1. The concept of Input Service Distributor (ISD) has its roots in the service tax regime. The Head office of an organization obtains services that are common for all the company’s units located across the country. The supplier of such services issues an invoice in the name of the company’s head office. These services are utilized by all the units of the organization. The Input Tax Credit (ITC ) received on such services needs to be distributed among the consuming Branches/ Units. The provisions have been made under the CGST Act 2017 to apportion the ITC among the units consuming such common services.
2. The statutory definition of Input Service Distributor:- “Input Service Distributor” means an office of the supplier of goods and/or services which receives tax invoices issued under section 31 of CGST Act towards receipt of input services and issues a prescribed document 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 or both having the same PAN as that of the said office – section 2(61) of CGST Act.
2.1 Illustration: X Ltd, of Bangalore, hires an HR consultancy firm for its branches at Kolkata, Delhi, and Mumbai. HR Consultancy firm raises an invoice of Rs.11800/-(10000 + 18% GST) in the name of X Ltd. In this case, X ltd can be an Input Tax Distributor who receives invoices towards receipt of consultancy services and distribute the GST portion (Rs.1200) among its branches having the same PAN.
3. Conditions for Input Service Distributors: The essential conditions for qualifying as an input service distributor are as follows:-
(a) The Input Service Distributor should be an office of the supplier
(b) Such supplier can be a supplier of goods or services or both
(c ) Such an office should receive tax invoices issued in respect of receipt of input service.
(d) Tax invoices received in respect of input goods are not eligible for ISD benefits.
(e) Such office should issue a prescribed document for the purposes of distributing credits of CGST, SGST, IGST or UTGST, to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.
4. Registration of ISD: A taxable person who intends to use the facility can be registered under GST as ‘Input Service Distributor.’ Such a registered person/ Head Office registered as ISD can issue invoices on its units/branches/factories/depots. A separate registration is required, even if it is otherwise registered under GST.
4.1 A person can have multiple ISD registrations at different offices – FAQ on GST Chapter 3 Q No. 32 issued by CBI&C on 15-12-2018.
|Section 20(1) Read with Rule 39(1)(f)||
The distribution is to be made by an ISD by way of issue of a document containing the amount of input tax credit being distributed in the following manner:-
(a) Integrated tax as an integrated tax.
(b) Central tax as central tax (if the recipient and ISD are located in the same state) and as integrated tax (if the recipient and ISD are not located in the same state).
(c) State tax as state tax (if the recipient and ISD are located in the same state) and as integrated tax (if the recipient and ISD are not located in the same state).
|Section 20(2) read with Rule 39(1)(g), Rule 39(1)(h) and Rule 54(1)||
The credit can be distributed to the recipients of credit against a document containing such details as may be prescribed.
The Input Service Distributor shall issue an Input Service Distributor 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;
The Input Service Distributor shall issue a credit note, as prescribed.
ISD invoice / Credit Note shall contain the following details:-
(a) Name, Address & GSTIN of Input Service Distributor & the recipient to whom the credit is distributed.
(b) A consecutive not exceeding sixteen characters containing alphabets or numerals or special characters as- “-,” “/unique for a financial year.
(c ) date of its issue
(d) the signature or digital signature of the Input Service Distributor or his authorized representative
Invoice of ISD of banking, FI or NBFC – Where the Input Service Distributor is an office of a banking company or a financial institution or NBFC, 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 – proviso to Rule 54(1) of CGST and SGST Rules, 2017.
|Section 20(b)||The amount of the credit distributed shall not exceed the amount of credit available for distribution.|
|Section 20(c )||
The credit of tax paid on input services attributable to a recipient shall be distributed only to that recipient.
For Example – XYZ Ltd of Bangalore has a branch office in Delhi, Mumbai & Pune. An expenditure of Rs 1,18,000 ( 1,00,000+18000) incurred by HO ( XYZ Ltd ) for software installation in Mumbai Office. The credit of Rs 18000/- shall be distributed only to the Mumbai office.
|Section 20(d) read with Rule 39(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 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.
The input tax credit that is required to be distributed in accordance with the provisions of sec 20(d) & 20(e) 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 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.
