1) Introduction :
The concept of input service distributor exists even in the earlier service tax law. This has been borrowed into GST, entitling a person who is registered as an Input Service Distributor (ISD) to distribute the credit in respect of input services (and not inputs) received in its name. Given that services are intangible, it is not practicable to trace every service to the ultimate recipient of the service, as is distinguishable in case of goods, justifying the need for a distributor to services.
2) Definition :
As per section 2(61) “Input Service Distributor” is defined as
- 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.
3) Analysis of Definition :
- This definition does not make reference to ‘office of taxable person’ i.e. Place of Business, it refers to ‘office of the supplier’.
- If supplier which is considered taxable person for purposes of section 9(1) obtains registration, then that supplier will remain a registered person and not an ISD.
- If a person is a registered person, then in respect of every office location of that person (in that State), he will remain registered person.
- To obtain ISD registration, the person must have an ‘office’ that is NOT a registered location from where taxable supplies are effected.
- Care must be taken not to have overlapping registration as both taxable person and ISD.
- This deliberate use of words ‘office of supplier’ indicates that there is no any activity from that office in the nature of outward supply, not receive inward supplies of its own or not attract RCM liability.
- The definition appears to indicate that the ISD-office cannot simultaneously be a place of business from where taxable supplies are made.
- ISD cannot distribute the input tax credit to outsourced manufacturers or service providers.
- Generally, the head office of the person, or the corporate office, by whatever name called, would be the location to which the services would be billed. However, there is no implication by law that an ISD must be the head office.
4) Conditions to be fulfilled by ISD to distribute credit are:
- Issue of an ISD invoice or credit note to each recipient of credit on every distribution.
- The amount of the credit distributed shall not exceed the amount of credit available for distribution.
- Tax paid on input services used by a particular location (registered as supplier), is to be distributed only to that location.
- Credit of tax paid on input service used by more than one location or all locations who are operational is to be distributed to all of them based on the pro rata basis of turnover of each location in a State to aggregate turnover of all such locations who have used such services.
- The period to be considered for computation is the previous financial year of that location. If it does not have any turnover in the previous financial year, then previous quarter of the month to which the credit is being distributed.
- Recipients of credit to are those taxable persons to whom it is attributable (whether or not they are registered /engaged in taxable supply or exempt supply), being persons having the same PAN (as issued under the Income Tax Law) as that of the ISD. Note: No differentiation is made to whether the unit is registered or not, and therefore, credit attributable to the unregistered unit is distributed to that unit which implies, it is a loss of credit.
- 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 entry 92A42 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule. (Ex. VAT/CST/Excise)
5) Manner of distribution of credit by Input Service Distributor:
- The ISD shall separately distribute the amount of ineligible input tax credit as per 17(5) and the amount of eligible input tax credit.
- The credit of tax paid on input service should be distributed in the following manner:
|
The credit of tax available under head of |
Location of ISD and Location of the recipient | |
| Within same state |
Within different state |
|
| IGST | IGST | IGST |
| CGST | CGST | IGST |
| SGST | SGST | IGST |
- Any additional amount of input tax credit on account of issuance of a debit note to an Input Service Distributor by the supplier shall be distributed in the manner in which credit contained in original invoice distributed.
- Each type of tax must be distributed through a separate ISD invoice. However, there is no requirement to issue ISD invoices at an invoice-level (received from the supplier of the service).
- Excess credit distributed to one or more recipient of credit in contravention of ISD provision under Section 20 is recoverable from the recipient of such credit along with Interest. The recovery would be under the provisions of Section 73 or 74.
The example provided below illustrates the application of Rule 39 for distribution of credits by an ISD in terms of Section 20.
