Input Service Distributor (ISD) Simplified – Part 1

A. Input Service Distributor (Its Need and definition):

The concept of input service distributor is not new now and this existed even in the service tax law (now subsumed in GST Law). This concept has been brought into GST regime also due to its need in business. As the services are intangible, it is not practicable to trace every common service to the ultimate recipient of the service, as is distinguishable in case of goods. Today, if any supplier (i.e. Business) is supplying goods or service from multiple locations (here location could be within the state and may include the business places from outside the state) and it receives services which is common like auditing expenses, software maintenance expenses, technical services etc. then it is very difficult to determine the proportion of service expense to be claimed at its respective locations, so the concept of Input Service Distributor (ISD) have been brought into the GST regime.

B. Interpretation of ISD – section 2 (61) of CGST Act, 2017

ISD have been defined under section 2 (61) of Central Goods & Services Tax Act, 2017 (CGST Act, 2017) and it can be interpreted as follows:

• ISD is an office of the supplier of goods or services or both (which could be the head office or corporate office or regional office, by whatever name called)
• ISD receives tax invoices (as issued under section 31 i.e. proper invoices as defined)
• Abovementioned Tax Invoice should be towards the receipt of input services only (for goods not allowed)
• ISD issues a prescribed document (i.e. Invoices) for the purposes of distributing the credit of central tax, state tax, integrated tax or union territory tax paid on the said services
• Such document (i.e. Invoices) is issued to a supplier of taxable goods or services or both having the same Permanent Account Number (as issued under the Income Tax Law) as that of the said office.

C. Input Service (Section 2 (60) of CGST Act, 2017):

Any service that is used or intended to be used by a supplier of goods or services, or both, in the course or furtherance of business would be treated as “input service”.

The meaning of the term “service” under the GST law is very vast to include everything that is not goods, barring securities, and monies that do not amount to activity relating to the use of money or conversion of money. Therefore, anything received by a person who is a supplier, which is not goods, and is neither securities nor money as such, would be treated as ‘input service’, so long as it is used or meant to be used in the course or furtherance of business.

Unlike the erstwhile law, there is no requirement for it to have direct nexus with the outward supply. In other words, the service received may not be directly linked to the outward supply of the supplier receiving the service, and the outward supply may be goods or services. Regardless of the outward supply, the service received would qualify as “input service” to him, when the same is used in the course or furtherance of business.

D. ISD Registration

Supplier requires separate registration for every office, which is intended to act as Input Service Distributor (ISD). In other words, a registration number of an establishment as an ISD is different from the registration number of such establishment u/s 22 (i.e. normal registration for making outward supply) of the Act.

E. Manner of Distribution of Credit by Input Service Distributor (ISD)

1. If ISD and recipients are in same state or different states

In same state then –

In different states then –

*It’s important to note that, section 20 permits distribution of Integrated Tax either as IGST or CGST or SGST. However, Rule 39(1)(e) permits distribution of ITC of integrated tax as IGST only.

2. Conditions for Distribution of Input Credit by ISD

The Input Service Distributor may distribute the credit subject to the following conditions, namely:

a) Credit can be issued Against A Document

• Credit can be issued by issuing 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.

b) Credit Amount to ISD

• Credit availed for Distribution = Credit Distributed
• Credit amount distribution only to the concerned Recipient

c) If More than one Recipient or all recipients

• All Recipients have turnover in the in the financial year preceding the year during which credit is to be distributed, the said financial year – Pro-rata on the basis i.e. Turnover of one recipient/Aggregate turnover of all recipient * Amount of Credit to be distributed)
• 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. – Pro- rata on the basis i.e. Last quarter’s turnover preceding to the month for which credit is to be distributed/ Aggregate turnover of all such recipients for the period * Amount of credit.

Here recipient and turnover has the following meaning:

Recipient of credit: means the supplier of goods or services or both having the same Permanent Account Number as that of Input Service Distributor. (i.e. all the taxable persons having same PAN no. including those with different business verticals)

Recipient to whom input tax credit is attributable, includes the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason.

Turnover: 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.

(i.e. Turnover is exclusive of any taxes)

3. Distribution Time and Return

• Tax credit available for distribution in a month shall be distributed in the same month
• The details thereof shall be furnished in FORM GSTR 6
• Eligible and ineligible input tax credit both will be distributed separately.

4. Issue of Debit Note

Any additional amount of input tax credit can be distributed by issuing debit note to the recipient. Distribution will be in the same manner and will be reported in the concerned month’s GSTR 6 return.

5. Issue of Credit Note

Any input tax credit required to be reduced can be reduced by issuing a credit note to the recipient in the same ratio in which the input tax credit contained in the original invoice was distributed. 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*; or

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