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An Overall Concept of Input Service Distributor (ISD) under GST

Deepti Shikha

| Updated: Apr 21, 2020 | Category: GST

Input Service Distributor

The theory of Input Service Distributor (ISD) is in existence since the Service Tax Regime. According to the CENVAT credit rules 2004, Input Service Distributor means the manufacturer’s office or of the producer or provider of output service, which receives the invoices issued towards the purchase of the input services. The idea of input service distributor under GST has its base on the service tax regime. Therefore, it is proposed to take a look at how a manufacturing unit’s head office and its branch units function to understand the idea of Input Service Distributor. Typically, the head office of an organisation obtains services that are general for all the company’s units located across the country. As a result, the supplier of the services issues an invoice in the name of the head office of the company. The invoice is issued in the name of the company’s headquarters because the headquarters raise the purchase orders.

What is an Input Service Distributor (ISD) under GST?

As prescribed in section 2 (61) of the Central Goods and Services Tax Act, 2017, an Input Service Distributor has the following characteristics:

  • The office of the goods and/ or services is Input Service Distributor.
  • The office receives tax invoices as per section 31 of the CGST Act, towards the receipt of input services used by its branches.
  • It generates a prescribed document to distribute tax credit on such services. This credit is against central tax or state tax or integrated tax or Union territory tax paid on the said services.
  • This document is issued in its branches, which can supply the taxable goods and/or services. There can be different GSTIN no for these branches, but the branches must have the same PAN Number as the head office or Input Service Distributor (ISD).
  • Therefore, an office of the supplier that has an intention to act as an Input Service Distributor (ISD) must obtain a separate ISD. This statement clarifies that the registration number of the organisation as an input service distributor is different from the registration number, which is obtained by it as per section 22 of the CGST Act, 2017.

The CGST Rules, 2017 also prescribes the procedural situations to be observed by the input service distributor (ISD) under GST. The manner and even the quantum of input tax credit (ITC) to be distributed by Input Service Distributor to the eligible beneficiaries, the invoice that must be issued. Return that must be filed by the input service distributor and how to deal with the input tax credit on the credit and debit notes issued to the office.

What are the conditions to be complied by an Input Service Distributor (ISD) under GST?

The conditions to be fulfilled by an input service distributor (ISD) under GST are as follows:

  • The tax paid on the services used during the course of business by the business of a registered person can only be distributed by input service distributor to them.
  • Input Tax Credit available in a particular month must be distributed in the same month. So, delaying of the credit distribution is not permitted. It must also be ensured by the input service distributor not to distribute credit in excess of what is available with him.
  • An input service distributor cannot accept any invoices on which the tax is to be paid on reverse charge mechanism (RCM) basis. The recipient of service taxable under the reverse charge mechanism must discharge the tax liability, and then it can take credit for the same.
  • Hence, if it wants to take reverse charge supplies, it should ensure that it gets itself registered as a normal taxpayer, but it cannot distribute the tax credit available thereof.
  • The credit of CGST or SGST, UT/ GST, or IGST must be separately distributed. Also, eligible and ineligible credit needs to be distributed separately.
  • The credit that is applicable to any particular recipient unit is distributed to it even if the unit is unregistered or makes exempted supplies.
  • It is mandatory to make separate registration as an input service distributor even though it has received the registration in REG-01 as a normal taxpayer by registering itself under Serial number 14 of the form that it is registering as ISD.
  • There is a probability that the different offices of a company can have separate registrations as input service distributor. It can also be said that an entity or a company can have multiple ISD registrations.
  • The input service distributor is supposed to issue an invoice known as ISD invoice only to those units to whom it wants to distribute the credit of tax paid on services. There should be a clear indication as to the primary purpose of issuing the invoice input tax credit.
  • The office needs to issue an ISD credit note if the credit that is already distributed gets reduced for any reason.

