When it comes to Goods and Services Tax (GST) in India, the concepts of “distinct persons” and “related persons” play a crucial role. These terms have specific definitions and implications under GST law, which affect registration and tax liabilities.
Before starting it, I will tell you the distinct persons and related persons are not specifically defined but with few conditions, the definitions have been derived to make it more simple. Let’s break down these concepts in a simple and friendly manner to help you understand the differences.
Where Distinct Persons mentioned
Section 25 of the CGST Act 2017, has specified the distinct persons.
25. Procedure for registration.—(4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.
(5) Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.
Where Related Persons mentioned
The term – “related person” appears in the explanation of Section 15 of the CGST Act 2017 states that –
Explanation.—For the purposes of this Act,––
(a) persons shall be deemed to be ―related persons‖ if––
(i) such persons are officers or directors of one another‘s businesses;
(ii) such persons are legally recognised partners in business;
(iii) such persons are employer and employee;
(iv) any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;
(v) one of them directly or indirectly controls the other;
(vi) both of them are directly or indirectly controlled by a third person;
(vii) together they directly or indirectly control a third person; or
(viii) they are members of the same family;
(b) the term ―person‖ also includes legal persons;
(c) persons who are associated in the business of one another in that one is the sole agent or sole distributor or sole concessionaire, however described, of the other, shall be deemed to be related.
Distinct Persons in GST
Definition:
- A person who has obtained or is required to obtain more than one GST registration, whether in one State/Union territory or across multiple States/Union territories, is treated as a distinct person for each registration.
- Establishments in different States/Union territories of the same entity are considered distinct persons.
Key Points:
- Each GST registration is treated separately. Each distinct person will have its own GST Identification Number (GSTIN).
- Supplies between different registrations of the same entity are considered as supplies between distinct persons and are taxable.
- Helps in tracking and managing tax liabilities accurately across different locations.
- Transactions between distinct persons are treated as supplies and are subject to GST, even if there is no actual exchange of goods or services. For instance, a branch in Maharashtra supplying goods to a branch in Gujarat must charge GST.
- Distinct persons can claim ITC on the supply of goods and services received from other distinct persons, subject to the conditions laid down in the GST law.
- The Parent company can register themselves for input service distributor and can distribute input tax credit to their branch entities.
Example: If ABC Ltd. has GST registrations in both Maharashtra and Karnataka, these two establishments are considered distinct persons. Any supply of goods/services between them will be treated as taxable under GST.
Related Persons in GST
Definition: Persons are deemed to be related if they meet any of the following criteria:
- Officers or directors of one another’s businesses.
- Legally recognized partners in business.
- Employer and employee.
- One person owns, controls, or holds 25% or more of the voting stock or shares of both entities.
- One person directly or indirectly controls the other.
- Both entities are controlled by a third person.
- Together they control a third person.
- Members of the same family.
- Associated in business such as sole agent, sole distributor, or sole concessionaire.
Key Points:
- Related persons often have significant influence over each other. Immediate family members are considered related persons. Transactions between family members could attract GST under certain circumstances.
- Entities where one entity controls or significantly influences the business decisions of another entity are considered related persons. This includes holding substantial interest or control in the management or capital.
- Specific relationships defined under GST as related persons include employer-employee, partners in a business, and entities under common control or management.
- Transactions between related persons must be valued at open market value to prevent tax evasion through undervaluation.
Example: If Mr. X owns 30% shares (that is more than 25% shares) in both Company A and Company B, then Company A and Company B are related persons under GST law. Any transactions between these companies must comply with GST provisions applicable to related persons.
Comparison Table
| Aspect | Distinct Persons | Related Persons |
| Basis of Definition | Multiple GST registrations of the same entity | Control, ownership, partnership, family relations, etc. |
| Tax Treatment | Treated as separate entities for tax purposes | Transactions are scrutinized for fair value and tax compliance |
| Examples | Different branches of a company in different states | Companies with common ownership or control |
| Legal Implications | Taxable supplies between different registrations | Need to ensure arm’s length pricing |
FAQs
Q1: Why are different GST registrations treated as distinct persons?
- This helps in managing and tracking tax liabilities specific to each state or union territory where the business operates.
Q2: Can a single person have multiple GST registrations?
- Yes, a single person can have multiple GST registrations for different states or business verticals.
Q3: How does GST law ensure fair transactions between related persons?
- GST law requires that transactions between related persons be conducted at arm’s length prices to prevent tax evasion and ensure fair taxation.
Q4: What happens if an employer supplies goods to an employee?
- Since an employer and employee are related persons, such supplies need to be valued at open market value for GST purposes.
Conclusion
Understanding the difference between distinct persons and related persons under GST is essential for compliance and efficient tax management.
Distinct persons pertain to multiple registrations of the same entity across different locations, while related persons involve various forms of control, ownership, and business relationships. Properly identifying and treating transactions between these entities ensures adherence to GST laws and prevents legal complications.
Read this: Understanding GST on Place of Supply with Examples and FAQs
