Input Service Distributor (ISD) under GST Law

What is the meaning of Input Service Distributor (ISD) under GST Law.

As per Section 2(61) of CGST Act,2017, Input Service Distributor means :

(a) It is the office of supplier of goods and / or services

(b) The said office receives tax invoices towards receipt of input services

(c) The said office distributes credit of CGST/SGST/IGST/UTGST to a supplier of goods/services having same PAN

(d) The said office issues tax invoice or other prescribed documents for distribution of credit.

A supplier of goods /services may have various offices such as head office, registered office, regional office, marketing office, branch, godown, sales depot etc., which avail various input services such as security services, communication charges, courier expenses, housekeeping expenses to name a few, and pay service tax. Such units and premises may obtain registration as an Input Service Distributor for availment of credit on such input services and distribution of credit to other units to resolve the challenge of efficient utilization of accumulated credit.

A. Manner of distribution of credit by Input Service Distributor:

As per Section 20(1)of CGST Act,2017 states that the Input Tax Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner s may be prescribed.

B. Distribution of credit of State Tax and UT-Tax:

Input Service Distributor shall distribute the credit of state tax as state tax or integrated tax and integrated tax as integrated tax or state tax , by of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed .

C. How Input Tax Distributor may distribute the credit under GST 

1. Where ISD and the recipient are in the same State :

2. Where ISD and the recipient are in different State:

It is to be noted that the credit of CGST and SGST can be distributed as IGST also if the ISD and recipient are in different State. This has been included for smooth credit by large organization having presence in more than one State. In practice a situation may arise wherein an ISD may receive invoices towards input tax credit , on payment of CGST and SGST (On intra-State supply) but the recipient unit may be some other states. If the ISD distributes the SGST of its state to the recipient state it cannot utilize the said input to claim any credit.

Example:

An ISD situated in Kolkata may receive an Invoice for intra state supply of input service on payment of CGST and SGST (West Bengal) and such service may be common for its units situated in the State of Jharkhand as well as other states. The CGST credit can be distributed to all the units of the ISD and such credit can also be used by such units without any problem. But if the SGST (West Bengal) credit is distributed to the units in other states, such states cannot utilize such credit of SGST (West Bengal) for any purpose. Hence, a thoughtful provision has been made in the law that such SGST Credit can be distributed either as IGST if the ISD and Unit are situated in different State. Once the SGT (West Bengal) credit is distributed as IGST to the units in other states, such units can utilize such IGST credit, either for payment of CGST or SGST of their State.

D. Receiving credit in Input Service Distributor (ISD):

As per section 16 of the CGST/SGST Act,2017, the credit will be available to the taxable person in electronic credit ledger maintained in the common portal. Every person making outward supply of goods or services is required to declare the details of outward supply by the 10^th of following month. The registered number of recipient is also declared by the supplier making outward supply. The credit gets auto populated in the accounts of the recipient based on such declaration by person making outward supply. The recipient may have multiple registration under GST Law (State wise registration and ISD registration) . The recipient should carefully specify the ISD registration number in order to avail the credit.

E. Conditions for distribution of credit by Input Service Distributor:

As per Sec.20(2) of the CGST Act,2017 specifies condition subject to which credit can be distributed by Input Service Distributor. These are:-

(1) The credit can be distributed to the recipients of credit against a document containing such details as may be prescribed.

(2) The amount of the credit distributed shall not exceed the amount of credit available for

(3) The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient.

Example:

ABC Limited has its corporate office in Mumbai and three manufacturing facilities in Jharkhand, Maharashtra and West Bengal. Its Corporate Office is registered as an Input Service Distributor (ISD) under GST Law, 2017. On the direction of ABC Limited, Audit Committee its Corporate Office has appointed an audit firm to carry out the Management Audit of its plant in Jharkhand. In this case, as the service is exclusively for its unit in Jharkhand, the credit can be distributed to Jharkhand unit only and not Maharashtra or West Bengal unit.

(4) The credit of tax paid on input services attributed 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.

Example:

A Limited company has its corporate office in Mumbai and three manufacturing facilities in Jharkhand, Maharashtra and West Bengal. Its corporate office is registered as an Input Service Distributor (ISD). Turnover of the three units in its states for the last financial year and current year (Quarter-1 and Quarter -2 ) as follows:

Input Service Distributor (ISD) has obtain certain services for its units in Jharkhand ad West Bengal on which CGST and SGST of Rs.20 Lakhs was paid. ISD wanted to distribute the credit in the month of July,2017 (Financial Year 2017-18) . The credit will be distributed as under:-

Jharkhand =Rs.20 Lakhs × (400crs/(Rs.400 crs.+Rs.500 crs.)=Rs.8.89 Lakhs

West Bengal =Rs.20 Lakhs ×(500crs/(400crs+Rs.500 crs) = Rs.11.11 lakhs

Maharashtra = Nil ( as the services was only for Jharkhand and West Bengal )

(5) 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..

