Input Service Distributor (ISD) under GST (All you know about)

Input Service Distributor: A company may have a number of units and the GST paid by it on input services received can be distributed to the beneficiary units on the basis of their previous year turnover. The office of the company which distributes the credit is called input service distributor.

Section 2(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 prescribeddocument 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

Let’s understand with an example.

Head officeof ABC limited is located at Bangalore having branches at Chennai, Mumbai and Kolkata. The head office incurred annual software maintenanceexpense(service received) on behalf of all its branches andreceived the invoicefor the same. Since software isused by allits branches, theinput tax creditof entire services cannot be claimed at Bangalore. The same has tobe distributedto all the three locations. Here, the Head office at Bangalore is the Input Service Distributor.

Manner of distribution of credit by Input Service Distributor [Section 21]

Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

Input Tax Credit (ITC) is credited to a person’s electronic credit ledger. The person may use this to pay his output tax liability.

In terms of Sec. 49(5) , the manner of utilization of ITC is as under:

The CGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence	The SGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence	The IGST liability can be extingulshed by utilizing the input tax credit (ITC) in the following sequence
First, ITC standing under CGST Then, ITC standing under IGST	First, ITC standing under SGST Then, ITC standing under IGST	First, ITC standing under IGST Then, ITC standing under CGST Then, ITC standing under SGST

Therefore, it is clear that there is no offset available between the CGST and the SGST.

2. Situations where ISD is not applicable

ISDcannotdistribute the input tax credit :

• paid on Inputs e.g Raw materials and capital goods e.g Machine purchased
• to outsourced manufacturers or service providers.

3. Purpose of registering as ISD

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. The mechanism is meant to simplify the credit taking process for entities and the facility is meant to strengthen the seamless flow of credit under GST.

4. Insight on ISD under Earlier regime and GST regime

Point of Difference	Earlier Regime	GST Regime
1.Who can beInput service distributor?	An office of themanufacturer or producerof final products orproviderof output service	An office of thesupplierof goods and/or services
2. Document based on which credit can be distributed	Receives invoices issued under rule 4A of Service Tax Rules, 1994 towards purchase of input services	Receives tax invoices issued by supplier towards receipt of input services
3.Howto distribute credit?	By issuing invoice, bill or challan for the purposes of distributing to such manufacturer or producer or provider.	By issuing anISD invoicefor the purposes of distributing to a supplier of taxable goods and/or services having the same PAN as that of the office referred to above
4. Type oftax creditthat can bedistributed	The credit ofservice taxpaid on the said services	The credit ofCGST (SGST in State Acts) and/or IGST paid on the said services
5.To whomcan it be distributed?	To its units and outsourced manufacturers	To supplier having thesame PAN.i.e creditcannot be distributed to outsourced manufacturers or service providers.

Thus, on looking into the highlighted differences between the two regimes, distribution of credit is restricted to office having the same PAN. The reason could be due to the shift of taxable event from manufacture to supply. The tax liability would arise at the time of supply which would be ultimately paid by ISD on the utilization of available input tax credit.

5. Conditions to be fulfilled by ISD

• Registration:Input Service Distributor has to compulsorily register as “ISD” apart from its registration as a normal taxpayer under the Act, wherein he has to specify under serial number 14 of the REG-01 form as an ISD. Only then he shall be able to distribute the credit to the recipients.
• Invoicing:ISD can distribute the amount of tax credit to recipients as earlier stated by issuinganISD invoice
• Returns:Amount of tax credit distributed should not exceed the amount of tax credit available withthe ISD as at the end of a relevant month to be filed in GSTR-6by 13th* of the succeeding month by ISD.

The recipient of the tax credit can view the tax credit so distributed by ISD inGSTR-2Athat is auto-populated and in turn, can claim the same by filingGSTR-2.

An ISD need not file annual returns as ISD.

• Distribution ofInput Tax credit:The credit of tax paid under reverse charge mechanism is not available for distribution tothe recipients. So, the ISD has to utilize such credit only as a normal taxpayer.

The credit ofCGST, IGST and SGSTshall be distributed, in theprescribed mannerasper below chart :

1)The taxcreditavailable against anyspecificinput services used entirely by one of therecipients can be allocatedonly to that recipientfor utilization of such credit and not toother recipients.

2)The taxcreditavailable against the input services usedcommonlybymore than onerecipients of the ISD shall be allocated to those recipientson a proportionatebasis in the ratio of the turnover ofall suchrecipientsthat are operational during the year

3)The taxcreditavailable against the input services usedcommonlybyallthe recipients of the ISD shall be allocated to all the recipientson a proportionatebasis in the ratio of the turnover ofallthe recipientsthat are operational during the year.

Manner of recovery of credit distributed in excess

Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

Claim of input tax credit and provisional acceptance thereof (Section 41 of the CGST Act, 2017)

Section 41(1) of the CGST Act, 2017Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger..

Section 41(2)of the CGST Act, 2017 The credit referred to in sub-section (1) shall be utilised only for payment of self assessed output tax as per the return referred to in the said sub-section.

Declaration of outward supplies:

As per section 37 of the CGST Act, 2017 every registered person shall electronically furnish Form GSTR-1 details of outward supply of goods or services effected during the tax period on or before 10th of the month succeeding the tax period.

For example, details of outward supply made during January 2018 is required to declare by 10th of February 2018 in Form GSTR-1. It also ensures that the information declared by the registered person tallies with the financial ledger.

Confirming inward supplies:

The information furnished by person making outward supply in various tables of GSTR-1 will be auto populated into GSTR-2A.

As per section 38 of the CGST Act, 2017 every registered person (other than ISD, non-resident taxable person and composition levy assesse) shall verify and validate, modify or delete the details relating to inward supply and credit or debit notes communicated to him.

The registered person who receives the information in Form GSTR-2A shall accept, reject or keep it pending. Accordingly, he should prepare GSTR-2 for the purpose of completing the inward supply and file by 15th of the following month.