All about Input Service Distributor and Manner of Distribution of credit

Input Service Distributor (ISD) [w.e.f. 01/04/2025]

The concept of ISD started as a facility made available to businesses having a large share of common expenditure and billing / payment from a centralized location. The mechanism is meant to simplify the credit taking process for entities and the ISD provisions have become mandatory, w.e.f. from 1st April, 2025 vide Notification No. 16/2024-Central Tax dated 6th August, 2024.

ISD or an Input Service Distributor is a type of taxpayer under GST who needs to distribute the GST input tax credits that pertain to its GSTIN to its units or branches having different GSTIN but registered under the same PAN. An Input Service Distributor (ISD) is a taxpayer that receives invoices for services used by its branches. It distributes the tax paid known as the Input Tax Credit (ITC), to such branches on a proportional basis by issuing ISD invoices. The branches can have different GSTINs but must have the same PAN as that of ISD.

Therefore, in case services are procured from a third party vendor or services which are internally generated against one GSTIN but the said services pertain to multiple GSTINs, then this becomes a case of common services for which ITC has to be distributed to all the recipients through ISD registration. Some examples of common services taken from third party vendors where ISD kicks in are:

• Advertisement services / branding services / Brand royalty, IPR services
• Professional fee for audit (includes internal / statutory / concurrent / tax audit etc.)
• Banking services
• Recruitment services
• Software services

♦ Registration [Section 24(viii)]:

ISD has to obtain a registration compulsorily apart from its registration under GST as a normal taxpayer. Such a taxpayer has to specify under serial number 14 of the REG-01 form as an ISD. They shall be able to distribute the credit to the recipients only after this declaration.

♦ Returns under ISD (Section 39):

Amount of tax credit distributed should not exceed the amount of tax credit available with the ISD at the end of a relevant month to be filed in GSTR-6 by the 13th of succeeding month by ISD. An ISD can get the information of the ITC from the GSTR-2B return.

The recipient of the tax credit can view the tax credit so distributed by ISD in GSTR-6A which is auto-populated from the supplier’s return. In turn, the recipient branch can claim the same by declaring it in GSTR-3B. No Annual Return in form GSTR-9 is required for an ISD.

♦ Tax invoice, debit note and credit note in ISD (Rule 54):

An ISD can distribute the amount of tax credit to recipients only by issuing an ISD invoice, which shall contain the below:

• name, address and GSTIN of ISD
• consecutive serial number
• date of issuance
• name, address and GSTIN of the recipient to whom the credit is distributed
• amount of credit distributed
• signature or DSC of ISD or authorized representative

♦ Manner and procedure for distribution of credit by ISD (Section 20 of CGST Act, 2017 read with Rule 39 of CGST Rules, 2017):

• The available ITC in a month for distribution shall be distributed in the same month and details of the same are required to be given in Form GSTR-6
• distributed credit shall not exceed the available amount
• The credit of CGST shall be distributed as CGST or IGST and credit of IGST as IGST or CGST
• The credit of tax paid under the reverse charge mechanism u/s 9(3) and 9(4) shall also be distributed to the recipients by ISD.
• credit shall be only be distributed to the attributable recipients
• ineligible ITC u/s 17(5) shall separately distribute
• In case the credit needs to be distributed to more than one recipient, then such credit shall be distributed amongst each such recipients on proportionate basis of their respective turnover in the State / UT during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable, the said formula is given below:

  Definition of relevant period:

• If the recipients have turnover in preceding FY, then relevant period shall be the said preceding FY
• If some or all recipients do not have turnover in preceding FY, then relevant period shall be 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

 Definition of Turnover:

• 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 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

♦ Manner of discharge liability under RCM by ISD and its distribution:

• Any Normal registration (other than ISD) to discharge the RCM liability and take the ITC of such RCM
• Then the said normal registration has to issue an invoice from to ISD in respect of the said credit and report the same in GSTR-1, so that the same would be transferred to ISD GSTIN
• Thereafter, the ISD GSTIN would distribute the credit of the common input services as per the above discussed procedure.

♦ Other Points to note for ISD implementation:

• Services consumed by multiple GSTIN of the same assessee, then w.e.f. 01/04/2025, all such invoices have to be issued to ISD GSTIN otherwise department may disallow the entire credit (non-compliance of GST provisions)
• This provision is not applicable on goods
• Credit shall be distributed in the same month (Unlike the provisions of GSTR-1 or GSTR-3B where available time is 30th November)
• ISD return i.e., GSTR-6 has to be filed after filing of GSTR-1 by the vendor (otherwise credit may get lost) and before generation of GSTR-2B of the recipient. (This shrinks down the ideal period to 2 days i.e., 12th and 13th of the next month)
• The sacrosanct ‘Place of Supply’ provision has no application in ISD. The provisions are quite simple, if ISD is invoicing to an entity within the same state then CGST (and SGST/UTGST) and in case of other state’s GST registration, IGST to be distributed.