Finance Bill 2024 Proposes Changes to Input Service Distributor: A New Time Bomb Ticking

Introduction: The Interim Budget 2024 has introduced substantial amendments to the definition and procedures concerning the Input Service Distributor (ISD) concept under the Goods and Services Tax (GST) regime. This article delves into the proposed changes, their implications, and the potential challenges for businesses.

There has always been a dispute whether the taxpayer should compulsorily register as an input service distributor or can he take the route of cross charge. It is a general practice in the business, for some services which are received by the branches of a company the invoice will be received and paid by the head office. The head office may be registered in a separate state and the branch(s) may be registered in the same of different State or Union territory having separate GST registration. The concept of input service distributor comes into action in such situations, where the offices which receives the invoices has to distribute the credits received to the offices where the services are actually provided.

What is input service distributor?

The definition at present.

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;

It is a common practice that the companies receive invoices for the services provided which are common in nature, that means the services are provided to one or more offices of the registered person having different GST registrations. The head office receiving such invoices are not supposed to take the input tax credit, as the services are not received by the head office as condition laid out in section 16(2)(b) of the CGST Act is not met. The law mandates the head office or the office receiving the invoices to distribute such credits to the offices in proportion of the service received by such offices. Such distribution can happen only when the head office takes a registration as an input service distributor. 

The change proposed in the interim budget 2024 in the definition of input service distributor:

S 2(61) – “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;’.

The proposed change in the definition now includes even the services received where tax is paid under reverse charge. The amended definition also replaces the words office with same permanent account number with distinct person. The present definition did not give direct reference to section 20 for the purpose of distribution of the credit, the proposed definition now refers section 20 for the manner in which the credit shall be distributed.

Before going into the changes proposed in section 20, it is important for us to understand what is deemed distinct person.

Sub section 4 of Section 25 of the CGST Act deals with deemed distinct person as follows:

“A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of the Act.”

Therefore, registrations having same PAN in the same State or Union territories or in different State or Union territories will be treated as distinct persons.

Changes proposed in Section 20 of the CGST Act.

Before understanding the changes proposed in section 20, we need to know the existing provisions.

Existing subsection (1) of section 20 of CGST Act 2017 says:

S.20(1) “The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.”

The existing provisions mentions how the credit shall be distributed by way of a document in such manner as may be prescribed. By plain reading of the sub section, we may interpret that the registered person had an option not to distribute the credit if he wish so and if he wishes to distribute so, he should do in the prescribed manner.

The proposed change in the sub section (1) of section 20 of the CGST Act 2017 in interim budget 2024

S. 20(1) Any office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, shall be required to be registered as Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices.

The language of the proposed change in the sub section indicates that now there is no option for the registered person to not register as input service distributor. If the registered person has received any tax invoices including the services where reverse charge is applicable, on behalf of distinct persons, then he is compulsorily required to register as input service distributor and distribute the credit to the respective distinct person.

Sub section (2) of section 20 also is proposed to be replaced completely with a new sub section.

Existing sub section (2) of section 20 of the CGST Act 2017  

S. 20(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:-

a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed;

b) the amount of the credit distributed shall not exceed the amount of credit available for distribution;

c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient;

d) the credit of tax paid on input services attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period;

e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.

The proposed change in the sub section (2) of section 20 of the CGST Act 2017 in interim budget 2024

S. 20(2) The Input Service Distributor shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under sub-section (3) or sub-section (4) of section 9 paid by a distinct person registered in the same State as the said Input Service Distributor, in such manner, within such time and subject to such restrictions and conditions as may be prescribed.

New sub section (3) also is proposed to be inserted as follows:

S20(3) The credit of central tax shall be distributed as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit, in such manner as may be prescribed.

With the proposed amendments, we can expect rule 39 of the CGST Rules pertaining to the procedure for distribution of input tax credit by input service distributor also to be amended completely once the changes are notified in the section 20.

Please also refer circular 199/11/2023-GST dated 17.07.2023 which clarifies the difference between a cross charge & input service distributor. Though the significance of this circular once these changes are notified needs to tested.

As per the above circular, CBIC has clarified that, when the HO receives the invoices for the services received by its branch office/(s) (BO), it can be distributed to the BO’s only through the mechanism of input service distribution and nothing else.

What is cross charge then?

S.25(4) as discussed earlier says what is a distinct person and as per Schedule I serial number 2, any activity between the distinct person even if without consideration shall be treated as supply. It may happen that HO which is registered in a state provides some service to its BO which has a separate GST registration in the same State or Union territory or different State or Union territory and in such situation the HO should raise a tax invoice on such BO and the BO can avail the input tax credit on such invoices. The HO also can avail any input tax credit used by them to provide such services to the BO. Thus, cross charge is the allocation of some common functions to its different branches.

If we compare ISD with cross charge, the difference is evident. In ISD, what we are distributing is only the input tax credit which a HO or a branch would have received through tax invoice pertaining to other branches and through ISD mechanism such credits are distributed to respective branches. Whereas, cross charge has some service element ingrained in it, the HO or any branch may be actually providing some services to other branches, though without consideration, but being a distinct person by virtue of its mention in Schedule I, it will be treated as a deemed supply and such services has to be cross charged to respective branches or units.

The proposed changes in the Finance Bill 2024 with regards to input service distributor will make life more challenging for the business community, where the registered persons having multiple GST registrations should be compulsorily required to take ISD registrations and distribute such common credits. There may be many challenges and compliance will only increase and the cost. Can we request the service provider to split the invoice and give to avoid this additional compliance?

Is there any other way out? Time will tell once proper procedures are laid out.