025 |
| ITC on RCM services paid by HO (e.g., legal fees, GTA, import of services) | Previously not clear | ✅ Yes — explicitly added by Finance Act 2024 |
| Internally generated services (HO employee costs, management services) | ❌ No — ISD is for third-party invoices only | ❌ Cross-charge handles this; ISD cannot |
| ITC on capital goods | ❌ No — ISD distributes only input services, not capital goods | ❌ Same |
| ITC on goods (materials purchased centrally) | ❌ No — ISD is only for input services | ❌ Same |
| Blocked ITC under § 17(5) | ❌ No — blocked credits cannot be distributed | ❌ Same |
5. Cross Charge — Complete Mechanism
5.1 What Is Cross Charge?
Cross charge refers to the GST tax invoice raised by one GSTIN (typically HO) to another GSTIN (branch) of the same legal entity for services rendered using its own resources — principally its employees. This is a deemed supply under Schedule I Entry 2 — it is taxable regardless of whether actual payment occurs.
5.2 Services That Must Be Cross-Charged
| HO Service to Branch | Cross Charge Required? | Rate |
|---|---|---|
| HR team (Delhi) recruiting for Karnataka branch | ✅ Yes — HO employee services to branch | 18% (manpower services) |
| CFO managing finance for all units from Delhi | ✅ Yes — management service | 18% |
| IT helpdesk (Mumbai) supporting Chennai branch | ✅ Yes — IT services to distinct person | 18% |
| Legal team (HO) handling branch-specific disputes | ✅ Yes — legal services | 18% |
| Marketing team running national campaigns benefitting all branches | ✅ Yes — marketing service | 18% |
| HO paying vendor invoices on behalf of branch (third-party) | ❌ No — use ISD (post April 2025 mandate) | ISD distribution |
| HO paying salaries of employees who work exclusively in a branch | ❌ No — those employees are technically the branch’s; no cross-charge needed | N/A |
5.3 Valuation Under Rule 28 — Including the Critical Nil Value Rule
Rule 28, CGST Rules — Valuation for Related Party / Distinct Person Transactions:
The value of supply of goods or services between related persons or distinct persons, other than where the recipient is eligible for full ITC, shall be:
(a) Open Market Value (OMV) of such supply — if available; OR
(b) Value of supply of goods/services of like kind and quality; OR
(c) Cost-based value (cost + markup as per Rule 30)
But there is a critical proviso:
“Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.”
This means: If the branch receiving the cross-charge invoice is eligible for full ITC — any value including Nil is acceptable.
The value of supply of goods or services between related persons or distinct persons, other than where the recipient is eligible for full ITC, shall be:
(a) Open Market Value (OMV) of such supply — if available; OR
(b) Value of supply of goods/services of like kind and quality; OR
(c) Cost-based value (cost + markup as per Rule 30)
But there is a critical proviso:
“Where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.”
This means: If the branch receiving the cross-charge invoice is eligible for full ITC — any value including Nil is acceptable.
| Branch’s ITC Position | Valuation Requirement | Practical Treatment |
|---|---|---|
| Branch makes 100% taxable supplies (full ITC eligible) | Any value including Nil is acceptable | Raise invoice at ₹0 or cost or any value — all acceptable. Branch claims ITC on whatever GST is charged (even 18% on Nil = 18% on zero = ₹0) |
| Branch makes mixed supplies (taxable + exempt) — partial ITC | Open market value / cost + markup required | Must use proper valuation; department will challenge Nil or below-market cross-charges |
| Branch makes only exempt supplies (no ITC) | Open market value / cost + markup required | Valuation is critical — cross-charge tax on this becomes a real cost since branch cannot claim ITC |
The Nil Value rule is transformative for most IT and business services companies:
Companies where all branches make 100% taxable B2B supplies (IT companies, financial services, manufacturing) can raise cross-charge invoices at Nil value. GST on Nil = ₹0. Branch gets ISD credit from third-party services and a cross-charge invoice at Nil from HO. Compliance is achieved with zero cash flow impact. This is the most commercially efficient structure for fully-taxable multi-branch businesses.
