ITC Rules for Input Service Distributor under GST

Ashish M. Shaji

12 Nov, 2020

We have discussed in our previous article about Input Service Distributor. It means an office of the supplier which receives tax invoices relating to the receipt of input services and then issues a prescribed document for the purposes of distribution of such credit of central tax, State tax, integrated tax or Union territory tax paid on the said goods or services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

Here, we will discuss the ITC Rules regarding the distribution of ITC by such Input Service Distributor.

ITC Rules: Documents Required for Claiming ITC

As per ITC Rules^[1], the Input tax credit can be claimed by any input service distributor on the basis of any of the following documents:

• An invoice issued by the input goods and services or both by their supplier as per the provisions of Section 31.
• A debit note issued by the supplier specifying any increase in the contract price.
• Copy of invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31.
• Any bill of entry.
• Any ISD Invoice or an ISD credit note issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule invoice 7.
• Any document issued by an Input Service Distributor, as prescribed in clause (g) of sub-rule (1) of rule 4.

ITC Rules: Procedure of Distribution

 Rule 4 of ITC Rules issued by the Government, specify these conditions and procedures that are to be followed by an Input Service Distributor while distributing input tax credit:

• An input tax credit that is available for distribution in any month should be distributed in the same month. And a return relating to the same should be furnished in Form GSTR-6 on the 13^th of the next month.
• Input Service Distributor should distribute the eligible and ineligible ITC separately. Items on which ITC is not available are specified in sub-section (5) of section 17.
• Input Tax Credit on account of CGST, SGST, Union Territory tax and IGST shall be distributed separately in accordance with the provisions of clause
• In the case of input tax paid in relation to input attributable to more than one or all of the recipients, input tax credit to be distributed to such recipients is calculated based on the following formula.

                             C1 = C × ( T1/ T )
                             Here,
                             C1 =ITC share of specific recipient
                             C= Total ITC to be distributed
                             T1=Turnover of specific recipient
                             T= Total turnover of all recipients

•  ITC of IGST paid is to be distributed as the Input Credit of IGST to every recipient.
• In the case of Input credit relating to CGST and SGST, the following rules are to be followed:

1. If the recipient of input goods or services and ISD are located in the same state then it is to be distributed as ITC of CGST and SGST respectively.
2. If the recipient of input goods or services and ISD are not located in the same state then the ITC is to distributed as IGST. And such amount distributed should be equal to the aggregate of input credit of central as well as the state tax.

• Input Service Distributor shall issue an ISD invoice as per the provisions specified in sub-rule (1) of Invoice Rule 7, which should clearly state that it is for the purpose of distribution of ITC. Following details are to be mentioned in the invoice:

1. GSTIN, name, and address of Input service distributor.
2. GSTIN, name, and address of the recipient of credit.
3. Date of issue.
4. Serial no.
5. The amount of credit distributed.
6. Signature of ISD, or DSC of a person authorized to do so.

• Input Service Distributor shall issue an ISD credit note as per the provisions specified in sub-rule (1) of Invoice Rule 7, which should clearly state that any reduction in ITC due to any reason like the reduction of the contract price.
• In case any credit note is issued by the supplier reducing the Input credit, ISD shall apportion such amount to each recipient in the same ratio in which input tax credit contained in the original invoice was distributed. Such amount is to be reduced from the amount to be distributed in the month when information of such credit note is included in Form GSTR- 6.
• Any additional amount of ITC which is a result of the issue of any debit note by the supplier is to be distributed by the input service distributor as per the above-stated rules. This amount of ITC is to be distributed in that month when the details of debit notes are disclosed in the return filed in FORM GSTR-6.

Recovery of excess credit distributed by Input service Distributor to recipients

The provision of demand and recovery gets attracted as if the tax wasn’t paid, at a time when excess credit is distributed to any recipient.

Recovery of excess credit distributed with interest will be initiated against recipient and not the Input Service Distributor.

Conclusion

The concept of ISD under GST is a legacy going on from the service tax regime. The CGST Rules of 2017 provides the procedural conditions to be complied by ISD, the manner and quantum of ITC to be distributed by ISD to eligible recipients, return to be filed and how to deal with ITC on credit notes and debit notes issued to the ISD. For more information on ITC rules or related laws, contact Enterslice.

Read our article: Govt. Allows Taxpayers to File GSTR-3B Returns in a Staggered Manner