Tax laws governing Input Service Distributor (ISD) has always been one of the most popular concepts in indirect taxation. The concept of ISD under GST is a legacy carried over from the Service Tax Regime. This article will help you understand the meaning, scope and importance of the role an ISD plays in the GST regime.
Most of the mid and large sized organisations generally function by having a Head office registered in one place along with one or multiple branches located in various other states. To maintain standardisation, it is a common practice that the Head office procures certain services which will be utilised by all its branches. e.g., Maintenance of the organisation’s ERP system. However, there also may be times where a branch may procure a common service used by the entire organisation as well. In all these cases it is only logical that Input tax credit available from common services must be distributed to all the branches in a proportionate manner. This concept of distribution of common credit amongst various branches is known as Input Service Distribution and the branch/Head office distributing such credit is known as Input Service Distributor (ISD).
Scenarios where an Input Service distributor cannot distribute ITC:
An ISD needs to mandatorily take a separate registration in GST REG-1, whether or not, they have an existing registration under the GST Law. An important point that must be noted that the threshold limit prescribed for registration is not applicable to an ISD. During the registration process:
There are few conditions which must be fulfilled if an Input Service Distributor wants to distribute input tax credit to other locations.
If the recipients are located in the same state as Input Service Distributor
If the recipients are located in a state or union territory other than that of Input Service Distributor
The credit will be distributed to the recipient to whom it is directly attributable to. However, in case where it is attributable to multiple recipients then the distribution will be based on the ratio of the turnover of all registered recipients.
The distribution will be calculated by applying the following formula:
C1 = (t1÷T) × C
“C” is the amount of credit to be distributed,
“t1” is the turnover, as referred to in section 20, of person R1 during the relevant
“T” is the aggregate of the turnover, during the relevant period, of all recipients
to whom the input service is attributable
Let us understand this with the help of an example:
M/s Om Ltd. has its headquarters situated in Mumbai. The headquarters was registered as an Input Service provider under the GST laws. They have three branches located at “Delhi”, “Haryana” and “Goa”. The Mumbai office incurred Advertisement expenses amounting to Rs.12 Lakhs to promote a new product. Since this was attributable to all the three branches of M/s Om Ltd, being ISD the headquarters will distribute the ITC amongst them.
|Place||Amount (in Rs)|
|Delhi||Rs 5,00,00,000 (25%)|
|Haryana||Rs 10,00,00,000 (50%)|
|Goa||Rs 5,00,00,000 (25%)|
|Total turnover||Rs 20,00,00,000|
|Branch||Formula: C1 = (t1÷T) × C||Credit distributed (in Rs)|
Where an ISD distributes to one or more recipients excess credit then such credit so distributed in excess shall be recovered along with interest.
Wrongful distribution may be due to one of the following two reasons:
|Eligibility||Manufacturer or producer of final products or provider of output services||Supplier of goods or services|
|Registration||Form ST-1||FORM REG-1|
|Type of ITC||Service Tax||SGST/CGST/UTGST or IGST|
|Recipient of credit||Units providing taxable services or manufacturing excisable goods||Entities having same Permanent Account Number(PAN)|
|Document for Distribution||Invoice, bill or challan||ISD invoice|
The following contents must be included in an invoice issued by an input service distributor:
An Input Service Distributor must file monthly returns in FORM GSTR 6 within 13 days of the succeeding month by furnishing details of all the ISD invoices issued. This credit will reflect in GSTR 2A of the receiving party. ISD is not required to file GST Annual return.
Yes, every branch or unit which procures input services that are attributable to other branches will take an ISD registration.
If the ISD and registered recipient are in different states then CGST / SGST / UTGST can be distributed as IGST credit
No, ISD cannot accept invoices where RCM is applicable. ISD mechanism is to only facilitate distribution of tax credit paid. They cannot undertake the burden to collect taxes and remit them to the government.
If your business has multiple branches across different states, then the one registered as an input service distributor has to take care of related compliance requirements which are different from other registered taxpayers. If you are facing difficulties in meeting these requirements, you can avail the GST Compliance services offered by earlyGST and leave your worries to your GST expert.