Companies where all branches make 100% taxable B2B supplies (IT companies, financial services, manufacturing) can raise cross-charge invoices at Nil value. GST on Nil = ₹0. Branch gets ISD credit from third-party services and a cross-charge invoice at Nil from HO. Compliance is achieved with zero cash flow impact. This is the most commercially efficient structure for fully-taxable multi-branch businesses.
5.4 Employee Cost Cross Charge — The Columbia Asia Controversy Resolved
⚖️ AAAR Karnataka — Columbia Asia Hospitals (2018):
The Advance Ruling Authority held that while determining the cross-charge value, the HO must include employee costs in the cross-charge value (i.e., salary of Delhi HR team allocated to branches must form part of the taxable value). This created a significant compliance burden — salary costs are exempt from GST, yet the AAAR said they must be included in the taxable base for cross-charge.
The Advance Ruling Authority held that while determining the cross-charge value, the HO must include employee costs in the cross-charge value (i.e., salary of Delhi HR team allocated to branches must form part of the taxable value). This created a significant compliance burden — salary costs are exempt from GST, yet the AAAR said they must be included in the taxable base for cross-charge.
🆕 CBIC Circular 199/11/2023-GST — Resolution:
The circular explicitly resolved the Columbia Asia controversy: Where the recipient branch is eligible for full ITC — the cross-charge invoice may be at Nil value even if the HO’s internally generated services cost includes employee salaries. The Columbia Asia position of mandatory employee cost inclusion is effectively overruled for full-ITC recipients.
For branches with partial ITC or no ITC — employee costs may still need to be considered in cross-charge valuation. In such cases, use Rule 28 / Rule 30 (cost + markup / OMV as applicable).
The circular explicitly resolved the Columbia Asia controversy: Where the recipient branch is eligible for full ITC — the cross-charge invoice may be at Nil value even if the HO’s internally generated services cost includes employee salaries. The Columbia Asia position of mandatory employee cost inclusion is effectively overruled for full-ITC recipients.
For branches with partial ITC or no ITC — employee costs may still need to be considered in cross-charge valuation. In such cases, use Rule 28 / Rule 30 (cost + markup / OMV as applicable).
6. ⚡ Finance Act 2024 — ISD Made Mandatory from 1 April 2025
This is the most significant change to the ISD/Cross Charge framework since GST’s launch in 2017. The Finance Act 2024 amended Sections 2(61) and 20 of the CGST Act, and the effective date was notified via:
- Notification 16/2024-CT dated 6 August 2024 — announcing the ISD amendment
- Notification 09/2025-CT dated 11 February 2025 — confirming 1 April 2025 as the effective date
6.1 What Changed — Third-Party Services Must Use ISD
⚠️ Post-1 April 2025 — Critical Mandate:
For third-party input services (invoiced by external vendors to the HO/registered office but attributable to other GSTINs/branches):
What does NOT change: Internally generated services (HO employee services to branches) still require cross-charge — ISD cannot handle these.
For third-party input services (invoiced by external vendors to the HO/registered office but attributable to other GSTINs/branches):
- ISD registration is now COMPULSORY
- ITC distribution MUST be done via ISD mechanism and GSTR-6
- Cross-charging for third-party services is no longer permitted
- Businesses that were cross-charging third-party service ITC must convert to ISD
What does NOT change: Internally generated services (HO employee services to branches) still require cross-charge — ISD cannot handle these.
