GST treats transactions between related persons with heightened scrutiny. Unlike normal dealings, consideration is not the deciding factor—many related-party transactions are taxable even when provided free of cost. Most disputes arise from missed Schedule I supplies, valuation errors, cross-charge failures, and ITC denial.
1. Introduction
Related-party transactions commonly include:
management and support services,
use of brand/IP,
employee cost allocations,
inter-company leasing, and
reimbursements and recoveries.
Under GST, such transactions often qualify as supply by deeming fiction, triggering tax even without invoices or payments.
In GST, related-party dealings are taxed by relationship, not by price.
2. Who Are Related Persons Under GST
Persons are related if they:
are officers/directors of one another’s businesses,
are legally recognised partners,
control or are controlled by another person,
are members of the same family, or
are distinct persons under GST (same PAN, different registrations).
Distinct persons are treated as related by default.
3. Schedule I — Deemed Supply Without Consideration
Schedule I deems certain activities as supply even without consideration, including:
supply of goods or services between related persons or distinct persons in the course of business.
This provision is the backbone of related-party GST exposure.
4. Distinct Persons — PAN-Based Relationship
Different GST registrations under the same PAN (e.g., different States) are:
treated as distinct persons, and
supplies between them are taxable, subject to valuation rules.
This triggers cross-charge or ISD considerations.
5. Common Related-Party Transactions Under GST
Frequently encountered transactions include:
management fees and support services,
IT, HR, finance, and admin services,
inter-unit leasing of assets,
brand or IP usage, and
employee cost cross-charges.
Each requires independent GST analysis.
6. Cross-Charge vs ISD in Related-Party Context
Cross-Charge applies where there is actual service provision between related/distinct persons.
ISD applies only for distribution of ITC on input services without service provision.
Using ISD to bypass cross-charge is a high-risk audit issue.
ISD distributes credit; cross-charge taxes the service.
7. Valuation of Related-Party Supplies
Valuation must follow GST rules, typically:
open market value,
cost-based valuation, or
reasonable methods where OMV is unavailable.
Zero or nominal valuation is commonly rejected during audit.
8. ITC Implications for the Recipient
The recipient related person:
may avail ITC of GST charged, subject to eligibility and blocked credit rules.
Tax neutrality exists only where ITC is fully available.
9. Import of Services from Related Foreign Entities
Services from overseas group entities:
may qualify as import of services,
taxable under RCM, even if free of charge.
Valuation and PoS are critical.
10. Documentation and Agreements
Authorities examine:
inter-company agreements,
scope of services,
allocation keys, and
valuation workings.
Absence of documentation weakens defence.
11. Common Errors Observed
Frequently observed mistakes include:
ignoring Schedule I supplies,
non-valuation or under-valuation,
misusing ISD instead of cross-charge, and
inconsistent GST and accounting treatment.
These lead to demands with interest and penalties.
12. Audit and Scrutiny Perspective
GST audits focus on:
group structures and PAN mapping,
shared services and allocations,
valuation rationale, and
consistency across periods.
Related-party GST is a priority audit area.
13. Practical Guidance for Businesses
Best practices include:
mapping all related-party transactions annually,
deciding cross-charge vs ISD upfront,
documenting valuation methodology, and
aligning GST treatment with accounting and transfer pricing.
Proactive structuring avoids recurring exposure.
14. Practical Guidance for GST Practitioners
Practitioners should:
conduct functional analysis,
prepare valuation and allocation workings,
review inter-company contracts, and
defend positions during audit and litigation.
Related-party GST issues are fact- and structure-driven.
15. CABTA Insight
“In GST, related parties create supply by existence, not by invoice.”