In recent times, the provisions of GST Law relating to Input Service Distributor (ISD) have undergone multiple changes, making ISD a mandatory requirement for any registered person having multiple branches / registrations in the same state and / or in different states. There are certain grey areas which needs more clarity and refinement in the language of the Law. Let us discuss this in detail here.
What is an Input Service Distributor (ISD) ?: As per the definition of ISD as amended vide Finance Act, 2024 (No.8 of 2024), ISD is an office of the supplier of the goods / services, which receives tax invoices towards the receipt of input services, including invoices in respect of services which are liable to be taxed under Reverse Charge Mechanism (RCM) in terms of sub-section (3) or (4) of Section 9 of CGST Act, 2017.
Section 2(61) of the CGST Act, 2017 as amended vide the said Finance Act, reads as follows:
“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.
With effect from 1st April 2025, in terms of Section 20 (1) of the CGST Act, any office which receives tax invoices towards the receipt of input services, including invoices for which tax is payable under Reverse Charge Mechanism (RCM) for or on behalf of other branches / registrations in the same state of in different states, shall be required to be registered as ISD.
Further, in terms of Section 20 (2) of the CGST Act, such an office of the ISD, shall be required to distribute the credit of taxes charged on invoices received by it, including the taxes paid under RCM by another branch / person (distinct person) registered in the same state.
Section 20 (1) and 20 (2) of the CGST Act, as amended vide the said Finance Act, reads as follows
(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.
Further, rule 39 (1A) of the CGST Rules 2017 which was inserted vide notification 12/2024-CT dated 10/07/2024 reads as follows:
(1A) For the distribution of credit in respect of input services, attributable to one or more distinct
persons, subject to levy of tax under sub-section (3) or (4) of section 9, a registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note as per the provisions of sub-rule(1A) of rule 54 to transfer the credit of such common input services to the Input Service Distributor, and such credit shall be distributed by the said Input Service Distributor in the manner as provided in sub-rule (1).
On a plain reading of the Section 2(61) and Section 20 (1) supra, one can understand that
- ISD is an office required to be registered under the GST Law as provided under Section 24.
- ISD shall receive tax invoices on behalf of the distinct persons
- in respect of services which are taxable under forward charge and
- invoices issued for the services which are taxed under RCM.
Further, as per Section 20 (2), ISD shall distribute the credit of taxes so received through the invoices received from 3rd party service providers and the distinct persons of same state or other state for services which are taxed under forward charge and for the services for which taxes are paid under RCM by the distinct person of same state as the ISD.
As per the current process flow designed for ISD in the GSTN portal, in the case of invoices for services which are taxed under forward charge i,e tax paid by the supplier, an ISD can receive such invoices (including debit notes / credit notes, as the case may be) and account it and distribute the ITC as required under section 20(2) of the Act, as the suppliers upload their invoices against the GSTIN of ISD in their GSTR1/IFF returns which flows into the GSTR6 returns.
However, in the case of invoices raised for services which are taxed under RCM, ISD cannot receive invoices directly from the supplier, as GSTN is not designed to receive invoices raised for services taxed under RCM directly i.e the suppliers of services in respect of the services which are taxed under RCM cannot upload invoices against the GSTIN of ISD in their GSTR1/IFF returns.
As per Section 20 (2), ISD is required to distribute the tax so received through the invoices raised for services taxed under forward charge and the invoices raised for services taxed under RCM i.e ISD is expected to distribute the tax in respect of invoices raised for services taxed under RCM which is supposed to be received by it as per the provisions of Section 2(61) and section 20(1), but it is not possible as per the process designed in GSTN. Hence, such taxes are to be received, paid and transferred through invoice (in terms of Rule 39(1A) supra) by the distinct person situated in the same state as the ISD.
Hence, it appears that section 2(61) and 20 (1) are not aligned with the process flow designed in GSTN (ideally GSTN should design the process in accordance with the Law).
Further, Section 20 or any other provision in the law does not specify that the distinct person situated in the same state as the ISD is required to pay the tax in respect of the services which were received by him partly and partly by other distinct persons situated in other states. However, Section 20 (2) read with Rule 39(1A) provides that the tax paid by the distinct person needs to be distributed by the ISD.
Additionally, ISD, in terms of Rule 39 (1A) is also required to avail the credit of such tax paid by him for the purpose of transferring it to ISD.
In terms of Section 16 (2), ITC cannot be availed inter alia without the receipt of the goods / services. Similarly, in terms of Section 31(2), a tax invoice needs to be issued when there is a supply of services. However, rule 39(1A) supra provides that the distinct person is required to avail the ITC without the receipt of the services fully and needs to issue an invoice, without making any supplies, to transfer such credit to the ISD.
Hence, it appears that provisions of Section 20 (2) and Rule 39(1A) which have come into force with effect from 1st April 2025 are inconsistent with the other provisions of GST Law as explained above.
Although it can be understood that the aforesaid amendments are made to align with the process already being followed by the ISDs who were registered before it became mandatory from 1st April 2025, the language of the above said provisions create unnecessary confusions among taxpayers. Hence, government / CBIC needs to make necessary amendments in the law or issue necessary clarifications on this matter.
(The views expressed in this article are strictly personal)
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