The Existing Model of Input Service Distributor (ISD) for the purpose of distribution of input credit on services has been adopted in the Model GST Law with modifications to align the concept with the framework of GST law. In the existing model of ISD, an office of manufacturer or service provider who procures services which are used by or intended to be used by the different factories/offices (collectively called ‘units’) of the said manufacturer/service provider can distribute the respective input credit on such services to the units to which such credit may be attributed, by using the ISD mechanism provided in the CENVAT Credit Rules, 2004 (CCR).
2. Concept of Input Service Distributor (ISD) in Model GST Law (MGL):
2.1 In the ISD mechanism proposed in the MGL, the same concept has been carried forward and an ISD has been defined under Section 2 (56) as follows ‑
“input service distributor” means an office of the supplier of goods and/or services, which receives tax invoices issued under section 23 towards receipt of input services and issues tax invoice or such other document as prescribed for the purposes of distributing the credit of CGST (SGST in State Acts) and/or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above.
Explanation – For the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST, Input Service Distributor shall be deemed to be a supplier of services.
2.2 The above definition provides that, an ISD –
(i) is the office of supplier of goods and / or services;
(ii) the said office receives tax invoices towards receipt of input services;
(iii) the said office distributes credit of CGST/ SGST/IGST to a supplier of goods/services having same PAN;
(iv) the said office issues tax invoice or other prescribed document for distribution of credit.
2.3 The above definition of ISD is almost similar to the one in the existing regime with the difference being that recently in the existing regime, distribution of input service credit has been allowed to an outsourced manufacturing unit also, while the ISD in GST regime is to distribute credit only to the supplier having same PAN, that means the credit can be distributed only to the units of the same entity. The reason of non inclusion of outsourced manufacturing unit for the purpose of credit distribution seems to be that – in the GST regime, ‘manufacture’ is not a taxable event, and tax liability would arise only at the time of supply, which would be ultimately paid by the principal in this case when the respective input credit can be used.
3. Registration of Input Service Distributor (ISD):
3.1 As per Section 19 of the MGL read with Clause (vii) of Para 5 of Schedule III thereof, an ISD would have to take registration under GST regime as a deemed supplier of services. The threshold limit of turnover is also not applicable to ISD. Further as per the provisions contained in Proviso to Section 19, the ISD registration in the existing regime would not get migrated into ISD registration in GST regime. An aspiring ISD in GST would have to apply for registration afresh.
3.2 As ISD would be a deemed supplier of services, it is possible that at the same address a supplier of services is registered as ‘supplier of services’ and also as ‘ISD’. In the existing service tax regime, there is a confusion regarding registration status of ISD in such cases – some field formations grant status of ISD in the same registration number of service provider while some other formations provide a separate registration number as ISD in addition to service tax registration number. In the GST regime, however, ISD would always have a separate registration number (GSTIN). Further the ISD is required to file return by 13th while a supplier of services is required to file return by 20th of the succeeding month, which is possible with different registration numbers only.
4. Distribution of credit by Input Service Distributor (ISD):
4.1 Once a person gets registered as ISD in the GST regime, he would be eligible to transfer or distribute credit as per provisions of Section 17 of the MGL. As per this provision, an ISD would be able to –
2. Distribute credit of CGST/SGST and IGST to the supplier to whom such services may be attributed.
3. In case of inter-state transfer of input credit where ISD and recipient are located in different States:
a) under the CGST law, components of CGST and IGST can be transferred as IGST.
b) under the SGST law, components of SGST and IGST can be transferred as IGST.
Note: It is important to note that ITC of CGST cannot be utilized for payment of SGST. However, for inter-state transfer of input credits, there could be no other mechanism because SGST of one State cannot be transferred and used in the other State. Further, if it is presumed that the distribution by ISD to its own supplier unit constitutes a taxable supply, the appropriate tax would have been IGST only, against which the distributor would have been in a position to claim input credit of CGST/SGST/IGST. In other words, ITC of CGST, SGST as well as that of IGST can be distributed as ITC of IGST.
4. In case of intra-state transfer of input credit where ISD and recipient (business verticals having obtained separate registrations in same State):
a) under the CGST law, components of CGST and IGST can be transferred as CGST.
b) under the SGST law, components of SGST and IGST can be transferred as SGST.
Note: Distribution of credit through ISD would be required within the same State when the taxable person is having more than one tax registration within the State which is possible only if the taxpayer has opted for separate registrations for separate business verticals under the provisions of section 19(2) of the MGL. In other words, ITC of CGST & IGST can be distributed as ITC of CGST while ITC of SGST & IGST can be distributed as ITC of SGST.
