GST enables a seamless flow of Input Tax Credit (ITC) on all goods and services procured for providing outward supply (apart from the ineligible supply) There are numerous services that are procured centrally but used across geographical locations. The tax credits on such services can be accounted for centrally and distributed across such locations by obtaining registration as an input service distributor (ISD). The concept of ISD under GST is a legacy carried from the Service Tax Regime.
In this article, we shall cover the following topics:-
What is ISD
As per Section 2(61) of CGST Act, Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.
This can be better understood with the below example: – An entity has procured services of GST consultant in Mumbai for its registrations across India and having its head office in Delhi. Such a company can obtain ISD registration in Mumbai and distribute the credit on services of the GST consultant in Mumbai to all its locations by issuing an ISD invoice. The restriction in distribution is towards the vertical / location/office with the same PAN.
Documentations Related to ISD
As per Section 20 of the CGST Act read with Rule 39 and Rule 54 of CGST Rules 2017 and as amended vide Notification No 3/2018 dated 23 Jan 2018, an input service distributor is required to issue an ISD invoice or debit or credit note to transfer the credit to the recipient. Such ISD invoice or debit or credit note shall contain the below details:-
- Name, address and GSTIN of ISD;
- Consecutive serial number;
- Date of issue;
- GSTIN of supplier of common service and original invoice number whose credit is sought to be transferred to ISD;
- Taxable Value, Rate and Amount of the credit to be transferred;
- Authorized Signature / digital signature.
The taxpayer needs to obtain a separate registration as an “input service distributor”. The process of registration is the same as required to be followed for a normal registration that is GST REG -01. There is no threshold limit for registration.
The business can take multiple registrations as an ISD within the same state or across states if ITC related to more than 1 GSTIN is received at a single place and credit needs to be distributed.
Benefits of ISD in GST
ISD ensures no accumulation of ITC at a single depository due to centralized billing for services consumed across locations/business verticals. Common services to multiple locations are managed through the ISD route and ensure seamless flow of ITC.
Out of Scope from ISD Mechanism
ISD allows the distribution of credit pertaining to common services only. The credit of inputs and capital goods cannot be transferred through the ISD mechanism. It additionally restricts the distribution of ITC only to the supplier with the same PAN.
Manner of Distribution of ITC
The manner of computation of the amount to be distributed is provided in Rule 39 of CGST Rules, 2017. The amount to be distributed to one of the recipient (irrespective of such recipient being unregistered / registered or making exempt supply or otherwise) shall be computed as under: –
C1 = (t1 /T) X C
C1 is the amount to be distributed to one recipient;
T1 is the turnover of the recipient unit during the relevant period;
T is the aggregate turnover of all recipients in the relevant period; and
C is the total amount to be distributed to all the recipients.
- In case the services are consumed only by a particular unit or particular set of units, the respective tax credit can be apportioned only to that unit or amongst those units as the case may be.
- The amount of credit that cannot be apportioned by establishing one to one link shall form part of common credit to be apportioned as per the above formula.
- The turnovers considered above shall be only of units that are operational during the year.
- The amount distributed should not exceed the amount of credit available for distribution.
- As per Section 2(6) of CGST Act, “aggregate turnover” means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis), exempt supplies, exports of goods or services or both and inter-State supplies of persons having the same Permanent Account Number, to be computed on all India basis but excludes central tax, State tax, Union territory tax, integrated tax, and cess.
- The Input Service Distributor has to separately distribute the amount of ineligible input tax credit, under the provisions of section 17(5) or otherwise and the amount of eligible input tax credit.
- Any amount distributed without complying the above provisions shall be considered as inappropriate distribution of credit and shall be recovered from such recipient(s) along with interest and the provisions of ‘Demand and Recovery’ shall apply for effecting such recovery.
|ITC on Account of||Distributed As|
Differentiation between ISD under GST and under Service Tax
The coverage of the applicability of GST is far more than that of service tax and hence the scope of ISD in GST has expanded as compared to the Service Tax regime which restricted only manufacturer or provider of output service.
Service Tax being only one tax was distributed as a service tax only. However, in the GST regime, there are IGST, CGST, SGST / UTGST which are required to be distributed. The manner of distribution hence varies significantly from the service tax regime which is explained in point 6 of this article.
Restriction in the GST regime on distribution is that it can be distributed only to the recipient with the same PAN number on the basis of ISD invoice whereas the Service Tax regime allowed distribution to all the units and outsourced manufacturers as well on the basis of invoice/bill/challan.
Compliances Related to ISD
- The taxpayer who has obtained the registration as an Input Service Distributor is required to file GSTR 6 on monthly basis containing details of ITC received by the ISD unit and amount actually distributed.
- The due date of filing GSTR 6 is the 13th of the following month.
- The supplies received by the ISD unit will be available for viewing purposes in GSTR 6A.
- The amount shown as distributed in GSTR 6, will be available for viewing purposes in GSTR 2A of the recipient to whom the credit is distributed.
- ISD is not required to file an Annual return.
- The ISD itself cannot discharge any tax liability (as a person liable to pay tax) and remit the tax to the government account.
Advance Ruling in Relation to ISD
Authority for Advance Ruling Maharashtra in the case of M/s. Cummins India Limited. Order No – GST-ARA-66/2018-19/B-162
Facts of the case: – The Company has obtained registrations for each unit as per the provisions of law. These units and Head office receive certain common input supplies on behalf of multiple/all of its units registered distinctly under GST. These common input supplies are procured on payment of GST and credit thereof is availed by receiving unit/head office. Ambiguity in terms of whether such facilitation of common input services requires registration as an ISD is resolved through this AAR.
Ruling Pronounced: – The facility for the distribution of Input Tax Credit is available to the applicant under the provisions of Section 20 of the CGST Act, 2017 by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed. The applicant may opt for this facility and get themselves registered under the ISD category. It was held that the company is mandatorily required to obtain ISD registration to distribute input tax credit.