Large companies, banks may have to split top management salaries

The Authority for Advance Ruling (AAR) in Maharashtra has declared that enterprises must “value” the service supplied by senior management and charge it to their branch offices across India (with a separate GST registration).

According to experts, this could create a extreme difficulty for large organizations and banks with multiple branch offices.

The salary of chief executive officers (CEOs) and chief financial officers (CFOs) typically become expenses of the head office, not all of the branch offices.

Companies may now be required to “cross charge” common expenses, such as top executive pay, across branch offices as a result of the AAR judgement.

“Under most Indian regulations, an employee is regarded as an employee of the entire organization/company rather than a specific location. As a result, there is a strong belief that even while CXOs are based in one state, they provide no service to other branches because they are employees of all branches, i.e. the entire organisation under the same PAN,” explained Harpreet Singh, partner, indirect taxes, KPMG in India.

According to the Maharashtra AAR, a CXO’s remuneration or “managerial and leadership services provided by the registered/corporate office to its group firms can be treated as ‘supply of service’.”

Although AAR judgments are legally only binding on the corporations that apply for them, they are also used as precedent in tax law.

Companies must register separately in each state, treat these as branch offices, and separate all expenses under the goods and services tax (GST) regime.

For all considerations, branch offices are recognised as separate organisations. What happens to ordinary expenses like advertising, legal fees, or even travel expenses incurred by the CEO or CFO?