6.2 What Remains Cross-Charge — Internally Generated Services
The Finance Act 2024 mandate covers only third-party service ITC distribution via ISD. Internally generated services — where the HO’s own employees provide services to branches — remain in the cross-charge domain:
- HO employee salaries for services rendered to branches → Cross-charge (not ISD)
- Management oversight services by promoters/directors based at HO → Cross-charge
- Centralised administration rendered by HO staff → Cross-charge
- R&D work done at HO for products used by branches → Cross-charge
6.3 Transition Compliance: From Cross Charge to ISD
Businesses that were cross-charging third-party service ITC before April 2025 must:
- Register as ISD on the GST portal (separate from regular registration)
- Ensure all third-party vendor invoices are addressed to the ISD GSTIN (or ensure the regular GSTIN’s ITC is processed through ISD)
- File GSTR-6 by 13th of every month for ISD distributions
- Stop raising cross-charge invoices for third-party services from 1 April 2025
- Continue cross-charge invoices for internally generated services (employee-based services)
- Update ERP systems to generate ISD invoices and GSTR-6 data
Penalty for non-compliance with ISD mandate (post-April 2025):
If a company continues to cross-charge third-party service ITC (instead of using ISD) after 1 April 2025, the ITC claimed by the recipient branch under the cross-charge route may be questioned as illegitimate — since the legally mandated mechanism (ISD) was bypassed. The department may deny ITC to branches and demand recovery, even though the underlying service is genuine and tax was actually paid.
If a company continues to cross-charge third-party service ITC (instead of using ISD) after 1 April 2025, the ITC claimed by the recipient branch under the cross-charge route may be questioned as illegitimate — since the legally mandated mechanism (ISD) was bypassed. The department may deny ITC to branches and demand recovery, even though the underlying service is genuine and tax was actually paid.
7. Revised ISD Framework — April 2026 Update
🆕 Revised ISD Mechanism — w.e.f. 1 April 2026:
As of April 2026, CBIC issued further operational guidelines and rule amendments for the ISD framework including:
As of April 2026, CBIC issued further operational guidelines and rule amendments for the ISD framework including:
- GSTR-6 format updated to capture RCM ITC distributions separately
- Inter-state RCM ITC (per 55th Council recommendation, December 2024) now formally distributable via ISD — a significant clarification for companies paying RCM at HO level on services received from foreign parties, GTAs, and other RCM categories used by multiple branches across states
- Rule 39 of CGST Rules was comprehensively amended to reflect the expanded ISD scope including RCM distributions and revised proportionate distribution methodology
- Reconciliation requirements between ISD invoices and GSTR-6 with recipient branch’s GSTR-2B are now more strictly monitored by the portal’s automated reconciliation engine
8. CBIC Circular 199/11/2023-GST — Full Summary
This July 2023 circular remains the foundational guidance document on ISD vs Cross Charge — though subject to the April 2025 ISD mandate overlay:
| Issue Addressed | CBIC Position (Circular 199) | Post-April 2025 Position |
|---|---|---|
| Third-party services (software, audit, insurance) paid by HO — ISD mandatory or optional? | Optional — HO could use ISD or cross-charge | Now mandatory ISD (Finance Act 2024) |
| If ISD registration exists, can HO cross-charge instead? | No — must use ISD | No — must use ISD (even stricter) |
| Internally generated services — taxable or not? | Taxable as deemed supply under Schedule I | Taxable — unchanged |
| Valuation for cross-charge when branch has full ITC? | Nil value acceptable | Nil value acceptable — unchanged |
| Employee cost inclusion in cross-charge value? | Not mandatory when branch has full ITC (Nil value OK) | Not mandatory for full ITC branches — unchanged |
| No invoice raised — is cross-charge still required? | If branch has full ITC, Nil invoice is sufficient compliance | Unchanged |
9. Branch Stock Transfers — Schedule I and E-Way Bill
When a company transfers goods from one GSTIN to another GSTIN of the same PAN (e.g., from manufacturer in Gujarat to sales branch in Delhi), this is a deemed supply under Schedule I Entry 2:
Branch Transfer — GST Treatment:
Supply type: Deemed supply between distinct persons (same PAN, different states)
Tax: IGST (inter-state movement)
Rate: Applicable GST rate on those goods
Invoice: Tax invoice from supplying GSTIN to receiving GSTIN