Illustration:- XYZ Ltd of Bangalore has a branch office in Delhi, Mumbai & Pune. An expenditure of Rs 1,18,000 ( 1,00,000+18000) incurred by HO ( XYZ Ltd ) for software installation in all the three Branches. Mumbai Office is not registered under GST and engaged in making exempted supplies. Aggregate turnover of the Branches for the relevant period is Rs 60 Lakh, 10 Lakhs & 30 Lakhs, respectively.
ITC credit distribution (C1)shall be calculated as follows:-
Mumbai Office = M1 , tl = turnover of M1 = 10 L , T = Aggregate turnover of all the three branches ( 60 L+10L+30L=100 L ) T and C = Credit to be distributed( 18000)
C1= (tl/ T ) * C = (10/100)*18000 = Rs 1800/-
The credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients. Such distribution shall be pro-rata on the basis of the turnover in a State or turnover in 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.
In the illustration above , credit to be distributed to Delhi & Pune Branch shall be –
(60/100*18000= 10800 ) & (30/100*18000= 5400) respectively.
Manner of recovery of credit distributed in excess :
Where the credit distributed by the Input Service Distributor is in excess of the credit available for distribution by him, the excess credit so distributed shall be recovered from such distributor along with interest, and the provisions of sections 66 and 67 shall apply mutatis mutandis for effecting such recovery.
The recipient unit should deposit excess credit received from Input Service Distributor along with interest, if any, by using form GST DRC-03. If the recipient does not pay, proceedings should be initiated by raising demand under form GST DRC-07. Further Input Service Distributor will be liable to the general penalty under section 122(1)(x) of CGST Act – CBI&C Circular No. 71/45/2018-GST dated 26-10-2018.
5.1 Meaning of relevant period:- Explanation (a) to section 20 of CGST Act: The relevant period shall be as follows:-
(a) If the recipients of the credit have a turnover in their States/ UT in the financial year preceding the year during which credit is to be distributed, the said financial year.
(b) If some or all recipients of the credit do not have any turnover in their States/ UT 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
5.2 Meaning of ‘recipient of credit’ Explanation (b) to section 20 of CGST Act: 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.
5.3 Turnover not to include Excise Duty, CST, and State VAT – Explanation (c) to section 20 of CGST Act: 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 i.e., excise duty, Central Sales Tax and State VAT (inserted vide CGST (Amendment) Act, 2018w.e.f. 1-2-2019.
6. Monthly return by Input Service Distributor (ISD) :
6.1 ISD (Input Service Distributor) has to file monthly return GSTR 6 by thirteenth of the following month – section 39(4) of the CGST Act.
6.2 Monthly return is not required if there is no transaction during a month – section 39(8) of the CGST Act.
6.3 The inward supplies of ISD will be self populated in Form GSTR-6A. He can accept, reject, delete or add to these details and then file return in Form GSTR-6 before the 20th of the following month – Rule 65 of CGST and SGST Rules, 2017.
6.4 Commissioner can extend the date of filing return by issuing notification – section 39(6) of the CGST Act.
6.5 An Input Service Distributor (ISD) need not file annual returns as ISD.
6.6 The recipient of the tax credit can view the tax credit so distributed by ISD in GSTR-2A that is auto-populated and, in turn, can claim the same by filing GSTR-2.
7. General Provisions & Rules related to Input Service Distribution :
7.1 Rule 39(1)(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 these rules.
7.2 Rule 39(1)(b): The Input Service Distributor shall separately distribute the amount of ineligible input tax credit (ineligible under the provisions of Sec 17(5) or otherwise) and the amount of eligible input tax credit;
7.3 Rule 39(1)(c): the input tax credit on account of central tax, State tax, Union territory tax, and integrated tax shall be distributed separately.
7.4 Rule 39(1)(h): The Input Service Distributor 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.
7.5 Rule 39(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 rule 39(1)(j) shall mutatis mutandis apply for a reduction of credit
7.6 Rule 39(3) Distribution of credit based on Credit Note – Subject to rule 39(2), the Input Service Distributor shall, issue an ISD Invoice to the recipient entitled to such credit and include the ISD credit note and the ISD Invoice in return in Form GSTR-6 for the month in which such credit note and invoice was issued
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Part 14 of the series will cover the topic “Registration under GST Sec 22 of CGST Act.