ABC Ltd. has its head office in Jaipur, for which it additionally has an ISD registration. The company has 6 units across India including its head office. It receives the following invoices in the name of the ISD at Jaipur, for the month of May 2020.
| Invoice No. | Taxable Value | Tax | Supplier |
Purpose |
| 101 | 2,00,000/- | IGST – 36,000/- | Swati Furniture registered in Bhopal | For repairs executed in 3 units: Mumbai, Gandhinagar, Panaji. (Note: Panaji location is not registered as it is engaged in making only exempt supplies) |
| 102 | 6,00,000/- | CGST – 54,000/-
SGST – 54,000/- |
M/s. SD tech. registered in Jodhpur | For repairs executed in 3 units: Jaipur, Mumbai, Gandhinagar. |
| 103 | 10,00,000/- | IGST – 1,80,000/- | M/s. Quick Heal security registered in Mumbai | For manpower security services for the company |
| 104 | 20,000/- | CGST – 1,800/-
SGST – 1,800/- |
Chandu tea stall registered in Jaipur | For supply of tea during the month to its Jaipur unit |
The turnover of each of the units during the year 2019-20 is: Jaipur: 2 Crore, Mumbai: 1 Crore, Gandhinagar: 3 Crore, Panaji: 2 Crore, Each of the other 2 unite 1 Cr. resulting in the aggregate turnover of the company in the previous financial year of 10 crores.
Distribution of credits by the ISD:
| Invoice | Particulars | Mumbai | Gandhi-nagar | Jaipur | Panaji | Other 2 Unit | Total |
| 101 | T/o in State |
1 Crore |
3 crore | – | 2 Crore | – |
6 Crore |
| Pro-rata ratio |
16.67% |
50% | 33.33% |
100% |
|||
| Credit – 36,000 (IGST) |
6,000/- |
18,000/- | – | 12,000/- | – |
36,000/- |
|
| Dist. Type |
IGST |
IGST | – | IGST | – |
– |
|
| 102 | T/o in State |
1 Crore |
3 crore | 2 Crore | – | – |
6 Crore |
| Pro-rata ratio |
16.67% |
50% | 33.33% | – | – |
100% |
|
| Credit – 54,000 (CGST) |
9,000/- |
27,000/- | 18,000/- | – | – |
54,000/- |
|
| Dist. Type |
IGST |
IGST | CGST | – | – |
– |
|
| Credit – 54,000 (SGST) |
9,000/- |
27,000/- | 18,000/- | – | – |
54,000/- |
|
| Dist. Type |
IGST |
IGST | SGST | – | – |
– |
|
| 103 | T/o in State |
1 Crore |
3 crore | 2 Crore | 2 Crore | 2 Crore |
10 Crore |
| Pro-rata ratio |
10% |
30% | 20% | 20% | 20% |
100% |
|
| Credit – 1,80,000 (IGST) |
18,000/- |
54,000/- | 36,000/- | 36,000/- | 36,000/- |
1,80,000/- |
|
| Dist. Type |
IGST |
IGST | IGST | IGST | IGST |
– |
|
| 104 | T/o in State |
– |
– | 2 Crore | – | – |
2 Crore |
|
Pro-rata ratio |
– | – | 100% | – | – |
100% |
|
| Ineligible Credit – 1,800 (CGST) |
– |
– | 1,800/- | – | – |
1,800/- |
|
| Dist. Type |
– |
– | CGST | – | – |
– |
|
| Ineligible Credit – 1,800 (SGST) |
– |
– | 1,800/- | – | – |
1,800/- |
|
| Dist. Type |
– |
– | SGST | – | – |
– |
It can be seen from the illustration that credit of CGST of 54,000/- is distributed as CGST credit only to the extent of 18,000/- likewise, credit of SGST of 54,000/- is distributed as SGST credit only to the extent of 18,000/-.
6) Conclusion:
Thus the concept of ISD is a facility made available to business having a large share of common expenditure and billing/payment is done from a centralized location. ISD is not merely a matter of compliance but involves great revenue implications to a registered taxable person. The important point is to note that liability to cross charge for services provided between distinct persons (branches/ HO etc.) is independent from the function of the ISD.
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