Summary: “Rule 54(1A) of the CGST Act permits a normal GSTIN to issue invoices to an Input Service Distributor (ISD) within the same State or Union Territory under the same PAN to transfer eligible common input service credits. This mechanism facilitates the distribution of common ITC, including credits from both Reverse Charge Mechanism (RCM) and Forward Charge Mechanism (FCM) invoices, as the rule doesn’t specify any restrictions. Crucially, this intra-state transfer is not considered a “supply” under Section 7 of the CGST Act. It lacks consideration, does not involve the transfer of goods or services, and isn’t for business benefit, serving merely as a statutory ITC distribution method. Consequently, transactions under Rule 54(1A) should not be included in “total turnover” for ITC reversal calculations (Rule 42/43) or refund computations, nor in “aggregate turnover” for e-invoicing or GSTR-9/9C applicability. While simplifying ITC transfer, it’s vital to remember its non-supply nature to avoid incorrect reporting and compliance issues, though future clarifications from authorities are always a possibility.
Rule 54(1A) of CGST – A Small Clause with Big Impact on Turnover, ITC Reversal, Refunds & More
With ISD now mandatory, these details matter more than ever. Do read till end.
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Rule 54(1A) allows a registered person (Normal GSTIN) to issue an invoice to an Input Service Distributor (ISD), provided both registrations are in the same State or Union Territory and belong to the same PAN. This invoice serves the purpose of transferring eligible common input service credits to the ISD unit.
But the moment you dive deeper, this seemingly simple rule starts raising complex and practical questions. Let’s understand each of them.
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Which common ITC Can Be Transferred – RCM Only or FCM Also?
The rule does not specify whether only ITC related to RCM invoices can be transferred, or whether it also includes FCM invoices.
On plain reading of the rule, no such restriction is provided.
Therefore, in the absence of any clarification, it is reasonable to interpret that both RCM and FCM related common ITC can be transferred through this mechanism.
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Now, the Crucial Part – Is This Considered a ‘Supply’?
Let’s dive deeper into the concept of “Supply” under Section 7 of the CGST Act.
When the normal GSTIN raises an invoice to the ISD GSTIN under Rule 54(1A), it is not a commercial or taxable supply of goods or services.
The transaction is merely a statutory mechanism to enable distribution of common ITC to ISD.
For instance, ISD cannot pay tax under RCM, hence cannot capture common credit arising from such inward supplies unless this route is used.
Therefore, this transaction:
>>Has no consideration,
>>Does not involve transfer of goods/services,
>>And is not intended for business benefit.
As a result, such an invoicing does not qualify as “supply” under Section 7 of the CGST Act.
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Now to the practical implications:
1. Will it be included in Total Turnover for ITC Reversal (Rule 42/43) or For Refund computation?
No.
Since this is not a supply, it should not form part of “total turnover”.
Accordingly Refund amount will be reduced and ITC Reversal will increase.
2. Will it be included in Aggregate Turnover for E-invoicing or GSTR-9 / GSTR-9C applicability?
No.
Aggregate turnover under GST includes taxable supplies, exempt supplies, exports, and inter-State supplies of persons having the same PAN.
But again, as this is not a supply, it does not fall under any of these categories, and hence, should not be included in aggregate turnover for threshold-based compliances.
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Rule 54(1A) offers a compliance-friendly mechanism for intra-state transfer of common ITC to ISD through invoicing.
However, this transaction:
>>Is not a supply in legal or commercial sense,
>>Should not be included in total or aggregate turnover,
>>And has no bearing on ITC reversal or threshold calculations for GSTR-9, 9C, or e-invoicing or Refund computation etc.
But, as always with GST, one should stay alert for future circulars or clarifications in this regard.
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Disclaimer: This article is not meant for an opinion or advisory purpose. The views expressed are personal and purely for informational purposes.
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