Cross charge of common costs between branches
The most common departmental finding in a multi state group, and the one most often ignored until an audit.
Where a head office performs a function for its branches using its own employees and infrastructure, that is a supply of service between distinct persons under Schedule I, taxable without consideration, and it must be cross charged. Where a third party service is procured centrally for the benefit of branches, the credit must be distributed through the Input Service Distributor mechanism, which is mandatory from 1 April 2025. The two mechanisms cover different transactions and one does not substitute for the other.
The distinction that decides the treatment
Internally generated services — management, finance, human resources, technology support, legal, procurement — are supplied by the head office to the branches. They are cross charged with an invoice and tax.
Third party services procured centrally — audit, insurance, software licences, advertising — are not supplied by the head office at all. The credit on them is distributed through the ISD mechanism.
A group that cross charges third party invoices instead of distributing them through ISD is now non compliant, and a group that does not cross charge internally generated services has an exposure for every open year.
Valuation
Rule 28 applies. Where the receiving branch is eligible for full input tax credit, the second proviso permits the invoice value to be treated as the open market value.
Circular 199/11/2023-GST clarified that in such a case the cost of all components, including employee cost, need not necessarily be included in the value.
Where a branch is not eligible for full credit, the value must be established, and a cost allocation basis with a documented methodology becomes necessary.
The allocation basis should be defensible and consistent — turnover, headcount, or a driver relevant to the service — and should not change from year to year without reason.
Getting it operational
A schedule of internally generated services, the branches benefiting, the allocation basis and the periodicity of the cross charge invoice.
Monthly or quarterly invoicing, consistently. An annual cross charge invoice raised in March is the pattern departments treat as an afterthought.
A reconciliation showing that the total cross charged reconciles to the cost pool, so that a demand for a higher value can be answered with the pool.
For branches without full credit, a valuation note with the cost build up.
Authorities relied on
Clarified the treatment of internally generated services supplied by a head office to branches and the valuation where the recipient is eligible for full input tax credit.
What to do on Monday
Draw up the schedule of internally generated services and the branches benefiting from each.
Start invoicing monthly or quarterly on a documented allocation basis.
Reconcile the total cross charged to the cost pool each year.
Prepare valuation notes for branches that are not eligible for full credit.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Is cross charge required where all branches have full credit?
Yes. The supply exists and must be invoiced; the valuation is simplified but the obligation is not removed.
Can we cross charge instead of using ISD?
Not for third party common input services. ISD is mandatory for those from 1 April 2025.
Must employee cost be included?
Where the recipient is eligible for full credit, the circular clarifies it need not necessarily be included. Where it is not, build the cost.
How often should we invoice?
Monthly or quarterly, consistently. An annual entry invites the argument that no supply was contemplated.
What is the exposure for past years?
Tax on the value of services not cross charged, with interest and penalty, for every open year. Where the branches had full credit, the revenue neutrality argument reduces the practical exposure but not the interest.
In this cluster
- Valuation under Section 15: transaction value and its exceptions
- Rule 28 in practice: related party and distinct person supplies
- Corporate guarantees between group companies: the one percent rule
- Northern Operating Systems: secondment, and the notice that follows every expatriate
- Mandatory Input Service Distributor: the compliance rebuild
- Post sale discounts: the agreement requirement and the credit note trail
- Free of cost supplies, warranty replacements and moulds
- Reimbursements and the pure agent exclusion under Rule 33
- Liquidated damages, penalties and notice pay recovery
- Vouchers and gift cards: the amended treatment
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.