4.2 The conditions and manner of distribution of credit by ISD are same as are there in the present service tax regime, and the same are summarized as follows:
1. The credit would be distributed through tax invoice or other document as prescribed;
2. The amount of credit distributed shall not exceed the amount of credit available for distribution;
3. If the credit is attributable to one supplier, it shall be distributed only to that supplier;
4. The credit of tax paid on input services attributable to more than one supplier shall be distributed only amongst such suppliers to whom a given input service is attributable. The manner of allocating the amount for distribution is governed by clause (d) of section 17(3) of the MGL. As per this provision ‑
a. the distribution would be pro rata the value of turnover in a STATE of such supplier to the aggregate of turnover of all such suppliers to whom the input service is attributable.
b. for the purpose of computing distribution ratio, the turnover of respective suppliers for preceding year is to be taken. In case any of the supplier was not operational in the preceding year, the turnover of immediately preceding quarter from the month of distribution is to be taken as basis. (as per ‘explanation’ to section 18 of the MGL, ‘relevant period’ has been defined in this manner).
4.3 Once the credit is distributed by an ISD in the prescribed manner by way of a prescribed document, the supplier(s) to whom such credit is distributed get credit in their Electronic Credit Ledger and can use it for payment of their output taxes.
4.4 An ISD is required to file its Return by 13th of the month succeeding the month in which the credit has been distributed. When ISD files his return, the amount of credit gets credited in Electronic Credit Ledger of the Supplier.
5. Recovery of credit distributed in excess by Input Service Distributor (ISD):
5.1 There could be a situation of distribution/use of excess credit in comparison to what is available or allowed under the law. To take care of this situation, Section 18 of the MGL contains provisions for recovery of excess credit distributed by ISD.
5.2 Section 18(1) of the MGL provides that in case the credit distributed by an ISD is more than the credit available to them, the excess credit may be recovered from ISD by initiating action under the provisions of Section 51 of the MGL.
5.3 Section 18(2) of the MGL provides that in case the credit distributed by ISD is in contravention of Section 17 (which could be distribution of more than available credit or distribution of credit in incorrect ratio or distribution of credit to a supplier not entitled to it or it could relate to the type of tax distributed), the excess credit may be recovered from the Supplier (i.e. recipient) by initiating action under the provisions of Section 51 of the MGL.
6. Transitional provisions:
6.1 As for the transition of input credit lying with the ISDs in the existing regime to GST, relevant Sections in the MGL are Sections 143 and 162.
6.2 Section 143 of the MGL provides that the amount of CENVAT Credit carried forward in a return furnished under the earlier law by an assessee would be allowed as input tax credit in the GST regime.
6.3 Section 162 of the MGL provides that input tax credit on account of any services received prior to the appointed day by an ISD shall be eligible for distribution as credit even if the related invoices are received on or after the appointed day, that is the day when GST would get implemented. It is important to note that the transition of ISD credit is with respect to CGST only.
6.4 Section 162 of the MGL provides for distribution of credit for such services only which were received prior to the appointed day but invoices are received later. That means the credit for such services was not booked prior to the appointed day, and it will be booked in the GST regime for the first time. Thus no carrying over of documentation etc. would be required. The MGL does not provide any time limit for taking such credit either.
6.5 It may be noted that Section 162 of the MGL does not take care of the credit which is lying in the books of an ISD on the appointed day. This has been taken care of by Section 143 of the MGL which is a general transition provision for all types of credit, and would apply to ISD as well because the ISD credit is also carried forward in a return which is filed by ISD under the existing law, and the related procedure may be used for transition of ISD credit also.
7. Conclusion:
7.1 A broad look at the ISD provisions proposed in the MGL reflects that the provisions are on the lines of the existing ISD provisions in the CCR. The modifications have been made to fit these provisions in the framework of GST. Recovery provisions are new.
ANNEXURE
LIST OF RELEVANT PROVISIONS
1. Section 2(56): Input Service Distributor (ISD)
2. Section 17: Manner of distribution of credit by ISD
3. Section 18: Manner of recovery of credit distributed in excess by ISD
4. Section 19 r/w clause (vii) of Para 5 of Schedule-III: Liability to be registered
5. Transitional Provisions:
a) Section 143: Amount of credit carried forward in a return to be allowed as ITC
b) Section 162: Credit distribution of service tax by ISD (only in CGST Act)