Example:

XYZ Limited has its corporate office in Mumbai and three manufacturing facilities in Jharkhand, Maharashtra and West Bengal. Its Corporate Office is registered as an Input Service Distributor. Turnover of the three units in its states for the last financial year and current year (Q-1 and Q-2) are as follows.

ISD has obtained certain common services for all its units on which IGST of Rs.40 lakhs was paid. ISD wanted to distribute the credit in the month of Juy,2017 (Financial Year 2017-18). The credit will be distributed as under:-

Jharkhand = Rs.40 lakhs ×(Rs.60 crs /(Rs.60 crs+ Rs.50 crs.)= Rs.12.97 Lakhs

West Bengal= Rs. 40 Lakhs ×(Rs.50 crs/ (Rs.60crs + 50 crs +75 crs)= 10.81 lakhs

Maharashtra= Rs. 40 Lakhs×( Rs.75 crs/(Rs.60 crs+Rs.50crs+Rs.75 crs)= 16.22. lakhs.

F. Meaning of Relevant Period

Meaning of “ Relevant Period” as per Explanation -1:

The Relevant Period” shall be :-

(a) If the recipients of the credit have turnover in their State or Union territory in the financial year preceding the year during which credit is to be distributed, the said financial year, or

(b) If some or all recipients of the credit do not have any turnover in their State or Union Territory 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.

G. Meaning of Turnover in a State or Turnover in a Union Territory

Meaning of Turnover in a State or Turnover in a Union Territory as per Section 2(112) of CGST Act,2017:

“ Turnover in State” or Turnover in Union territory “ means the aggregate value of all taxable supplies (excluding the value of inward supplies on which tax is payable by a person on reverse charge basis) and exempt supplies made within a State or Union Territory by a taxable person , exports of goods or services or both and inter-State supplies of goods or services or both made from the State or Union territory by the said taxable person but excludes central tax, State Tax, Union territory tax , Integrated tax and cess.

Meaning of Recipient of Credit as per Explanation 2:

The expression “recipient of Credit “means the supplier of goods or services or both having the same PAN as that of the Input Service Distributor.

Meaning of turnover as per Explanation 3 :

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 under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said schedule.

H. Procedure for distribution of input tax credit by Input Service Distributor:

As per Rule 39 of CGST Rules,2017 these following procedure we have to follow:

(1) An Input Service Distributor shall distribute input tax credit in the manner and subject to the conditions, namely:-

(a) The input tax credit available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6 in accordance with the provisions of Chapter VIII of these rules,

(b) The Input Service Distributor shall, in accordance with the provisions of clause (d), separately distribute the amount ineligible as input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount eligible as input tax credit.

(c) The input tax credit on account of central tax, State tax , Union territory tax and integrated tax shall be distributed separately in accordance with the provisions of clause (d);

(d) The input tax credit that is required to be distributed in accordance with the provisions of clause (d) and € of sub-section (2) of section 20 to one of the recipients”R1”, whether registered or not , from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount ,”C1”, to be calculated by applying the following formula:-

C1=(t1÷T)×C

Where ,

“C” is the amount of credit to be distributed,

”t1” is the turnover, as referred to in section 20, of person R1 during the relevant period, and

“T” is the aggregate of the turnover during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of section 20,

(e) the input tax credit on account of integrated tax shall be distributed as input tax credit of tax to every recipient,

(f) The input credit on account of central tax and State tax or Union territory tax shall,

(i) In respect of a recipient located in the same State or Union territory in which the Input Service Distributor is located, be distributed as input tax credit of central tax and State tax or Union Territory Tax respectively,

(ii) In respect of a recipient located in a State or Union territory other than that of the Input Service Distributor, be distributed as integrated tax and the amount to be so distributed shall be equal to the aggregate of the amount of input tax credit of central tax and State tax or Union territory tax that qualifies for distribution to such recipient in accordance with clause (d),

(g) The Input Tax Distributor shall issue an ISD invoice, as prescribed in sub rule (1) of rule 54 clearly indicating in such invoice that it is issued only for distribution of input tax credit.

