Input Service Distributors (ISD) play a crucial role in distributing Input Tax Credit (ITC) among businesses with multiple GST registrations. Recent amendments have made ISD mechanisms mandatory and expanded their scope to include input services under Reverse Charge Mechanism (RCM). This article discusses the key changes and implications of these amendments.
1. About Input Service Distributors:
1.1 The Concept of ISD is not new as the same concept was there in the earlier tax regime of Service Tax. The input service distributor is a common ITC distribution arm of a taxpayer having multiple GSTIN in India. The purpose of ISD is to allow businesses to distribute the ITC on input services which shall be availed by other offices as well.
1.2 Recently, the Finance Act 2024 has substituted the definition of ISD given u/s 2(61) and the provisions related to ISD manner of distribution of ITC given u/s 20 of the CGST Act.
1.3 The amendment u/s 2(61) and 20 is to align the recommendations of GST Council to make ISD compulsory. The comparison of existing and new provisions is given as under:
| Section | Existing Provisions | New Provisions |
| 2(61) | “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office; | “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;’. |
| 20 | (1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:- (a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed; (b) the amount of the credit distributed shall not exceed the amount of credit available for distribution; (c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient; (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 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; (e) 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. |
(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 sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, shall be required to be registered as Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices.
(2) The Input Service Distributor shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under sub-section (3) or sub-section (4) of section 9 paid by a distinct person registered in the same State as the said Input Service Distributor, in such manner, within such time and subject to such restrictions and conditions as may be prescribed. (3) The credit of central tax shall be distributed as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit, in such manner as may be prescribed.”. |
2. Important points of Amendment:
2.1 As per the above comparison, we have observed the below 2 major changes laid down in the new provision:
2.1.1 Compulsory distribution of common ITC as per ISD mechanism: The provision of Section 20 shall be mandatory to be followed by taxpayers having common ITC with multiple GSTIN in India.
2.1.2 Input services on which GST is payable under RCM shall also be subject to ISD: The input tax credit on input services on which tax is payable under RCM shall also be subject to distribution as per ISD mechanism.
The revised procedure and manner of distribution of ITC as per the above amended provision, shall be clarified/notified by the CBIC very soon.
3. Implication of Amendment:
3.1 Presently, the recipient of services having more than 1 GST registrations had an option to have ISD registration or distribute the common input tax credit through cross charge between distinct persons.
3.2 However, now, such taxpayer shall have to internally analyze the expenses (including expenses on which GST is payable under RCM) and create a nexus for expenses which are incurred at the Head Office (HO) level for which ITC will be needed to be distributed by way of ISD or Cross Charge which can presently be done either by ISD or cross charge.
3.3 Accordingly, if required, the taxpayer shall require obtaining ISD registration.
4. Time to Re-Assess:
4.1. Re-assess the expenses and reach out such vendors supplying common services, to raise invoices on ISD GSTIN. If you are registered in multiple States, then you may expect GST notices of assessment in coming days due to this issue.
4.2. Therefore, the taxpayer should get registered as Input Service Distributor (ISD), if not registered already. Also, the expenses and reach out such vendors supplying common services, to raise invoices on ISD GSTIN.
4.3. Also, to mitigate the risk of GST demand and interest/penalty, the company Modify the SOPs and educate finance team to identify the common expenses. In this regard, update the accounting of GST credit as well and ensure the input tax credit eligibility at respective distinct person GSTIN to avoid any potential cash loss to you.
5. Conclusion: The amendments to ISD provisions necessitate a re-assessment of expenses and potential registration as an ISD for businesses with multiple GST registrations. It’s essential to adapt internal processes, educate finance teams, and ensure compliance to mitigate the risk of GST demands and penalties. Stay updated with CBIC notifications for further clarity on the revised procedures.
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Disclaimer: The entire contents of this document have been prepared based on relevant provisions and as per the information existing at the time of the preparation. The observations of the authors are personal view and this cannot be quoted before any authority without the written permission of the authors. This article is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this article will be accepted by authors. It is recommended that professional advice be sought based on the specific facts and circumstances. This article does not substitute the need to refer to the original pronouncements on GST.
(For any feedback or query, the author can be reached at rapg@rapg.in, 9999836182/9818449179)
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