INTRODUCTION
Finance Bill 2024 has introduced a significant and welcome change in the GST Law w.r.t. Input Service Distributor (‘ISD’) Mechanism. This is in line with the recommendations made by the GST Council in its recent meetings. This Article delves into detailed analysis of the need of the amendment and effects of the amendments proposed by Finance Bill 2024 in the definition of ISD and ITC distribution mechanism by ISD.
NEED OF THE AMENDMENT
The GST Law was not much clear as to whether ISD mechanism is compulsory for distribution of ITC on account of invoices received from third parties, such as Auditors, ERP Services, etc. which generally pertain to whole of the company hence give rise to common ITC which obviously cannot be availed only by the Head Office (HO) rather is to be distributed to all the concerned GSTINs of the branches of the entity.
Notably, ISD is a separate registration apart from normal registration obtained by the company generally in the name of HO.
Since there was doubt as to whether ISD mechanism is optional or mandatory, certain entities were passing the ITC to the branches through Cross Charge route instead of ISD mechanism.
Accordingly, the GST Council in its 50th meeting held on 11-7-23, recommended to clarify through a circular that ISD mechanism is not mandatory for distribution of input tax credit of common input services procured from third parties to the distinct persons. The Council had also recommended that amendment may be made in GST law to make ISD mechanism mandatory prospectively for distribution of input tax credit of such common input services procured from third parties.
Later, it was clarified vide Circular No. 199/11/2023-GST dated 17-7-23 that ISD mechanism is optional.
Thereafter, the GST Council in its 52nd Meeting held on 7-10-23, recommended a law amendment with respect to ISD in Section 2(61) and section 20 of the CGST Act as well an amendment in Rule 39 of CGST Rules, 2017 in respect of the same.
AMENDMENTS PROPOSED BY FINANCE BILL 2024
1. Amendment to definition of ISD contained in section 2(61) of the CGST Act, 2017-
The new definition reads as under- “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“
2. Amendment to Manner of distribution of credit by ISD as laid down in section 20 ibid –
The newly substituted section 20 is reproduced below-
“(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.
(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.
(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.”.
EFFECT OF THE AMENDMENT
Following important changes emerge from reading of the amended provisions:
(a) Vide this new definition, ISD mechanism will be made mandatory as the definition states “liable” to distribute ITC. Although this change will apply prospectively, i.e. ISD mechanism will be mandatory w.e.f. the date which the Central Government appoints by notification in the Official Gazette.
(b) Even ITC on RCM invoices, on which tax is firstly to be paid by the distinct person registered in the same state as that of ISD, is also to be distributed by ISD. Currently, in absence of specific guidance, the distinct person registered in the same state (normally H.O.) used to firstly pay tax under RCM, as ISD can’t pay tax under RCM, and then cross charge it to ISD for further distribution to other distinct persons(Branches).
Now this has been proposed to be made a part of the law as the newly substituted section 20 provides that ITC is also to be distributed on the tax “…paid by a distinct person registered in the same State…”
This is very common in case of GTA services, Legal Attorneys’ services,etc. which are specifically covered under RCM.
(c) Interestingly, the new section 20 per se does not provide any manner for distribution of ITC by ISD.
Whereas, current provisions contained in section 20 of the CGST Act, provides for a brief manner of distribution of ITC by ISD and the detailed manner is covered under Rule 39 of the CGST Rules.
So, now Rule 39 would be amended to include all provisions w.r.t. manner of distribution of ITC by ISD to the distinct persons especially the computation of ratio for the said distribution.
This would be in line with the recommendation made by GST Council in its 52nd Meeting.
(d) The earlier definition provided for distribution of ITC by ISD to branches having same PAN. But the proposed definition covers distinct persons as referred to in section 25 of CGST Act, which mainly includes other registrations of the same person in the same state/UT or other states/UTs.
NOTE
These amendments proposed by Finance Bill 2024 shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.
Conclusion: Finance Bill 2024 amendments bring crucial changes to the ISD mechanism, ensuring clarity, expanding obligations, and necessitating further rule adjustments. Stakeholders should stay abreast of these modifications, given their prospective mandatory implementation.
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Disclaimer: The information contained herein is not intended to be a source of advice and it is only for the convenience and educational purposes for the user. This is not an opinion to anyone and author is/ will not be responsible to anyone for any matter whatsoever regarding any reliance placed on this article.
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