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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.
As prescribed in section 2 (61) of the Central Goods and Services Tax Act, 2017, an Input Service Distributor has the following characteristics:
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.
The conditions to be fulfilled by an input service distributor (ISD) under GST are as follows:
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 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.
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.
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:
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.
The credit for paid taxes on input services applies to a specific recipient of credit. It shall be distributed to that recipient only.
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.
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 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.
The term “relevant period” is defined as follows:
The formula for calculating the input tax credit that needs to be distributed is as follows:
C1= (T1/T) x C
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.
The ISD needs to be distributed ITC in the following manner:
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.
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:
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.
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.
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.
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.
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.
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.
Enterslice intends to provide the following services to an input service Distributor.
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.