Valuation: Transaction value (transfer price); if unreliable, Rule 28 / OMV
E-way bill: Required for inter-state movement >₹50,000
ITC: Receiving GSTIN claims ITC on the transfer invoice — full ITC if used for taxable supply
Net GST impact: Zero (if both GSTINs are fully taxable) — output tax for sender = ITC for receiver
Supply type: Deemed supply between distinct persons (same PAN, different states)
Tax: IGST (inter-state movement)
Rate: Applicable GST rate on those goods
Invoice: Tax invoice from supplying GSTIN to receiving GSTIN
Valuation: Transaction value (transfer price); if unreliable, Rule 28 / OMV
E-way bill: Required for inter-state movement >₹50,000
ITC: Receiving GSTIN claims ITC on the transfer invoice — full ITC if used for taxable supply
Net GST impact: Zero (if both GSTINs are fully taxable) — output tax for sender = ITC for receiver
⚠️ Valuation of branch transfers — related party scrutiny:
If goods are transferred at below-market value between related GSTINs (e.g., manufacturer sells to sales branch at cost price when market value is higher), and if the receiving branch has restricted ITC (partial exempt supplies), the department may challenge the transfer price. They may re-determine the taxable value at OMV. Maintain documented transfer pricing rationale for high-value branch transfers.
If goods are transferred at below-market value between related GSTINs (e.g., manufacturer sells to sales branch at cost price when market value is higher), and if the receiving branch has restricted ITC (partial exempt supplies), the department may challenge the transfer price. They may re-determine the taxable value at OMV. Maintain documented transfer pricing rationale for high-value branch transfers.
10. Foreign Parent → Indian Subsidiary Transactions
10.1 ESOP / ESPP from Foreign Holding Company
When a foreign parent company grants ESOPs (Employee Stock Option Plans) or ESPPs (Employee Stock Purchase Plans) to employees of its Indian subsidiary — and charges the Indian subsidiary for this:
| Scenario | GST Treatment |
|---|---|
| Foreign parent charges Indian subsidiary for ESOP/ESPP issuance | Service by related person outside India to Indian business entity → 18% IGST under RCM (import of services, Schedule I Entry 4) |
| Foreign parent grants ESOPs/ESPPs for FREE (no charge to Indian subsidiary) | Nil value supply → GST at 18% on Nil = ₹0 (if Indian subsidiary has full ITC, Nil value is acceptable per Circular 199) |
| Indian subsidiary claims ITC on RCM paid for ESOP | ✅ ITC available if used for taxable business; subject to § 16(4) time limit |
SEBI / RBI compliance: ESOP transactions also involve FEMA compliance (Foreign Direct Investment, External Commercial Borrowings framework) and SEBI regulation. The GST treatment is separate from and in addition to these regulatory compliances. Ensure all three are addressed.
10.2 Intra-Group Loan Interest — New GST Relief (June 2024)
🆕 CBIC Circular (June 2024) — GST on Intra-Group Loans:
A long-standing dispute: When a foreign parent or group company provides an interest-bearing loan to an Indian subsidiary, is the interest a taxable service? The CBIC circular clarified:
A long-standing dispute: When a foreign parent or group company provides an interest-bearing loan to an Indian subsidiary, is the interest a taxable service? The CBIC circular clarified:
- If the foreign parent charges interest → import of services → 18% IGST under RCM on the interest amount
- If the Indian subsidiary has full ITC eligibility → value declared on invoice (including NIL) is deemed as OMV → effectively Nil GST if loan at Nil interest
- Eliminates the earlier position where the department tried to impute a market rate interest even when the related party loan was interest-free
10.3 Technical Know-How and Management Fees
| Service | GST Treatment |
|---|---|
| Technical know-how fee paid by Indian company to foreign parent | Import of services — 18% IGST under RCM § 5(3), IGST Act |
| Management fees for group services (brand licensing, management oversight) | Import of services — 18% IGST under RCM |
| Royalty for use of intellectual property | 18% IGST under RCM (if paid to foreign entity) OR 18% forward charge (if paid to Indian entity) |
| IT support services by foreign group entity to Indian entity | 18% IGST under RCM |
ITC on RCM for import of services: The Indian subsidiary pays 18% IGST under RCM on all these foreign parent service charges. If the Indian subsidiary is fully taxable — it can claim ITC on all these RCM payments. The cash flow impact is temporary (pay GST in cash; claim ITC against output). Maintain self-invoices within 30 days (Rule 47A) for each such import of service.
