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Introduction: The Budget 2024 has introduced pivotal changes to the Goods and Services Tax (GST) regulations, particularly affecting Input Service Distributors (ISD). Stemming from recommendations made during the 50th and 52nd GST Council meetings, these amendments aim to refine the distribution of Input Tax Credit (ITC) for services procured by a Head Office (HO) that are attributable to both the HO and its Branch Offices (BOs) or exclusively to one or more BOs. This article delves into the implications of these changes, focusing on the mandatory prospective application of the ISD procedure for certain input services under Section 20 of the CGST Act, 2017.

The changes are in light of the recommendations in the 50th GST Council meeting held on 11.07.2023 which provides that the ISD (Input Service Distributor) procedure as laid down in Section 20 of the CGST Act, 2017 may be made mandatory prospectively for distribution of ITC in respect of input services procured by Head Office (HO) from a third party but attributable to both HO and Branch Office (BO) or exclusively to one or more BOs. Further, The Council in its 52nd GST council meeting held on 7th October 2023 has recommended amendments in Section 2(61) and Section 20 of CGST Act, 2017 as well as amendment in rule 39 of CGST Rules, 2017 in respect of the same.

Input Service distributer, which is well known as the important GST compliance for Head Offices which tend to do billing to branches is set to shift with the introduction of new rules from the Budget 2024. These changes aim to address concerns about the fair distribution of GST revenue across states and ensure compliance for businesses operating in multiple locations. But what does this mean for you as a business owner or finance professional? In this article, I will help you to decode the same!

Suppose I own two businesses in Ajmer, Rajasthan with the name M/S ABC and M/S CDF, and both are my proprietary concerns with common office premises, but both have two different registrations, in simple words there are two GST numbers, but billing for rent is solely on M/S ABC as I have given only one GST number to my Landlord

Now Do you wonder How ITC will be distributed amongst these two entities?

How two entities for ITC Distribution?

As per the GST Act, they will be taken as two distinct entities that are defined as establishments with different GST numbers but registered under the same PAN (Permanent Account Number). This essentially means that multiple branches of the same company operating in different states or even within the same state, while having the same PAN, will be considered distinct entities for GST purposes if they have separate GST registrations.

Now what is the role of ISD?

In the context of the Goods and Services Tax (GST) in India, an Input Service Distributor (ISD) plays a crucial role in ensuring the fair distribution of input tax credit (ITC) across different branches or distinct persons registered under the same PAN.

Hence an ISD is essentially an office of a supplier that receives tax invoices for input services and distributes the corresponding ITC among various recipients. These recipients can be branches of the same company with different GST numbers under the same PAN (distinct persons) or independent entities altogether.

When You Need an ISD Registration:

Previously, Head Offices often billed branches under the “cross-charge” method, but things are changing. Here’s when you’ll need to register as an Input Service Distributor (ISD):

First, you are providing the services under RCM which means if your HO bills branches for services like security or legal advice falling under the Reverse Charge Mechanism (RCM), ISD registration is mandatory. You’ll need to distribute the Input Tax Credit (ITC) to your branches according to specific rules.

Other Services i.e. Services where RCM is not applicable, for these services where branches have different GST numbers under the same PAN, ISD registration may be required. This helps ensure fair distribution of GST revenue even when branches operate in different states.

Offices, Billing Branches & Input Service Distributor Budget 2024 GST Amendment Analysis

How does ISD work?

First, as an ISD, you collect tax invoices for input services used by distinct persons, the next step is you will calculate the total ITC available on these invoices, and then finally you distribute the ITC proportionally to each distinct person based on specific rules, common ITC might be distributed based on turnover or profits. Most importantly, you need to issue a document to each recipient reflecting the amount of ITC distributed.

Distributing the ITC and the Right Way to distribute Input Tax credit

Distributing ITC under the new system requires careful attention

-CGST/IGST & SGST Separation: You’ll need to distribute central tax (CGST) and integrated tax (IGST) as CGST/IGST, and state tax (SGST) as SGST. This ensures each state receives its due share of revenue.

-Specific Rules Await: The exact rules for distribution are still to be announced. These may consider factors like branch turnover and location to ensure fair allocation.

