Taxability of Services Between Distinct Persons in GST Introduction GST (Goods and Services Tax) applies to almost every business activity in India. The law is designed to tax the supply of goods and services at every stage. One important but often confusing area is the taxability of services between distinct persons. Under GST, different registrations of the same business are treated as separate taxable persons. This means that even though the business is the same, the law sees each registered unit as independent. Because of this, services exchanged between such units can attract GST. Many businesses assume that GST applies only when money is charged. This is not always true. GST law clearly states that certain transactions are taxable even if there is no payment. Services between distinct persons fall under this rule when they are provided in the course of business. Understanding this concept is important to avoid GST notices, penalties & compliance issues. This article explains the taxability of services between distinct persons.
What are “Distinct Persons” under GST? Under GST, a person must register in all States or Union Territories where they carry out business. When a business has more than one GST registration then each registration is treated as a distinct person. This rule applies even if all registrations belong to the same legal entity or the same PAN (Permanent Account Number) . Distinct persons can include:
Separate registrations of the same business in different states. Separate registrations of different business verticals within the same state. Business units in India & units outside India with separate registrations. Each distinct person must follow GST compliance separately. This means separate GST returns, records and tax filings.
What Does “Supply” Mean in GST? Under GST, supply includes all forms of transfer, sale, exchange or barter of goods or services. GST applies only if there is a supply made by a taxable person. A taxable person is someone who is registered or required to be registered under GST. A supply can be:
For money (paid supply), or Even without money (deemed supply) if specified under GST. Supply of Services Between Distinct Persons GST law includes certain transactions that are treated as supply even without any payment. These transactions appear in Schedule I of the CGST Act. One important item in Schedule I is the supply of goods or services between distinct persons when made in the course of business. These are considered taxable supplies.
Key Rule: When a service is provided by one distinct person to another distinct person, and it is part of business activities, then GST applies even if no money is charged. The law treats these transactions as if they were normal supplies.
Example If a head office provides consulting services to its branch in another state (with a separate GST registration ), GST applies to the service. There may be no payment between them but GST must still be paid. This rule prevents businesses from avoiding GST by not charging for services between their own units.
How is GST Calculated for Such Services? When services between distinct persons are taxable then GST must be calculated on a value determined by GST rules. Normally, the value of a supply is the price actually paid or payable. But for supplies between distinct persons, the transaction value may not be reliable. Therefore, GST uses valuation rules to find a fair value for tax purposes. Valuation follows this sequence:
Open Market Value – Price if sold in the market. Value of Similar Services – If the open market value is not available. Cost-Based Value – If still not available, cost plus a markup (e.g., 110% of cost). Residual Method – Reasonable method if none of the above is possible. The value chosen must represent a fair market price for GST purposes. This ensures GST is paid on a realistic value and not on zero or nominal amounts.
When Are Supplies Between Distinct Persons Not Taxable? Even though most services between distinct persons are taxable. A few exceptions exist.
Gifts by Employer to Employee Gifts given by an employer to an employee that do not exceed ₹50,000 in a financial year are not treated as a supply. This means no GST is charged on such gifts.
Non-Business Activities If services are not provided in the course or furtherance of business, they may not be treated as a supply. In such limited cases, GST may not apply. Though, this requires careful examination of facts.
Place of Supply and Export Considerations For services between distinct persons, the place of supply rules also matter. GST applies based on where the service is supplied. If the place of supply is in India, GST is charged. If the place of supply is outside India & other conditions are met, then it may be treated as an export of service. But when the recipient is just another establishment of the same person (distinct person), this may not qualify as an export.
Export of services has its own conditions like payment in foreign exchange and the location of the recipient outside India. Even if a branch outside India receives the service then GST may apply if export conditions are not met.
Input Tax Credit on Such Supplies When GST is charged on services between distinct persons, the recipient may be eligible to claim Input Tax Credit (ITC) . ITC allows the recipient to reduce GST paid on inputs from GST liability on outputs. However, claiming ITC depends on compliance conditions. The recipient must follow the invoice & payment rules to claim ITC. If these conditions are not met then ITC may be denied.
Practical Examples A company in Delhi provides IT support services to its unit in Mumbai (distinct persons). GST applies even if no payment is charged. A factory transfers training services to a branch in another state under the same business. GST applies as it is in the course of business. A parent company provides branding services to its business vertical with a separate GST registration. GST applies to the service value. Conclusion GST views services between distinct persons as taxable supplies when they are part of business activities. Even if no money is charged, GST must be paid based on fair market value. This rule prevents tax avoidance & ensures GST is applied fairly across all business transactions. Distinct persons arise from multiple GST registrations of the same business. Services between such persons are taxable if in the course of business. GST value is determined using valuation rules. Some exceptions, such as gifts up to ₹50,000, exist. Understanding these rules helps businesses comply with GST and avoid penalties. Always consult a GST expert for complex cases.
Also Read: Taxability of Barter and Exchange Under GST in India
FAQs Q1. Are services between branches of the same company taxable under GST? Yes. If the branches have separate GST registrations then they are treated as distinct persons. Services between them are taxable if provided in the course of business, even when no payment is made.
Q2. Is GST applicable if no consideration is charged between distinct persons? Yes. Under Schedule I of the CGST Act, services between distinct persons are treated as a supply even without consideration. GST must be paid on the applicable value.
Q3. How is the value of services between distinct persons determined? The value is determined using GST valuation rules. Open market value is used first. If not available, a similar service value or cost-based value is applied.
Q4. Can the input tax credit be claimed on such services? Yes. The recipient distinct person can claim input tax credit, provided all GST conditions are met, such as proper invoicing and use of the service for business purposes.
Also Read: GST Taxability on Employees' Personal Use of Business Assets
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