11. Valuation Framework for Related Party Transactions
| Scenario | Rule | Basis of Valuation |
|---|---|---|
| Related party / distinct person — recipient has full ITC | Rule 28 proviso | Any value declared on invoice, including Nil |
| Related party — recipient has partial ITC or no ITC | Rule 28 | Open Market Value → Value of similar supply → Cost + markup (Rule 30) |
| Open Market Value (OMV) unavailable | Rule 29 | Value of goods/services of like kind and quality |
| No OMV or like-kind value available | Rule 30 | Cost of production/provision + 10% markup |
| Agent procuring on behalf of principal | Rule 28(1)(a) | OMV or value of supply of like kind |
| Import of services from related foreign person (free supply) | Schedule I + Rule 28 (with Nil proviso for full ITC) | Nil (if full ITC recipient) or OMV/cost+ if partial ITC |
12. SEZ Units and ISD — Special Considerations
SEZ (Special Economic Zone) units operate as zero-rated supply entities. ITC distribution to SEZ units has specific complexities:
- ISD can distribute ITC to an SEZ unit’s GSTIN
- The SEZ unit’s turnover is considered for the proportionate formula — even though it makes zero-rated supplies
- Cross-charge to SEZ unit: The supply is treated as zero-rated (export) — 0% IGST if done under LUT; or 18% with refund claim
- Nil value cross-charge for SEZ units is acceptable since SEZ units are eligible for full ITC (or zero-rating effectively makes them equivalent)
- SEZ units cannot use ISD invoices to claim ITC in the same way — coordinate with SEZ compliance team for specific handling
13. Common Disputes, Notices and Litigation
| Issue | Department’s Position | Taxpayer’s Defense | Current Position |
|---|---|---|---|
| Cross-charge not raised for HO employee services | Demand for GST + penalty on deemed supply (Schedule I) | Branch has full ITC; Nil value acceptable per Circular 199 | For full-ITC branches: Nil value valid. For partial/no ITC branches: demand likely sustained |
| ITC distributed via cross-charge (third-party) after April 2025 | ISD mandate bypassed; ITC distributed is irregular | Substantive compliance achieved; procedure different | Risky post-April 2025 — transition to ISD mandatory |
| Employee cost not included in cross-charge value | Columbia Asia position — employee cost mandatory | Circular 199 overrules; Nil value acceptable for full ITC | For full ITC: Nil value valid. For partial ITC: still open |
| Import of services (management fees) — Nil value claim | Must pay 18% IGST on OMV/arm’s-length price | Full ITC eligible; Nil value acceptable per Rule 28 proviso | June 2024 circular confirmed Nil value for full-ITC recipients |
| Cross-charge for HO services to SEZ — taxability | Taxable supply; SEZ must follow zero-rating procedures | SEZ is zero-rated; cross-charge should also be zero-rated | Complex area; consult GCA before raising invoices to SEZ |
| ISD distribution without proportionate calculation | Arbitrary distribution; demand ITC reversal from branches | Practical business allocation reasonable | Rule 39 is mandatory — proportionate formula must be followed |
14. Practical Case Studies
Case 1: IT Company — ISD Post April 2025 Compliance
InfoSystems Ltd. (HO: Delhi). Branches in Hyderabad, Pune, Chennai. Third-party services paid by HO: Software licence ₹5L/month (18% GST), Audit fee ₹2L/month (18% GST). Turnover split: Delhi 40%, Hyderabad 30%, Pune 20%, Chennai 10%.
