Budget 2024: Decoding GST changes – Input Service Distribution ISD

Introduction: The budget for 2024 introduces pivotal changes to Input Service Distribution (ISD) under GST, addressing issues of revenue distribution among states. Through practical examples and analytical insights, this article elucidates the amended provisions, their implications, and actionable strategies for compliance.

New provisions for “Input service distribution” brought in the budget 2024-

An Analytical Overview

For one of my client from 2017, when GST was just introduced, I proposed instead of giving service bills with IGST at client’s head office as “Place of Supply” for supplies made on pan-India to client’s various states’ branch offices with the different GST numbers having same pan number.

To make it easier, I will explain with example. My client’s HO is at Delhi, supplies man power including accountants, receptionist, EDP men, drivers, marketing men etc at various states offices of his client but billed locally, on his request, at the client’s state of Delhi -HO, at the same time money was remitted by different states of his clients to my client’s HO at Delhi. More interestingly my client was also registered at the same states where my client’s client is registered. For example, services from local office of my client at Maharashtra Branch rendered at his client’s Maharashtra office but my client billed at Delhi HO of his client by applying CGST + SGST from my client’s HO at Delhi.

In above example, I contended that resources of Maharashtra Govt are being used by my client as well services are also taken and consumed locally at Maharashtra. Money is also being paid by Maharashtra branch to my client at Delhi, but at Maharashtra no GST comes in picture because at Delhi my client is billing to Delhi HO of his client for pan-India. This is a sheer loss of revenue of Maharashtra Govt.

Further, even if my client’s Maharashtra office billed to his client’s HO at Delhi by IGST billing then GST will also move from Maha to Delhi, again Maha will lose it’s revenue.

Now, Govt has come with the solution of this problem of states revenue losses. Most of the big corporates have Head Offices at metropolitan cities and they are taking centralised services at their HO as well ITC is being collected at Head Office itself instead at the state where services actually executed.

With the “prospective provisions” Govt has amended the definition of “Input service distributor -ISD” u/s 2(61) of the GST Act, 2017 and substituted section 20 of the said act through it’s budget 2024 provisions under clause 11 & 12 under chapter IV – Indirect taxes- “Central Goods & Service Tax”.

By these amendments Govt is trying to justify the adequate share distribution of revenue collected under GST by various states and services consumed at different states.

I. THE FIRST CHANGE – DEFINITION OF ISD U/S 2(61)

(CLAUSE 11 OF CHAPTER IV OF BUDGET)

OLD DEFINITION:

** Section 31 – Defines Tax Invoices

AMENDED ONE:

** Section 9(3) – RCM for registered suppliers & 9(4) RCM for unregistered persons;

** Section 25 – Pan-India registration with same PAN number – called distinct persons.

** Section 20 – Defines the procedure for ISD

WHAT IS CHANGE IN NEW DEFINITION

Now Govt has included those services which you received under the category of “Reverse Charge Mechanism” (means you have to pay tax as recipient of services not to be paid by service provider) – i.e. Proprietorship Security Company, Advocate Services, Transport Services etc. in addition to other general category goods/services received through tax invoices u/s 31 of the Act.

As a general practice such services were dealt with “Cross Charge” method instead ISD method.

Here, it is more pertinent to read last line of definition “and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20” Therefore newly substituted section 20 of “ISD” becomes more relevant.

II. THE SECOND CHANGE – SUBSTITUTION OF S 20 OF THE ACT

(CLAUSE 12 OF CHAPTER IV OF BUDGET)

OLD SECTION 20:-

* Section 20. Manner of distribution of credit by Input Service Distributor:-

(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.

(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.

Explanation .- For the purposes of this section,-

(a) the ” relevant period ” shall be-

(i) if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or

(ii) if some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed;

(b) the expression “recipient of credit” means the supplier of goods or services or both having the same Permanent Account Number as that of the Input Service Distributor;

(c) the term “turnover”, in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied 1 [under entries 84 and 92A] of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule.

Substitution of section 20- Manner of distribution of credit by Input Service Distributor.

NEW SECTION 20:-

“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.

(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.”.

PRACTICAL APPROACH AND ACTION POINTS

Foremost important thing the proposed changes/amendments are “prospective” and at the same time these changes/amendments are confirmed to be implemented because Govt is in Majority and finance bills usually passed without any further changes except procedural changes or rules may amend from time to time. Therefore, it is important to act pro-actively and do not wait for final approval or rules come in.

In new section 20 “manner may be prescribed” it denotes that “Rules for Input Service Distribution” shall be published later on. How to distribute and what to distribute shall be prescribed till date please follow circular no. 199/11/2023-GST dt.17-07-2023.

