In this article, we will study complete details about ISD provisions including Rules with the help of Q&A and illustrations. Further, reasons behind the recommendation of 50th & 52nd GST Council for amendments in ISD Provisions will also be discussed in detail.
What is Meaning of Input Service Distributor (ISD) and what is its Purpose
Meaning as per Section 2(61) of CGST Act, 2017
Input Service Distributor means an office (Can be Head Office or other office) of the Taxpayer which receives tax invoices and distribute the credit on the said services to a branch/factory/office of the Taxpayer. Both (ISD Distributor and Branch/Factory) must have the same Permanent Account Number.
Purpose of the Concept of ISD Distribution
To optimise the cost & operational efficiencies, most of the times some of the important functions like marketing, consultancy services etc. are centralised at Head office level. Accordingly, Invoices against these common services are received by the Head Office.
However, these services pertains to Factories so the ITC of these services also pertains to Factories. Moreover, output tax liability is also discharged at Factory level, therefore, some mechanisms needs to be developed in law to transfer this common ITC to the factories.
Accordingly, mechanism of Input Service Distribution has been developed in law to distribute this Common ITC to the branches/factories by the Head Office.
Important Note:
1. ISD distribution can only happen for common services not for goods.
2. ISD mechanism can be opted for distribution of Credit to even One Branch/Factory also. (i.e. it is not necessary that Taxpayer must have more than one factory/recipient for ISD mechanism).
Mandatory Registration of ISD (Section-24 read with Rule-8)
As per Section-24, for distribution of Common Credit by the Head Office/other office of Taxpayer, it needs to be compulsorily registered as ISD even if it has a normal registration. Application needs to be filed in GST REG-01.
Distribution of the ITC by ISD in which Head of GST (Section 20 read with Rule-39)
The Head in which ITC will be distributed by the ISD is being Tabulated below:
ISD Registration is Based out of State/UT | Branch/Factory is based out of State/UT | ITC Available to ISD in the Head | ITC will be distributed in the Head |
"X" (Like UP) | "X" (Like UP) | IGST | IGST |
"X" (Like UP) | "X" (Like UP) | CGST/SGST | CGST/SGST |
"X" (Like UP) | "Y" (Like Haryana) | IGST | IGST |
"X" (Like UP) | "Y" (Like Haryana) | CGST/SGST | IGST (Sum of CGST & SGST) |
Ratio to be used for distribution of ISD Credit
In this regard, before discussing the Ratio to be used for distribution of ISD Credit, following points may be noted:
i. The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient.
ii. The amount of the credit distributed shall not exceed the amount of credit available for distribution.
iii. Input Service Distributor shall, separately distribute the amount of ineligible input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount of eligible input tax credit.
Ratio for distribution of Credit by ISD
ITC Attributable to Let's Say Factory-A:
Turnover of Factory-A in a State during Previous Financial year * Common ITC
Total Turnover of All Recipients (who are operational during current year) to whom such Common Credit Pertains during the Previous Financial Year
Explanations of Key Words
All Recipients: Here all Recipients to whom such common credit pertains means to include even those Recipients who may be Un-registered for whatever reason. (like may be involved in Exempted Supply, Supply which is outside the preview of GST etc.)
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 (like Excise Duty on Petroleum Products, Tobacco) and 92A (like Taxes on inter-state Sales/purchases) of List I of the Seventh Schedule to the Constitution and entries 51 (like Excise Duty by State on Alcohol for human consumption & Opium products) and 54 (like VAT on intra-state sale of Petroleum Products, Alcohol for human consumption) of List II of the said Schedule.
Note: As per Section-20, Turnover is defined for Registered Persons only, but as per Rule-39 Turnover of Un-Registered Persons to whom such Credit Pertains also needs to be considered. Though Rule appears to be more logical, however there appears to be gap between law and Rule on this point.
Previous Financial Year: In case Turnover of some Recipient for Previous Financial Year is not available, in that case Turnover of previous quarter for which it is available for all Recipient will be considered.
Return for Distribution of Credit by ISD (Section 20 read with Rule 39 & 65)
i. The input tax credit available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6 in accordance with Rule 65.
ii. As per Rule-65,
Every Input Service Distributor shall, on the basis of details contained in FORM GSTR-6A, and where required, after adding, correcting or deleting the details, furnish electronically the return in FORM GSTR-6 , containing the details of tax invoices on which credit has been received and those issued under section 20.
