Input Service Distributor (ISD) Mandatory w.e.f. 01st April 2025

With effect from 01.04.2025, Input Service Distributor (ISD) provisions have been mandated where any office of the supplier of goods or services or both receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under reverse charge. In this article, we will understand all the concepts related to Input Service Distributor: –

A. MEANING OF INPUT SERVICE DISTRIBUTOR (ISD)

Section 2(61) of the CGST Act 2017 –  “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.

It may be noted that the ISD mechanism is exclusive to input services and does not extend to goods (inputs or capital goods).

Further, not only normal ITC but also the RCM ITC shall be distributed for common services.

B. REGISTRATION OF INPUT SERVICE DISTRIBUTOR (ISD)

Section 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 reverse charge, for or on behalf of multiple offices of the entity, shall be required to be registered as Input Service Distributor in respect of such invoices.

This section has been made effective from 01.04.2025 and thus it is a mandatory requirement to take registration under ISD for the entity at the location of the office where services are procured for other/ multiple office(s) of the entity under the same PAN.

Accordingly, it can also be understood that ISD registration shall be taken in the state of existing office where common services are received which may or may not be registered under GST.

Further, multiple ISD registrations can also be taken depending upon the procurement of common services in different offices.

C. IDENTIFY SERVICES RECEIVED FOR OR ON BEHALF OF MULTIPLE OFFICES OF THE ENTITY

Services received for or on behalf of multiple offices of the entity, referred to as common services in general parlance, are not defined under GST law.

In order to understand whether any service is common or not, one should check the services which are billed at one location and benefits to other or multiple offices of the entity under the same PAN.

Few of the example are: –

• Software services.
• Advertising services.
• Information Technology (IT) services.
• Auditor Fee.
• Director Services. Etc.

D. MANNER OF DISTRIBUTION OF ITC BY ISD

Section 20(2 &3) read with Rule 39

• The input tax credit on account of central tax, State tax, Union territory tax and integrated tax shall be distributed separately.
• The ITC shall be distributed as follows: –

E. CONDITIONS FOR THE DISTRIBUTION OF ITC BY ISD

(Rule 39)

1. 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 for the same month.

2. The amount of the credit distributed shall not exceed the amount of credit available for distribution.

3. The amount of credit shall be distributed to registered as well as unregistered recipients to whom such a service is attributable including the recipients who are engaged in making exempt supply.

4. ISD shall separately distribute the amount of ineligible input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount of eligible input tax credit.

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

6. The credit of tax paid on input services attributable to more than one recipient/ all recipients of credit shall be distributed amongst such recipients/ all recipients to whom the input service is attributable, and which are operational in the current year on pro rata basis in the manner provided separately later in this document (refer manner of pro- rata distribution of ITC).

F. DISTRIBUTION OF ITC BY ISD ON TAXES PAID UNDER RCM

Rule 39– For the distribution of credit in respect of input services, attributable to one or more distinct persons, subject to levy of tax under reverse charge, 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 to transfer the credit of such common input services to the Input Service Distributor.

Such credit shall be distributed by the said Input Service Distributor in the manner as provided above for normal ITC.

G. MANNER OF PRO-RATA DISTRIBUTION OF ITC

(Rule 39)

For one of the recipients “R1”, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, shall be the amount, “C1”, to be calculated by applying the following formula –

C 1 = (t 1 / T) x C

where,

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

“t₁ ” is the turnover, 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.

Relevant Period means: –

(a) 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

(b) 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.

For Example: – If we distribute ITC for the 1^st Qtr of FY 2024-25, we shall consider the turnover for FY 2023-24. However, while distributing the ITC for later Qtr(s) of the FY 2024-25, turnover for the FY 2023-24 or the turnover of previous Qtr can be considered (in case all recipients don’t have turnover in FY 2023-24).

Turnover means: – 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 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.

H. DOCUMENT FOR DISTRIBUTION OF ITC

(Rule 39)

• The ISD shall issue an Input Service Distributor invoice, indicating in such invoice that it is issued only for distribution of input tax credit.
• The ISD shall issue an Input Service Distributor credit note, for reduction of credit in case the input tax credit already distributed gets reduced for any reason.
• Any ITC distributed by ISD and required to be reduced later on for any reason for any/ all recipients (including that it was distributed to a wrong recipient), shall be reduced by issuance of a credit note by ISD and shall be apportioned to each recipient in the same ratio in which the input tax credit contained in the original invoice was distributed and the amount so apportioned shall be-
• reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; or
• added to the output tax liability of the recipient 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.
• 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 as discussed above for distribution of ITC on invoice and such credit shall be distributed in the month in which the debit note is included in the return in FORM GSTR-6.

I. PARTICULARS OF DOCUMENTS ISSUED FOR TRANSFER OF ITC

[Rule 54(1) &(1A)]

1. Invoice or credit note issued by ISD to the recipient to whom the credit is distributed: –

2. name, address and GST Number of the ISD.

3. a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters hyphen or dash and slash symbolised as- “-”, “/” respectively, and any combination thereof, unique for a financial year;

4. date of its issue;

5. name, address and GST Number of the recipient to whom the credit is distributed;

6. amount of the credit distributed; and

7. signature or digital signature of the Input Service Distributor or his authorised representative:

Provided that where the Input Service Distributor is an office of a banking company or a financial institution, including a non-banking financial 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 mentioned above.

*It may be noted that document shall clearly indicate on the Invoice/ Credit Note that such Invoice/ Credit Note is for the purpose of distribution of ITC by ISD.

A registered person (having the same PAN and State code as an ISD), may issue an invoice or, as the case may be, a credit or debit note to transfer the credit of common input services on which tax is paid under RCM to the ISD, with the taxable value same as the value of the common services: –

• name, address and GST Number of the registered person
• a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters -hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;
• date of its issue;
• GST Number of supplier of common service and original invoice number whose credit is sought to be transferred to the Input Service Distributor;
• name, address and GST Number of the Input Service Distributor.
• taxable value, rate and amount of the credit to be transferred; and
• signature or digital signature of the registered person or his authorised representative.

J. MANNER OF RECOVERY OF ITC DISTRIBUTED IN EXCESS

Section 21- Where the Input Service Distributor distributes the credit in contravention of the above mentioned provisions 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 recovery proceedings under the provisions of section 73 or section 74 or section 74A, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

K. FORM AND MANNER OF SUBMISSION OF RETURN BY ISD

 Section 39(4)– Every taxable person registered as an Input Service Distributor shall, for every calendar month or part thereof, furnish, in such form and manner as may be prescribed, a return, electronically, within thirteen days after the end of such a month.

Rule 65- 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.

L. ROADMAP RELATED TO ISD IMPLEMENTATION

Laying down a proper strategy to implement the ISD system and change the accounting accordingly.

• List down all the expenses and identify which expense to be considered as common for ISD.
• Identifying the states which receive the common services, even in more than one state which needs to be distributed to other branch(s).
• Identifying if the common input services can be sourced to one unit or else multiple units, and accordingly, ISD registration can be taken.
• Identifying vendors providing common services and communicating them for updating the ISD registration number
• Identifying common expenses where GST is payable under RCM and to route the same to the registered office in the same state where ISD registration is taken. Then to transfer the ITC to ISD by such office and getting the same distributed to other branch(s).
• Separate accounting & distribution in SAP.
• Filing of ISD returns.