Under GST, when a single entity holds more than one registration, whether in different states or multiple registrations within a state, each registration is treated as a distinct person under Section 25 of the CGST Act. As a result, supplies of goods or services between these registrations are taxable, even when made without any consideration.

Understanding Distinct Persons under GST

In the context of India’s Goods and Services Tax (GST) framework, a “distinct person” refers to entities that, while sharing a single Permanent Account Number (PAN) and thus belonging to the same legal entity, possess different GST Identification Numbers (GSTINs). These establishments can be located within the same state, in different states or union territories, or even in separate countries.

This article explores situations where taxpayers are classified as distinct persons, outlining the specific GST provisions that apply to them. This includes their taxability, how stock transfers are managed, the treatment of services exported between such entities, and whether transactions among them constitute a supply under GST law.

What Defines a Distinct Person?

Any individual or entity holding a valid PAN and subject to GST registration is mandated to apply for GST registration in each state or union territory where they operate, within 30 days of becoming eligible. Typically, a single registration covers all units within the same state.

However, an exception exists for business verticals within the same state. These verticals can obtain separate GST registrations if their operational risks, returns, and functions differ significantly from other components of the business. Consequently, if two units of the same business obtain distinct GST registrations, they are legally recognized as distinct entities or persons under GST regulations.

Both entities are independently required to adhere to return filing and other compliance procedures. Therefore, distinct persons can include:

• An establishment situated in India and another located outside India.
• An establishment located in one state or union territory and another in a different state or union territory.

For instance, if Company A, based in Bangalore, has branches in Germany and Maharashtra, both the Maharashtra and German branches would be considered distinct persons or entities relative to Company A in Bangalore. Similarly, if Company A operates another component, Company B, which is distinct from A and has secured a separate GST registration, then A and B are recognized as distinct entities.

Do Supplies Between Distinct Persons Constitute a Taxable Supply under GST?

According to Schedule I of the GST Act, any supply made between distinct persons in the course of business is considered a taxable supply, even if no consideration is involved. This means such transactions are subject to GST.

For example, stock transfers between distinct units, even when no payment is exchanged, are treated as taxable supplies. In the previous tax regime, inter-state or intra-state stock transfers were subject to Excise Duty upon goods removal from a factory, though they were not liable for VAT/CST.

GST Taxability for Distinct Persons

As established, supplies between distinct persons are taxable. Their valuation for GST purposes is determined by Rule 2 of the Valuation Rules, which specifies the following methods:

• The open market value of the supply.
• If the open market value is not ascertainable, the value of similar goods or services of like kind and quality.
• Should the above two methods be impracticable, valuation can be based on Rule 4 (where the value equals 110% of the production cost) or Rule 5 (residual value method).
• If the recipient is eligible for full input tax credit, the value stated in the invoice is deemed to be the open market value for the transaction.

Is Export of Services Between Distinct Persons Considered a Supply?

For a service to be classified as an export, the following five conditions must be fulfilled:

1. The service provider is located in India.
2. The service receiver is located outside India.
3. The place of supply is outside India.
4. Payment for the service is received in convertible foreign exchange.
5. The service provider and receiver are not merely establishments of a distinct person.

Consequently, if an Indian unit provides services to its branch located outside India, this transaction will not qualify as an export of service because the fifth condition is not met. Since such a supply is not an export, it also does not qualify as a zero-rated supply. Therefore, this type of transaction, which might have been exempt before the implementation of GST, is now subject to taxation.

Frequently Asked Questions (FAQ)

What does distinct persons mean under GST?

It means that separate GST registrations of the same entity, such as branches in different states, are treated as different persons for GST purposes under Section 25.

Are supplies between branches taxable?

Yes. Supplies of goods or services between distinct persons of the same entity are treated as taxable supplies, even if made without consideration.

Why does GST treat branches as distinct persons?

Because GST is a destination-based tax administered state-wise, each state registration is treated separately so that the tax reaches the correct state.

How is the value of supply between distinct persons determined?

The value is generally the open market value, and where the recipient is eligible for full input tax credit, the value declared on the invoice is usually accepted.