Accordingly, ISD Distributor needs to file monthly GSTR-6 to distribute the ITC to the Recipient.
Whether Credit pertaining to Invoice of Lets' say April month is required to be distributed in the same month i.e. April only
If we see the language of Rule-39, it says ITC available in a month needs to be distributed in same month.
Now important question arise, what is meaning of word available.
Should it be considered as like Credit pertaining to the invoices of the April Month needs to be distributed in the month of April only.
If we accepts this interpretation, it will be too harsh to the taxpayer under ISD mechanism as like in case of Normal Taxpayer, he has right to claim the credit of invoice pertaining to current Financial year till 30th November of Next Financial year in terms of Section 16(4).
Many of times, it may not be possible also for Large Corporates to process the invoices in the same month itself.
Further, even though Rule 65 also prescribes that distribution should be based on GSTR-6A but at the same time , it is allowing addition, correction or deletion from GSTR-6A for distribution in GSTR-6.
In our considered opinion based on principal of equity, here "available for distribution" means what Taxpayer has shown in GSTR-6 for distribution (i.e. Table 3 of GSTR-6). Thereafter, the same needs to be distributed in the same month only. Taxpayer can not carry forward the ITC in next GSTR-6 after making it available in Table-3 of GSTR-6.
However, Government needs to clarify the legal position to save the taxpayers from un-necessary legal disputes.
Whether 2B will be available to ISD Distributor
As per Current Rule Position and GSTN Advisories following is the position regarding GSTR-2B
2B Flow Chart
From above, it is clear that 2B is not applicable to ISD distributor. Now question comes, can ISD distributor still distribute credit for which Supplier of ISD distributor has not filed GSTR-1. On the other hand, same is not allowed to normal Taxpayer under Section 16.
In this regards, though GSTR-6A is available to ISD distributor under Rule-65, however there is no such specific restriction under law like for normal taxpayer.
In our opinion, Law needs to make necessary amendment to make entry in GSTR-6A mandatory for distribution of Credit by ISD distributor. This may be one of area for amendment as proposed by the GST Council.
Proposal of 50th & 52nd GST Council on ISD
At present Head Office has option to distribute the Credit of common services to its branches/factories either by following mechanism of ISD or by issuance of Tax Invoice considering it Supply by Head office to its branches under Schedule-I.
The same has been clarified vide Circular 199/11/2023-GST. (Further, for complete details on taxability of services provided by Head office, please read at Taxability of Services by Head Office.
Under the method of raising tax invoice, Head office has liberty to adopt the value of service as per his whims if its factories are eligible for full ITC against these services as per Valuation Rule-28. By this way, Taxpayer can indirectly transfer the ITC from Head Office to branches as per his choice (more to some factories, less to other factories), however in ISD mechanism it can only be in the ratio of turnover of factories.
Therefore, to plug this, 50th GST Council as also reiterated by 52nd GST Council, has recommended that necessary amendment in law must be made to make ISD mechanism mandatory for distribution of common credit by Head Office to its branches/factories.
Reversal of Wrongful Distribution of ITC (Section-21)
As per Section-21, in case excess/ineligible ITC has been distributed to the Recipients, in that recovery proceedings will be initiated against the ultimate beneficiaries i.e. Recipients (Factories/Branches). Such excess ITC will be recovered along with interest and penalty as applicable under Section-73/64 as the case may be.
Other Misc. Procedures regarding invoicing by ISD (Rule 39)
a. Input Service Distributor shall issue an Input Service Distributor invoice, as prescribed in sub-rule (1) of rule 54 , clearly indicating in such invoice that it is issued only for distribution of input tax credit.
b. Input Service Distributor shall issue an Input Service Distributor credit note, as prescribed in sub-rule (1) of rule 54 , for reduction of credit in case the input tax credit already distributed gets reduced for any reason.
c. 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 same manner as explained above, and such credit shall be distributed in the month in which the debit note is included in the return in FORM GSTR- 6.
d. any input tax credit required to be reduced on account of issuance of a credit note to the Input Service Distributor by the supplier shall be apportioned to each recipient in the same ratio in which the input tax credit contained in the original invoice was distributed in terms of clause (d), and the amount so apportioned shall be-
(i) reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6 ; or
(ii) added to the output tax liability of the recipient where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted.
Happy Reading !!! Happy Learning !!!
In case of any query, please raise in comment section.
Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.
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