| Service | Monthly ITC | Hyderabad (30%) | Pune (20%) | Chennai (10%) | Delhi HO (40%) |
|---|---|---|---|---|---|
| Software | ₹90,000 | ₹27,000 | ₹18,000 | ₹9,000 | ₹36,000 |
| Audit fee | ₹36,000 | ₹10,800 | ₹7,200 | ₹3,600 | ₹14,400 |
- Pre-April 2025: InfoSystems could cross-charge or use ISD (optional)
- Post-April 2025: Must register ISD and file GSTR-6 by 13th every month distributing ₹37,800 to Hyderabad, ₹25,200 to Pune, ₹12,600 to Chennai
- Internally generated services (Delhi HR, Delhi CFO, Delhi IT team) — cross-charge invoice at Nil value (all branches fully taxable)
Case 2: Manufacturing Company — Branch Transfer GST
SteelMax Ltd. (Manufacturer, Gujarat GSTIN) transfers finished goods worth ₹50 lakh to its Delhi distribution branch (Delhi GSTIN). Same PAN — distinct persons. Both GSTINs fully taxable.
- Supply: Deemed supply under Schedule I Entry 2 (distinct persons)
- Tax: IGST at 18% (steel products) = ₹9 lakh
- Gujarat GSTIN issues IGST invoice for ₹50L + ₹9L = ₹59L
- Delhi GSTIN claims ITC of ₹9L
- E-way bill: Required (inter-state, >₹50,000)
- Net cash impact: Zero (output tax by Gujarat = ITC for Delhi). But ₹9L must physically transfer from Gujarat’s Electronic Cash Ledger to Gujarat’s output liability — managed via GSTR-3B
Case 3: Indian Subsidiary — Foreign Parent ESOP Charge
IndiaOps Pvt. Ltd. (100% subsidiary of USParent Inc.). USParent grants 1,000 ESOPs to IndiaOps employees. USParent charges IndiaOps ₹50,00,000 for this.
- Transaction: Service by foreign related person to Indian entity — Schedule I Entry 4
- GST: Import of services — 18% IGST under RCM = ₹9,00,000
- IndiaOps issues self-invoice within 30 days; pays ₹9L IGST from ECL
- IndiaOps claims ₹9L ITC in same GSTR-3B (Table 4A3)
- If IndiaOps has full ITC eligibility: Net cash impact = Zero
- Income Tax: ESOP cost is deductible under Section 37 Income Tax Act separately — coordinate with income tax advisory
15. Frequently Asked Questions
Q1. Our company has branches in 5 states. We have been cross-charging third-party service ITC since 2019. Do we need to change something now?
Yes — Finance Act 2024 mandated ISD registration for distribution of third-party service ITC from 1 April 2025. If you were cross-charging third-party services before April 2025, that was acceptable under the pre-amendment framework. From 1 April 2025, you must: (1) Register as ISD on the GST portal, (2) Ensure third-party vendor invoices flow through ISD, (3) File GSTR-6 monthly for ITC distribution, (4) Stop cross-charging third-party ITC. Internally generated services (your own employees serving branches) still require cross-charge — that mechanism doesn’t change. Contact GCA for ISD setup and transition compliance.
Q2. Our Delhi HO has 10 HR employees who recruit for all branches. Must we charge GST for this? We thought intra-company services are not taxable.
