“Unlock the complexities of ISD vs Cross Charge for distributing input tax credit (ITC) after the 50th GST Council Meeting. Understand the implications, taxability of supplies between distinct persons, and the recommended clarifications. Stay informed for compliance in the evolving GST landscape.”
The use of cross charge and ISD to distribute input tax credit (ITC) has been a matter of debate since GST was introduced in 2017. Some people believe that cross charge is more efficient, while others believe that ISD is more compliant with the law.
50th GST Council Meeting has recently recommended to provide clarifications on these two mechanisms. Here is what we need to know:
- Distinct persons
Under GST law, entities with separate GST registrations under the same PAN will be treated as distinct persons. This means that two or more branches of the same company that are located in different states would be considered distinct persons.
- Taxability of supplies between distinct persons
Supply between distinct persons is taxable even if there is no consideration involved. This means that if one branch of a company provides services to another branch, the supply would be taxable and GST would be payable.
- ISD mechanism
The ISD mechanism is a way to distribute ITC of common input services to distinct persons. An ISD is a taxable person who is appointed by a group of distinct persons to distribute ITC of common input services to those persons.
- Cross charge
Cross charge is a mechanism where a taxable person invoices the supply of goods or services to another distinct person who is part of the same group. The invoice for cross charge is typically issued at a zero rate of tax.
- Clarifications from the GST Council
The GST Council has recommended the following clarifications on ISD and cross charge:
1. The ISD mechanism is not mandatory for distributing ITC of common input services procured from third parties to the distinct persons as per the present provisions of GST law.
2. The taxability of internally generated services provided by one distinct person to another distinct person will be clarified in the future.
3. The GST law may be amended to make the ISD mechanism mandatory prospectively for distribution of input tax credit of such common input services procured from third parties.
What does this mean for businesses?
Businesses that currently use cross charge to distribute ITC of common input services will not need to change their practices immediately. However, they should be aware that the ISD mechanism may become mandatory in the future.
Conclusion
The use of ISD and cross charge to distribute ITC is a complex issue. The GST Council’s recent clarifications provide some clarity, but businesses should continue to monitor the situation for further updates through circulars.
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