Cross Charge Versus ISD: What Circular 199/11/2023 Settled

Cross Charge Versus ISD 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.

For six years this was the most argued question in multi-location GST: cross charge or ISD? It is no longer a choice — but the circular that once said it was a choice remains the most important document in the area, because of everything else it decided.

Circular No. 199/11/2023-GST dated 17.07.2023 held that, under the law then in force, a head office could either distribute ITC on third-party common input services through an ISD or issue a section 31 tax invoice to the branches. That option ended when section 20 was substituted with effect from 1 April 2025 — the ISD route is now compulsory for third-party common services. What survives is the circular's valuation guidance on internally generated services: the value declared in the HO's invoice is deemed to be the open market value under the second proviso to rule 28 where the branch gets full ITC, that value may be declared as Nil where no invoice is issued, and HO employee salary cost is not mandatorily includible — even where full ITC is not available.

What "cross charge" is, and is not

It is not a defined term. "Cross charge is not defined in GST Act. The phrase 'Cross charge' is commonly used to describe the amount charged by one distinct person to another for supply of goods and/or services on which regular GST is to be charged at rates applicable."

Its foundation is section 25(4). Units of one legal entity registered in different States are distinct persons, so a supply between them is a supply — "The principle behind this is to ensure tax neutrality and avoid revenue leakage when services or goods are consumed by another unit of the same entity."

And it has a hard boundary. Two FAQs put it bluntly:

"If the invoice is received from supplier in your regular GSTIN, can you transfer the same to other distinct person directly by cross charge? — No, you cannot use cross charge unless you use that service to produce some support service for the distinct person and charge for such service generated."

"If supplier raises the invoice in your GSTIN instead of the distinct person who received the services, can you transfer the bill amount with tax to distinct person by cross charge? — No, you will have to get the bill rectified from the supplier in the name of the distinct person, or if services are rendered to two or more distinct persons you will have to get in the GSTIN of ISD, otherwise the ITC will be lost."

Cross charge is not a pass-through. It prices a service the head office itself generated. A third-party invoice sitting in the wrong GSTIN cannot be repaired by cross-charging it onward.

What the circular decided

The circular addressed a business with an HO in State-1 and branches elsewhere, where the HO procures security service for the entire organisation from a third party and also provides some services on its own to the branches.

(A) Third-party common input services. The HO had an option — distribute through the ISD mechanism, or issue a section 31 tax invoice to the branches, which could then avail the ITC subject to sections 16 and 17. Distribution through the ISD route was possible only if the HO registered mandatorily as an ISD under section 24(viii) and the services were attributable to, or actually provided to, that branch.

And the Handbook records the change of gear: "After 1st April 2025 when ISD mechanism is compulsory, ISD will issue ISD invoices as per rule 54(1) to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs."

(B) Must HO employee salary cost be included when the branch has full ITC? "the value declared in the invoice by HO shall be deemed to be the open market value of such services, in terms of second proviso to rule 28 of CGST Rules, irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not."

(C) What if the HO issues no invoice at all and the branch has full ITC? "the value of services may be deemed to be declared as Nil by HO to BO and may be deemed as open market value in terms of second proviso to rule 28."

(D) What if the HO issues an invoice but full ITC is not available to the branch? "the cost of salary of employees of the HO, involved in providing services to BOs, is not mandatorily required to be included while computing the taxable value of supply of services."

Limb (D) is the one that mattered most commercially. Before it, departments had argued that a full-cost allocation including HO payroll was required wherever the recipient branch had exempt or blocked output — which for banks, insurers, hospitals and education groups meant a large, real tax cost on an internal allocation.

Where that leaves the two mechanisms

The Handbook draws three conclusions:

1. ISD is compulsory from 1 April 2025 for services attributable to a branch and procured from an outside supplier.
2. Cross charge is not compulsory if the recipient branch is entitled to full ITC — the value may be Nil.
3. Where full ITC is not available, the value is determined "using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of these valuation rules. But in this case the employee cost may not be considered by HO."

And the FAQ adds the converse. If a business wants to include employee cost in the value of services given to branches — for its own branch accounting — "it will be permitted, but you will have to charge GST on the same." Choosing a fuller allocation is a choice to pay more tax.

Inputs and capital goods can enter the value. "While calculating the value as per section 15 of CGST Act read with rules 27 to 31 of CGST Rules, these amounts can be added to the value of services to be charged."

The comparison table

The practical division of an HO's costs

Route through the ISD: third-party invoices for audit fees, tax consultancy, legal services, telecommunication, advertisement, banking services, royalty, marketing and sales promotion — the Handbook's own list of common services procured from outside.

Route through a cross charge: services the HO generates itself — accounting, IT system management, CEO and CFO services, compliance, human resources — built out of salary, electricity and rent. On these, "tax credit on input services cannot be transferred by ISD to the distinct person as it is subsumed by central office."

Neither route is optional any more in its own lane. ISD is mandatory for the first; cross charge is the only mechanism available for the second, though its value may be Nil where the branch has full credit.

Key takeaways

• Circular No. 199/11/2023-GST gave an option between ISD and cross charge — that option ended on 1 April 2025.
• ISD is now compulsory for third-party common input services attributable to branches.
• Cross charge remains for internally generated HO services, which the ISD route cannot carry.
• Under the second proviso to rule 28, the value declared in the HO's invoice is deemed to be open market value where the branch has full ITC.
• Where no invoice is issued and the branch has full ITC, the value may be deemed Nil.
• HO employee salary cost is not mandatorily includible — even where full ITC is not available to the branch.
• Including employee cost voluntarily is permitted, but GST must then be charged on it.
• Cross charge cannot be used to pass on a third-party invoice — get the bill rectified, or route it through the ISD, or the credit is lost.

Read next

• ISD Becomes Mandatory: "May" to "Shall" from 1 April 2025
• Section 2(61): What an ISD Is, and the Four Things It Cannot Do
• Rule 54(1): The ISD Invoice and the ISD Credit Note

Disclaimer: Positions stated as on 5 September 2026, based on sections 15, 20, 24(viii), 25(4) and 31 of the CGST Act, 2017, rules 27 to 31 and 39 of the CGST Rules, 2017 with the second proviso to rule 28, and Circular No. 199/11/2023-GST dated 17 July 2023, as reproduced in the ICAI Handbook on Input Service Distributor under GST (2nd edition, September 2025).