They are taxable. Under Schedule I Entry 2 of CGST Act, services supplied between distinct persons (same PAN, different GSTINs) in the course of business are deemed supplies — taxable even without actual consideration. Delhi HO’s HR team serving branches is a deemed supply of manpower services (18% GST) from Delhi GSTIN to each branch GSTIN. However, if all your branches have full ITC eligibility (100% taxable business), you can raise cross-charge invoices at Nil value — Nil × 18% = ₹0 GST. This achieves GST compliance with zero cash flow impact. Issue the Nil-value tax invoice monthly to each branch and keep records — this demonstrates compliance without creating a real cost.
Q3. Our foreign parent provides us management services and charges USD 1,00,000/quarter. What GST do we pay?
This is an import of services under Section 5(3), IGST Act — specifically a service from a related person outside India in furtherance of business (Schedule I Entry 4). You must pay 18% IGST under RCM on the INR equivalent of USD 1,00,000. Issue a self-invoice within 30 days of the invoice date; pay 18% IGST in cash from your Electronic Cash Ledger; report in GSTR-3B Table 3.1(d). If your company has full ITC eligibility, you can claim this IGST as ITC in the same GSTR-3B — making the net cash impact zero. Keep the foreign parent’s invoice and self-invoice documentation for audit readiness.
Q4. The ISD formula distributes based on turnover. One of our branches (manufacturing) has very high turnover but uses very little of the software. Is there flexibility?
The standard Rule 39 formula uses proportionate turnover. However, if ITC is “attributable to a specific branch” — Rule 39 allows distributing that specific ITC entirely to that branch (not proportionately). The challenge is documenting attribution. For software used by all branches, turnover-based distribution is the safest and CBIC-aligned approach. For specific software used only by, say, the Karnataka branch — distribute 100% to Karnataka. For genuinely common services where usage patterns differ significantly from turnover patterns, consider implementing usage metrics and maintaining a documented policy. GSTAT has admitted appeals on ISD distribution methodology — this is an emerging area.
Q5. We give interest-free loans between group companies. Does GST apply on the interest we don’t charge?
Per the June 2024 CBIC circular: If both companies are related parties and the recipient company is eligible for full ITC — the open market value of the loan service can be the invoiced value (even Nil). So a Nil-interest intra-group loan, where the borrowing entity has full ITC, can be valued at Nil for GST purposes. No deemed interest needs to be computed. This circular significantly reduced compliance burden and ended litigation on this point. However, if the borrowing entity has partial ITC or makes exempt supplies — you should compute an arm’s-length interest and pay GST on that. Consult GCA for your specific group structure.
ISD Setup, Cross Charge Compliance & Related Party GST — GCA Can Help
ISD registration, GSTR-6 filing, cross-charge invoice issuance, valuation under Rule 28, import of services from foreign parents — these are complex, frequently audited, and high-stakes compliance areas. GCA provides ISD setup and monthly compliance, cross-charge policy design, foreign parent transaction advisory, and response to GST notices on related party transactions. Pan-India, 100% digital.
📞 +91-9911369185 · ✉️ [email protected]
Disclaimer: Educational purposes only. Based on CGST Act 2017, Finance Act 2024, CBIC Circulars, and related notifications/circulars up to May 2026. GST law in this area changes frequently — verify current circular and notification status before action. Consult a qualified professional for specific advice.
Key References: § 2(61), 2(84), 7, 20, 25(4), Schedule I Entry 2 & 4 — CGST Act 2017 · § 5(3) — IGST Act 2017 · Rule 28, 29, 30, 39, 54 — CGST Rules 2017 · Finance Act 2024 (ISD mandatory) · NN 16/2024-CT (6 Aug 2024) · NN 09/2025-CT (11 Feb 2025) · CBIC Circular 199/11/2023-GST (17 Jul 2023) · CBIC Circular (June 2024 — intra-group loans) · 50th GST Council (July 2023) · 55th GST Council (Dec 2024 — ISD RCM expansion) · AAAR Karnataka: Columbia Asia Hospitals · AAR Maharashtra: Cummins India