Cross-Charge vs. ISD

Not all the cases of transfer of services require Input service distributor (ISD) registration, Here’s when you can stick to the familiar “cross-charge” method i.e. method of handling inter-state transactions by determining applicable rates, claiming ITC, generating e-way bills, and managing compliance across multiple states:

Branches that are eligible for claiming Input tax credit (ITC), which means if your branches provide taxable services and can utilize ITC, the cross-charge method under rule 28 of the GST Rules remains an option. You can bill them based on the value of services provided.

Branches that are not eligible for ITC Utilization HO are required to issue invoices with GST to that branch. In this case, ISD registration might be needed depending on the service type and branch location, as the credit for the services provided to the branch is blocked

Ignoring the cross-chain method may result in a loss of revenue for the government.

In-house Services & ISD:

Remember the above example?

Even services provided internally within your organization come under scrutiny:

Like for example Rental income of the same premises used by two different entities, Accounting services, or common infrastructure for IT, HR or payroll services, these services are often provided by HO to branches that still need attention, the invoicing with GST is done as if branches cannot utilize ITC, HO needs to issue invoices with GST even for internal services, but at open market value or as per rules

Now what is open market value?

Open market value, also known as fair market value, refers to the estimated price a willing buyer would pay a willing seller in an arm’s length transaction, meaning neither party is forced to buy or sell. It considers factors like current market conditions, comparable sales, and the property’s unique features to determine a realistic and unbiased price

But as there is no loss to the government wrt ITC, any value provided by the company is accepted as open market value by the GST department

Offices, Billing Branches & Input Service Distributor: Changes in detail

Now let’s discuss the changes in detail:

1. Amendment in the Definition of Input Service Distributor

The amended definition of ISD reads as –

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.

The amendment proposed to include the ISD to distribute ITC in respect of services, the tax on which is liable to be paid under reverse charge mechanism u/s 9(3) and 9(4) of the CGST Act.

Have you wondered, why not goods?

ITC on goods, however, relates to tax paid on raw materials or capital goods used to create final products. This tax becomes part of the cost of the final product and is ultimately passed on to the consumer through the final selling price. Therefore, distributing ITC on goods wouldn’t serve the same purpose as it does for services, Implementing ISD for goods would create a significant administrative burden for businesses, especially those dealing with large volumes of transactions. Tracking and distributing ITC for countless individual items would be cumbersome and inefficient, and there are proper rules for ITC on goods, which is easily passed on being tangible in nature

2. Amendment in the Manner of distribution of ITC by the ISD

It was proposed to make registration as an Input Service Distributor (ISD) mandatory in case of procurement of common input services and distribution of ITC thereof to distinct persons, as I discussed in the above example!

Clause (61) of section 2 relating to the definition of ISD is proposed to be substituted for this purpose. Earlier through the 50th Council Meet held on 11.07.2023, followed by a CBIC Circular No. 199/11/2023-GST dated 17-07-2023, it was clarified that the Head Office (HO) had an option to distribute ITC in respect of such common input services either by following ISD mechanism or cross charge and that the ISD route was not mandatory as per the current provisions of the CGST Act and Rules. A new manner of distribution along with the restrictions and conditions would be prescribed, to distribute the credit of central tax or integrated tax charged on invoices received by ISD.

Now what does the bare act say?

2(61) “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) 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.

Conclusion

The GST amendments introduced in the Budget 2024 represent a significant shift in how businesses must manage and distribute ITC for services across their branches. By making ISD registration mandatory for specific scenarios, the government aims to streamline GST compliance and ensure a fair distribution of tax revenue. Businesses must adapt to these changes, ensuring that they comply with the new requirements to avoid penalties and maximize their ITC benefits. This analysis highlights the critical aspects of the amendments, offering a roadmap for businesses to navigate the evolving GST landscape.

This small amendment has a significant impact!

Author Bio

CA Aman Rajput, Practicing Chartered Accountant Contact me at 8209604735 Email ID aman.rajput @ mail.ca.in Area of practice:- Income tax, Audit, Company/LLP Incorporation or closure, Business consultancy, cost management, Financing, Startups, MSME, Finance, Virtual CFO and GST Introduct View Full Profile

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