Input Service Distributor under GST

Last Update Date : August 13, 2018

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.

Input Service Distributor

Who is an Input Service Distributor?

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).

Disallowed Input Tax Credit

Scenarios where an Input Service distributor cannot distribute ITC:

  • Relating to Input (goods) and Capital goods
  • Relating to services where reverse charge mechanism is applicable
  • To a registered person, not having the same PAN

Registration as Input Service Distributor

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:

  • Permanent Account Number (PAN) shall be validated online by the common portal from the database maintained by the CBEC
  • Mobile number will be verified through a One-time Password (OTP)
  • Email-address will also be verified through a OTP sent to the registered email address

Pre-requisites for Distribution of Common Credit

There are few conditions which must be fulfilled if an Input Service Distributor wants to distribute input tax credit to other locations.

  • Input tax credit of common input services can be distributed amongst those registered persons who have used these services in the course or for the furtherance of business.
  • Input service distributor must issue an ISD invoice. The invoice must indicate that it is issued for distribution purposes only.
  • The input service credit available in a month must be distributed in the same month by the ISD and details regarding the same must be furnished in FORM GSTR-6.
  • ISD shall distribute both eligible and non-eligible credit.

Rules of Distribution of Credit

If the recipients are located in the same state as Input Service Distributor

  • The input tax credit shall be distributed as CGST and SGST or UTGST respectively.

If the recipients are located in a state or union territory other than that of Input Service Distributor

  • The input tax credit on account of CGST and SGST or UTGST shall be distributed as IGST.
  • The amount to be distributed shall be equal to the aggregate of the amount of input tax credit of CGST and SGST or UTGST that qualifies for distribution to the recipient.
  • The input tax credit on account of IGST shall be distributed as IGST.

The manner of Distribution of Credit

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
where,
“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
period, and
“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.

Turnover

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

Distribution

Branch Formula: C1 = (t1÷T) × C Credit distributed (in Rs)
Delhi 12,00,000*(5,00,00,000/20,00,00,000) 3,00,000
Haryana 12,00,000*(10,00,00,000/20,00,00,000) 6,00,000
Goa 12,00,000*(5,00,00,000/20,00,00,000) 3,00,000

Recovery of Wrong or Excess Distribution of Credit

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:

  • Amount of credit distributed exceeds the credit available to the ISD
  • Ratio of distribution is incorrect

Input Service Distributor: Pre-GST vs Post-GST

Criteria Pre-GST GST
Eligibility Manufacturer or producer of final products or provider of output services Supplier of goods or services
Registration Form ST-1 FORM REG-1
Return Half yearly Monthly
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

ISD Invoice Format

The following contents must be included in an invoice issued by an input service distributor:

  • Name, address and GSTIN of the Input Service Distributor
  • Serial number
  • Date of invoice issued
  • Name, address and GSTIN of the recipient to whom the credit is distributed
  • Amount of credit distributed
  • Sign or DSC of the ISD’s authorised representative

Returns by 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.

Frequently Asked Questions

Can a company have multiple ISD registrations?

Yes, every branch or unit which procures input services that are attributable to other branches will take an ISD registration.

Whether CGST / SGST / UTGST credit can be distributed as IGST credit by an ISD to a recipient?

If the ISD and registered recipient are in different states then CGST / SGST / UTGST can be distributed as IGST credit

Can ISD accept any invoices on which taxes should be discharged under reverse charge mechanism?

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.

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