The significant points to be included in the Invoices by Input Service Distributor (ISD) under GST for the purpose of ISD invoice and ISD credit note are as follows: 

  • The name, address and GSTIN of the ISD and the recipient unit
  • A successive serial number which is either alphabets or numbers or special characters or combination thereof.
  • Date of issue of the invoice.
  • Amount of the credit distributed.
  • Signature of the ISD or his authorised representative.
Note: There is an exception as to who does not need to number the document serially.
  • In case the ISD is a banking company or a financial institution, including NBFC, then it is not required to number the document serially.

The Input Service Distributor needs to file GSTR-06 by the 13th of the month, succeeding in the relevant month, indicating that the credit distributed for the month pertinent to the recipient units and the ISD invoices issued in the relevant month.

Distribution of Input Tax Credit (ITC) by the Input Service Distributor (ISD) under GST

Form GSTR-6

An ISD distributes input tax credit or ITC in the same month in which it is made available to the central office. Hence, the details of ITC distribution are filed in form GSTR – 6.

Invoice Details

The office, as an input service distributor, needs to issue an invoice to distribute the tax credit. Such a tax invoice must include the following details:

Invoice Details

Eligible and Non-Eligible Input Tax Credit

The eligible and non-eligible credit must be distributed separately. For this, it is important to identify eligible and non-eligible credit. This can be achieved by checking section 17(5) of the CGST Act, 2017, for the credit that is not allowed.

ITC is to be Given Only to Specific Recipient

The credit for paid taxes on input services applies to a specific recipient of credit. It shall be distributed to that recipient only.

Distribution of ITC in case of more than one Recipient

In this type of cases, credit must be distributed on a pro-rata basis.ITC on input services is available to the entire recipient who has utilised the common services.

Pro-Rata Calculation

ITC needs to be distributed among the recipients on a pro-rata basis in case ITC is available to more than one recipient. The basic of pro-rata calculation is based on a ratio. This ratio is the ratio between the following components:

  • The total turnover of the recipient in a particular State/ Union Territory to
  •  The aggregate of the turnover of all the recipients to whom such input service is applicable. This ITC is distributed only if the branch units are operational during the relevant period.

Calculation of Turnover

The term turnover includes the sale of goods that are not taxable as per the CGST Act, 2017, in order to calculate turnover. However, the goods covered under entry 84 of List I and also Entry 51 and 54 shall be excluded.

What is the Meaning of Relevant Period?

The term “relevant period” is defined as follows:

  • Firstly, the recipients of credit have their aggregate turnover in their States or Union territories (UTs). These credits belong to the financial year preceding the year during which credit is to be distributed. Here, the preceding financial year is considered as the relevant period.
  • Secondly, if a few or all the recipients of credit do not have any turnover in their States or UTs. This credit is calculated in the financial year preceding the year during which the credit is to be distributed. Here, the relevant period is the last quarter previous to the month during which credit must be distributed. Provided the details of the turnover of the recipients are available.

The formula for Calculation of Input Tax Credit

The formula for calculating the input tax credit that needs to be distributed is as follows:

C1= (T1/T) x C

Where,
C is the  amount of total credit that is to be distributed
T1 is the Turnover of recipient R1 during the relevant period
T  is the Sum of the turnover of all recipients to whom the input service is available during the relevant period
C1 is the  ITC that is required to be distributed to recipient R1. The recipient here can be registered as well as non-registered.

The above-shown formula applies to all the taxes under GST. That is Central Tax, State-Tax, UT Tax, and Integrated Tax.

Distribution of ITC

The ISD needs to be distributed ITC in the following manner:

  • The first case is related to the one where the ISD and the recipient unit are located in the same State. In such a case,
    • The central tax credit is distributed as a central tax (CGST).
    • The credit of the tax of state is distributed as State tax or SGST.
    • The credit of Union Territory Tax is distributed as UT Tax or UTGST.
    • The credit of Integrated Tax is distributed as Integrated Tax or IGST.
  • The second case is one where ISD and recipient are located in different States. In this type of case, the credit of Central Tax, State-Tax, Union Territory Tax, and also the Integrated Tax is distributed.

Credit and Debit Notes Issued by the Input Service Distributor (ISD) under GST

There are situations when the supplier of goods or services issues a debit note or a credit note after making a supply and issuing a tax invoice.