(h) The Input Service Distributor shall issue an ISD credit note, as prescribed in sub-rule (1) of rule 54, for reduction of credit in case the input tax credit already distributed gets reduced for any reason.

(i) Any additional amount of input tax credit on account of issuance of a debit note to an Input Service Distributor by the supplier shall be distributed in the manner and subject to the conditions specified in clauses (a) to (f)and the amount attributable to any recipient shall be calculated in the manner provided I clause (d) above and such credit shall be distributed in the moth in which the debit note has been include in the return in FORM GSTR-6.

(j) Any input tax credit required to be reduced on account of issuance of a credit note to the Input Service Distributor by the supplier shall be apportioned to each recipient in the same ration in which input tax credit contained in the original invoice was distributed in terms of clause (d) above, and the amount so apportioned shall be:-

(i) Reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; and

(ii) Added to the output tax liability of the recipient and where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted.

(2) If the amount of input tax credit distributed by an Input Service Distributor is reduced later on for any other reason for any of the recipients, including that it was distributed to a wrong recipient by the Input Service Distributor, the process prescribed in clause (j) of sub-rule (1)shall, mutatis mutandis apply for reduction of credit.

(3) Subject to sub-rue (2), the Input Service Distributor shall, on the basis of the ISD credit note specified in clause (h) of sub-rule (1), issue an ISD Invoice to the recipient entitled to such credit and include the ISD credit note and the ISD Invoice in the return in FORM GSTR-6 for the month in which such credit note and invoice was issued.

I. Manner of recovery of credit distributed in excess under GST Law,2017:

As per sec.21 of the CGST Act,2017, Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74 as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

“This section provides for the recovery of credit where he credit has been distributed in excess of the credit permissible, it does not specify for transfer of credit from one unit to another unit wherein excess credit was issued to one unit and lower to another.

Example:

If ABC limited company has one unit in Rajasthan and other unit in West Bengal and as per the provisions contained in Section 21, Rs.1 Lakh was to be distributed to the unit in Rajasthan and Rs.2 Lakhs to unit in West Bengal. However, due to some calculation error credit of Rs.1.2 Lakh was issued to Rajasthan unit and Rs.1.8 lakh to the unit in West Bengal. Thus, excess credit of Rs.20,000/- issued to the unit in Rajasthan shall be recovered from the unit in Rajasthan and show cause notice shall be issued by the jurisdictional officer of Rajasthan.

J. Registration is mandatory as per section 24 of GST Law,2017:

As per Sec.24 of CGST Act,2017, an Input Service Distributor (ISD) whether or not separately registered under the Acts, is required to obtain registration. The application for obtaining registration is required to be made in Form GST REG-01.

K. Input Tax Distributor (ISD) can issue Tax Invoice :

As per Rule 54(1) of CGST Rules, 2017, states that an Input Service Distributor invoice or as the case may be, an Input Service Distributor credit note issued by an Input Service Distributor shall contain the following details:

(a) Name, addresses and GSTRIN of the Input Service Distributor,

(b) A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special charactershyphen or dash and slash symbolized as “-“ .”/” respectively, and any combination thereof, unique for a financial year,

(c) Date of its issue,

(d) Name, address and GSTIN of the recipient to whom the credit is distributed,

(e) Amount of the credit distributed ,and

(f) Signature or digital signature of the Input Service Distributor.

Provided that where the Input Service Distributor is an office of a banking company or a financial institution including a non-banking company, a tax invoice shall include any document in lieu thereof, by whatever name called, whether or not serially numbered but containing the information as prescribed above.

L. Filling of Returns under GST Law,2017:

As per section 34 (4) of the CGST Act,2017, states that every taxable person registered as an Input Service Distributor shall, forever calendar month or part thereof, furnish , in such form and in such manner as may be prescribed, a return, electronically, within thirteen days after the end of such month.

As per Rue 65 of the GST Rules,2017 states that every input service distributor shall, on the basis of details contained in FORM GSTR-6A , and where required , after adding, correcting or deleting the details, furnish electronically the return in FORM GSTR-6, containing the details of tax invoices on which credit has been received and those issued under section 20, through the common portal either directly or from a Facilitation Centre notified by the Commissioner.

As per Rule 60(5) of the GST Rules,2017 states that the details of invoices furnished by an Input Service Distributor in his return in FORM GSTR-6 under rule 65 shall be made available to the recipient of credit in Part B of Form GSTR-2A electronically through the Common Portal and the said recipient may include the same in FORM GSTR-2.