Cross Charge Between Distinct explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A head office in Mumbai runs finance, legal, HR and IT for branches in six States. Nobody invoices anybody. The costs sit in the Mumbai books.
Under GST that is not sustainable, because Schedule I paragraph 2 makes a supply between distinct persons taxable even without consideration. Head office and branch, separately registered, are distinct persons under s.25(4).
Circular No. 199/11/2023-GST dated 17.07.2023 settled the two questions that made cross charge genuinely difficult.
Where the branch is eligible for full input tax credit, the value declared in the head office's invoice is deemed to be the open market value — even if that value is nil. And the cost of employees of the head office who work on services for branches is not required to be included in the value, where full credit is available. Where the branch is not eligible for full credit, the cross charge must be at open market value, and the employee cost question becomes live.
Why a cross charge is required at all
Section 25(4): a person with more than one registration, whether in one State or several, shall be treated as distinct persons in respect of each registration.
Schedule I paragraph 2: supply of goods or services between distinct persons as specified in s.25, when made in the course or furtherance of business, is treated as a supply even if made without consideration.
So the Mumbai head office performing accounting work that benefits the Chennai branch is supplying a service to a distinct person. There is no consideration, and it is still a supply.
The absence of an invoice does not make the supply disappear. It makes it an unreported supply.
The valuation answer
Rule 28(1) would normally require open market value, then like kind and quality, then Rule 30 or Rule 31 — an unworkable exercise for internal support functions with no market comparable.
The second proviso to Rule 28(1) cuts through it: 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.
Circular 199 confirmed the consequence explicitly: where full ITC is available to the recipient branch, whatever value the head office declares — including a nil value — is the open market value. The department cannot substitute a higher figure.
The logic is straightforward. If the branch takes full credit of whatever tax the head office charges, the exercise is revenue-neutral. There is nothing to protect.
The employee cost answer
This was the harder question and the bigger exposure.
Head office employees — the CFO, the legal team, the IT function — spend part of their time on services that benefit branches. Their salaries are the largest component of the cost of those internal services. Does the cross-charge value have to include a share of them?
Circular 199 held that where full input tax credit is available to the recipient, the cost of employees of the head office involved in providing the services to the branch is not mandatorily required to be included in the value of the cross charge.
The salary itself is not a supply — Schedule III paragraph 1 excludes services by an employee to the employer. The circular's point is that the employer cannot be forced to re-characterise that excluded cost as a component of an internal supply, in a revenue-neutral situation.
Where full credit is not available, the position reverses. Open market value applies, and a valuation that excludes the dominant cost component is difficult to defend.
Cross charge or ISD?
The two are different mechanisms and Circular 199 kept them separate.
Input Service Distributor distributes credit on third-party input services received at a common location on behalf of multiple registrations. It distributes credit; it does not create a supply.
Cross charge is a supply by one distinct person to another — typically internally generated services such as management, finance, HR and IT support, which no third party invoiced.
The clean division:
| Cost | Mechanism |
|---|---|
| Third-party audit fee for the group, invoiced to HO | ISD distribution |
| Group insurance premium invoiced to HO for all locations | ISD distribution |
| HO's own management and support services | Cross charge |
| HO's own IT infrastructure used by branches | Cross charge |
ISD registration became mandatory from 1 April 2025 for distributing credit on common third-party input services, following the Finance Act, 2024 amendments to s.2(61) and s.20 and the insertion of Rule 39(1A). So the choice between ISD and cross charge is no longer a choice for third-party services — ISD is compulsory for those. ISD registration and credit distribution →
Practical notes
- Raise the invoices. A cross charge without an invoice is an unreported supply, whatever the value would have been.
- Test the recipient's credit position per branch. A branch making exempt supplies breaks the full-credit proviso, and that branch alone needs open market valuation.
- Keep the allocation basis documented — headcount, turnover, usage — even where the value is nominal.
- Do not confuse cross charge with ISD. Since 1 April 2025, third-party common input services must go through ISD.
- Watch the RCM interaction. Where the head office pays RCM on an input service, that credit is distributed as ISD credit under Rule 39(1A) via a self-invoice; it is not cross-charged.
- Cross charge is inter-State where the branches are in different States, so IGST applies.
Key takeaways
- Schedule I paragraph 2 with s.25(4) makes head office to branch services a supply without consideration.
- Second proviso to Rule 28(1): where the branch has full credit, the invoice value is the open market value — including nil.
- Circular 199/11/2023-GST: employee cost need not be included where full credit is available.
- Where full credit is not available, open market value applies and employee cost becomes relevant.
- ISD distributes third-party credit; cross charge is a supply of internally generated services.
- ISD is mandatory from 1 April 2025 for common third-party input services.
Read next
- Input Service Distributor: Registration and ITC Distribution
- Supplies to Related Persons: Schedule I and Rule 28
- Schedule I: Supply Without Consideration
- Multiple GST Registrations and Separate GSTINs
Disclaimer: Positions stated as on 5 September 2026, based on ICAI Background Material on GST, Volume I (2026 edition), the ICAI Handbook on Input Service Distributor (September 2025) and Circular No. 199/11/2023-GST.