SALIENT FEATURES OF CHANGES PROPOSED:

1. The changes are prospective.

2. Services taken under Reverse Charge mechanism are also covered.

3. Registration as “ISD” is mandatory if at HO or at any Branch, services are being taken for or on behalf of distinct persons referred to in section 25.

4. Credit of Tax collected at your “New ISD registration number” (if your are first timer) or at current “ISD number” shall be distributed as the credit of central tax shall be distributed central tax or integrated tax and integrated tax as integrated tax or central tax.

5. Credit of State Tax (SGST) when invoice received locally by ISD unit will be distributed accordingly through SGST when distributed to distinct person of same state. Actually, both SGST + CGST will distributed as SGST + CGST to local unit of the same state ISD unit.

DETAILING WITH EXAMPLE ISD & CROSS CHARGE BILLING UNDER NEW SCENARIO:

I will explain you with two examples of services, to grasp concept and changes in correct manner:

1. Security company services taken pan-India but billed at HO only:

1.1 When Security company is a registered corporate:

Suppose, at Delhi a Security Service provider is billing at Head office of his client and providing services at head office as well 16 branches of client at various states. Then actually HO is taking bill on behalf of branches and is liable to distribute Input Tax Credit (ITC) to all branches under ISD method. So, client should take ISD registration, but at present loosely Cross Charge & ISD is being followed by Suppliers. So, one may bill as normal invoice by apportioning security cost as per the rule 28 under “Cross Charge” method or under ISD unit if he has taken bill in name & number of ISD unit of security company.

1.2 When Security company is a proprietorship concern:

Now scenario will be changed under new budget proposals – because Security company services will be covered under RCM therefore as per new budget “Registration is mandatory as ISD”  now services taken under section 9(3) or 9(4) have been included in ISD services and registration is mandatory, henceforth client at HO has to be a ISD unit and bill from security company shall be taken in ISD registration number and then he has to distribute ITC to all branches as per the newly framed rules, which will come after some time. If, excess ITC transferred then it will be recoverable as well punishable too.

2. Advocate services billed at HO:

Mostly services are being taken by advocates by HO while matter may be related to branches. Here again ISD concept will attract because cross charge is debarred due to new section where RCM services is also included as mandatory registration for ISD unit. So, if billing is being taken at HO then ITC has to be distributed with new rules.

Further, it will be a prudence to take advocate bill if services are precisely taken for any branch issue this will avoid ISD concept. The branch itself will pay RCM and will take benefit in next month.

INHOUSE SERVICES BY HO TO BRANCHES OR BY BRANCH TO ANOTHER BRANCHES /HO

Before going in these provisions – understand which services we are talking – moastly at HO Marketing, Accounting, HR, IT etc departments worked and gave their services to all branches too.

These services from HO to Branches or by any branch to HO/other branches are covered under “CROSS CHARGE” billing as defined in Schedule 1 to the GST Act, 2017.

Distinct persons have been defined – different GST numbers with the same PAN numbers – means a company having offices in various states and those offices consumed services of HO for their business.

I will discuss this issue with two situations:

a. Situation 1 – When branches also supplying taxable services and can take benefit of ITC of bills raised by HO to them: – In such situation HO may or may not be issued Invoices as per the valuation of services as provided under rule 28 of GST Rules.

If, HO is not issuing invoices then it will be presumed that value of services taken by HO to branches is Zero and no tax is due – as per the rule 28 second proviso the open market value of such services shall also be taken as zero, hence no liability under cross charge and no billing is required.

b. Situation 2 – When branches are not supplying taxable services and can not take benefit of ITC of bills raised by HO to them: – In such situation HO has to issue the invoices as per the valuation of services as provided under rule 28 of GST Rules. It is not mandatory to include employee cost of HO for services but at market value these cost can be taken.

For example, book keeping cost at Mohali branch may be Rs.10,000/- per month in open market as per the size of the branch but centralised services of accounts are being provided by HO to Mohali branch then HO will issue Tax Invoice to its Mohali Branch with GST @18% – value of bill Rs.11,800/-; So, HO will pay to Govt Rs.1800/- as GST at Delhi and ITC at Mohali will be available to set off at their billing of Mohali. Now, this will depend on Mohali branch whether they can set of ITC or they have to bear this cost.

Conclusion: The amendments to ISD provisions under GST mark a significant stride towards equitable revenue distribution among states. With a proactive approach to compliance and a clear understanding of the amended regulations, businesses can navigate the evolving GST landscape effectively. This comprehensive overview equips stakeholders with the knowledge needed to adapt to the changes seamlessly and ensure compliance with the new provisions.

Friends, I hope new provisions/changes in Act as proposed in Budget 2024 are, after reading above explanations with example, is clearer. For any practical difficulties, you are most welcome to revert in question box.

CA Rajiv Nigam | [email protected] | 9811100737