Credit Notes Issued By Input Service Distributor (ISD) under GST

A credit note is a general document issued by the supplier of goods or services, after making a supply and by issuing a tax invoice, to a recipient. It is issued when:

  • The taxable value or the amount of tax levied in the tax invoice is more than the taxable amount or the tax payable in respect of the supply.
  • The recipient returns the goods supplied to them.
  • In case the services or goods supplied are found to be deficient.

Debit Notes Issued By Input Service Distributor (ISD) under GST

A debit note as a document is issued by the supplier of goods or services, after making a supply and issuing of a tax invoice. This is issued when the taxable amount or the amount of tax levied in the tax invoice issued is less than the taxable value or tax payable with respect to such supply of goods.

Treatment of Input Tax Credit (ITC) In Case of Credit Notes

The ITC distributes to the unit branches against the original invoice and gets it reduced whenever the supplier issues a credit note to a service distributor. It is issued because of the goods that are returned by the recipient or on account of the excess taxable value on the supply made. Further, the ITC amounts get reduced as per the original invoice to the branch units. It is reduced in the ratio in which the ITC was distributed to them originally.

Hence, an ISD issues an “ISD credit note” to the branch units to reduce ITC proportionately. In the same month, this document is issued in which the credit note approved to ISD is included in GSTR-6 return. Hence, this amount is added to the output tax liability of the recipient. When the ITC apportioned is less than the adjusted amount, this is done.

However, in some cases, the amount distributed is added to the recipient’s output tax liability. This is done in cases where the allotted amount is negative.

Now, the same process will be followed where the ITC amount is distributed by an ISD, which is reduced later on for any of its recipients.

Distribution of ITC to a Wrong Recipient

Further, there are cases when the credit is distributed to a wrong entity. This can be corrected by issuing an ISD credit note to the recipient to whom ITC was distributed wrongly. Also, the ISD invoice for that amount is issued to the recipient, who is genuinely entitled to such credit. Thus, both the documents must be shown in GSTR-6 of the ISD in the similar month.

Treatment of Input Tax Credit (ITC) In Case of Debit Notes

In some cases, the supplier issues a debit note to an ISD. The ISD here shall distribute the ITC arising on account of the supplier issuing debit note to ISD. The distribution of this ITC among the recipients in the month of issuing the debit note approved to ISD-office is included in the return in FORM GSTR-6. Here, it is not needed to distribute the credit to other entities in the same portion to which credit about the original invoice was distributed.

Excess Distribution of Input Tax Credit or ITC to One or More Recipients

Section 21 of Act provides deals with a case where ISD distributes credit in breach of the provisions mentioned in section 20. In this act excess distribution of credit to one or more recipients of the credit is shown.

The excess credit distributed shall be recovered from the recipients along with interest.

Filing of Return by Input Service Distributor (ISD) under GST

The ISD shall electronically file the return in Form GSTR-6 as prescribed in Rule 65 of the CGST Rules 2017. This form is filled based on details contained in Form GSTR-6A. On the other hand, specific information contained in Form GSTR-6A is added, modified, or deleted to fill Form GSTR-6.

Hence, GSTR-6 consists of all the details of tax invoices in which the credit has been received and issued under section 20. Additionally, the elements of invoices filed by an ISD in FORM GSTR-6 shall be made available to the credit recipient. These details are made possible to the recipient in Part B of FORM GSTR 2A electronically. Thus, the recipient might include these details in FORM GSTR-2.

How will Enterslice Help You?

Enterslice intends to provide the following services to an input service Distributor.

enterslice help in gst

Takeaway

Hence the concept of input service distributor (ISD) under GST is a facility which is made available to businesses having a large share of ordinary expenditure and billing or payment is done from a centralized location. This mechanism is meant to make things more relaxed regarding the credit taking process for entities, and the facility is intended to toughen the seamless flow of credit under GST.

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Deepti Shikha

Deepti is a Law graduate with an avid interest in reading and very proficient in summarizing legal cases. She has enough experience in handling legal affairs of the company. In the initial days of her career, she has worked as a legal researcher and has 3+ years of experience.

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