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Introduction: Delve into the significant amendments proposed in Input Service Distributor (ISD) provisions by the Finance Act, 2024. The alterations include redefined terms, mandatory registration, and a revamped distribution procedure. Explore the implications of these changes on taxpayers, emphasizing the need for strategic adaptation and compliance.

Changes in the provisions relating to Input Service Distributor (ISD) proposed in the Finance Act, 2024:

The summary of amendments are as follows:

Description

Before Amendment After Amendment
Definitions

Section 2, Clause (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;.
Manner of distribution of credit by Input Service Distributor

Section 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.

Explanation.- For the purposes of this section,-

(a) the “relevant period” shall be-

(i) if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or

(ii) 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;

(b) the expression “recipient of credit” means the supplier of goods or services or both having the same Permanent Account Number as that of the Input Service Distributor;

(c) 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 1[under entries 84 and 92A] of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule.

(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.”.

Effect of the amendments:

I) The amended definition of “Input Service Distributor (ISD)” :

i)”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” – Section 9 (3) and / or 9 (4) of CGST Act, 2017 are as follows:

(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(4) The Government may, on the recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of goods or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.

Hence ISD shall distribute Input Tax Credit (ITC) in respect of services, the tax on which is liable to be paid under reverse charge mechanism (RCM).

ii) “for or on behalf of distinct persons referred to in section 25 and liable to distribute the input tax credit” – Section 25 (4) and (5) of CGST Act, 2017 are as follows:

(4) A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.

(5) Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

The definition states “liable” to distribute Input Tax Credit (ITC), which means an Input Service Distributor (ISD) is mandated to distribute common ITC to GSTINs on the same PAN (i.e., distinct persons).

iii) “in respect of such invoices in the manner provided in section 20” – Section 20 of CGST Act, 2017 has been amended vide Finance Act, 2024 aforementioned and will be discussed in the following.

II) The amended definition of “Manner of distribution of credit by Input Service Distributor”:

i) 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 – Section 24 (viii) of CGST Act, 2017 are as follows:

Compulsory registration in certain cases – Input Service Distributor, whether or not separately registered under this Act.

The registered taxpayer who receives common Input Tax Credit (ITC) for or on behalf of distinct persons would be required to obtain mandatory registration as an Input Service Distributor (ISD).

ii) A new procedure would be prescribed, specifying the manner, timeframe, and subject to the restrictions and conditions as may be prescribed, to distribute the credit of central tax or integrated tax charged on invoices received by ISD.

iii) In the new procedure will also be prescribed for the distribution of the credit of central tax as central tax or integrated tax, vice versa. This includes the way a document is issued and the amount of input tax credit.

Whereas the current provisions contained in Section 20 of the CGST Act provide a brief method for the distribution of Input Tax Credit (ITC) by an Input Service Distributor (ISD), the detailed procedure is covered under Rule 39 of the CGST Rules. Therefore, Rule 39 will now be amended to include all provisions regarding the manner of distributing ITC by ISD to distinct persons, especially the computation of the ratio for the said distribution.

The registered taxpayer currently distributing common Input Tax Credit (ITC) through cross-charge will now need to modify their systems and distribute common ITC exclusively through the Input Service Distributor (ISD) mechanism. Furthermore, they will have to undergo significant modifications in their accounting systems to comply with the provisions of ISD distribution. The proposed amendments mentioned above will come into force upon the Finance Act, 2024 being assented to, and relevant notifications being issued accordingly. That being said, registered taxpayer need to start strategizing now, as ISD registration will entail a major change, especially for registered taxpayer with a multi-state presence.

Conclusion: The Finance Act, 2024 brings crucial changes to Input Service Distributor (ISD) provisions, reshaping definitions and distribution processes. From mandatory registration to detailed distribution procedures, taxpayers must prepare for a paradigm shift in compliance. Anticipate the impact on multi-state entities and adapt strategies for seamless integration into the reformed ISD mechanism.

Author Bio

Experienced Cost and Management Accountant with a demonstrated history of working in the accounting industry. Skilled in Direct Tax, Accounting Standards, Financial Accounting, Goods and Services Tax (GST), and Indian Taxation. Associate Member of The Institute of cost Accountants of India. View Full Profile

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