Input Service Distributor (ISD) under GST (All you need to know about)

Input Service Distributor: A company may have a number of units and the GST paid by it on input services received can be distributed to the beneficiary units on the basis of their previous year turnover. The office of the company which distributes the credit is called input service distributor.

Section 2(61): “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

Let’s understand with an example.

Head office of ABC limited is located at Bangalore having branches at Chennai, Mumbai and Kolkata. The head office incurred annual software maintenance expense(service received) on behalf of all its branches and received the invoice for the same. Since software is used by all its branches, the input tax credit of entire services cannot be claimed at Bangalore. The same has to be distributed to all the three locations. Here, the Head office at Bangalore is the Input Service Distributor.

Manner of distribution of credit by Input Service Distributor [Section 21]

Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

Input Tax Credit (ITC) is credited to a person’s electronic credit ledger. The person may use this to pay his output tax liability.

In terms of Sec. 49(5) , the manner of utilization of ITC is as under:

The CGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence The SGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence The IGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence
    • First, ITC standing under CGST
  • Then, ITC standing under IGST
  • First, ITC standing under SGST
  • Then, ITC standing under IGST
  • First, ITC standing under IGST
  • Then, ITC standing under CGST
  • Then, ITC standing under SGST

Therefore, it is clear that there is no offset available between the CGST and the SGST.

2. Situations where ISD is not applicable

ISD cannot distribute the input tax credit :

  • paid on Inputs e.g Raw materials and capital goods e.g Machine purchased
  • to outsourced manufacturers or service providers.

3. Purpose of registering as ISD

The concept of ISD is a facility made available to business having a large share of common expenditure and billing/payment is done from a centralized location. The mechanism is meant to simplify the credit taking process for entities and the facility is meant to strengthen the seamless flow of credit under GST.

4. Insight on ISD under Earlier regime and GST regime

Point of Difference Earlier Regime GST Regime
1.  Who can be Input service distributor? An office of the manufacturer or producer of final products or provider of output service An office of the supplier of goods and/or services
2.  Document based on which credit can be distributed Receives invoices issued under rule 4A of Service Tax Rules, 1994 towards purchase of input services Receives tax invoices issued by supplier towards receipt of input services
3. How to distribute credit? By issuing invoice, bill or challan for the purposes of distributing to such manufacturer or producer or provider. By issuing an ISD invoice for the purposes of distributing to a supplier of taxable goods and/or services having the same PAN as that of the office referred to above
4. Type of tax credit that can be distributed The credit of service tax paid on the said services The credit of CGST (SGST in State Acts) and/or IGST paid on the said services
5. To whom can it be distributed? To its units and outsourced manufacturers To supplier having the same PAN. i.e credit cannot be distributed to outsourced manufacturers or service providers.

Thus, on looking into the highlighted differences between the two regimes, distribution of credit is restricted to office having the same PAN. The reason could be due to the shift of taxable event from manufacture to supply. The tax liability would arise at the time of supply which would be ultimately paid by ISD on the utilization of available input tax credit.

5. Conditions to be fulfilled by ISD

  • Registration: Input Service Distributor has to compulsorily register as “ISD” apart from its registration as a normal taxpayer under the Act, wherein he has to specify under serial number 14 of the REG-01 form as an ISD. Only then he shall be able to distribute the credit to the recipients.
  • Invoicing: ISD can distribute the amount of tax credit to recipients as earlier stated by issuing an ISD invoice
  • Returns: Amount of tax credit distributed should not exceed the amount of tax credit available with the ISD as at the end of a relevant month to be filed in     GSTR-6 by 13th* of the succeeding month by ISD.

The recipient of the tax credit can view the tax credit so distributed by ISD in GSTR-2A  that is auto-populated and in turn, can claim the same by filing GSTR-2.

An ISD need not file annual returns as ISD.

  • Distribution of Input Tax credit: The credit of tax paid under reverse charge mechanism is not available for distribution to the recipients. So, the ISD has to utilize such credit only as a normal taxpayer.

The credit of CGST, IGST and SGST shall be distributed, in the prescribed manner as per below chart :

1) The tax credit available against any specific input services used entirely by one of the recipients can be allocated only to that recipient for utilization of such credit and not to other recipients.

2)The tax credit available against the input services used commonly by more than one recipients of the ISD shall be allocated to those recipients on a proportionate basis in the ratio of the turnover of all such recipients that are operational during the year

3)The tax credit available against the input services used commonly by all the recipients of the ISD shall be allocated to all the recipients on a proportionate basis in the ratio of the turnover of all the recipients that are operational during the year.

Manner of recovery of credit distributed in excess

Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

Claim of input tax credit and provisional acceptance thereof (Section 41 of the CGST Act, 2017)

Section 41(1) of the CGST Act, 2017Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger..

Section 41(2)of the CGST Act, 2017 The credit referred to in sub-section (1) shall be utilised only for payment of self assessed output tax as per the return referred to in the said sub-section.

Declaration of outward supplies:

As per section 37 of the CGST Act, 2017 every registered person shall electronically furnish Form GSTR-1 details of outward supply of goods or services effected during the tax period on or before 10th of the month succeeding the tax period.

For example, details of outward supply made during January 2018 is required to declare by 10th of February 2018 in Form GSTR-1. It also ensures that the information declared by the registered person tallies with the financial ledger.

Confirming inward supplies:

The information furnished by person making outward supply in various tables of GSTR-1 will be auto populated into GSTR-2A.

As per section 38 of the CGST Act, 2017 every registered person (other than ISD, non-resident taxable person and composition levy assesse) shall verify and validate, modify or delete the details relating to inward supply and credit or debit notes communicated to him.

The registered person who receives the information in Form GSTR-2A shall accept, reject or keep it pending. Accordingly, he should prepare GSTR-2 for the purpose of completing the inward supply and file by 15th of the following month.