Input Service Distributor – Concept and Procedures under GST


Concept of Input Service Distributor or say ‘ISD’ has been taken from earlier indirect tax well known as Excise Laws.  Under this concept, big business houses are able to distribute common input tax credits of an un-productive unit to productive units. Usually, business houses having multiple offices/work sites at different place use a single point management office to handle all the operations of all locations. Concept of ISD provides an opportunity to distribute tax credits on purchases/expenses for this management office among all offices/work sites where business are actually going on.

For example, a lawyer service for litigation matters, a chartered accountant’s services for audit and taxation matters, business development consultancy, Customer care services, etc.

As per Section 2(61) of CGST Act, “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.

As per the definition, only those credits, related to those input services which are intended to be used in the course of furtherance of business, are eligible to distribute by ‘ISD’ to its business units.

Input tax credits on purchase of any goods or capital items not allowed for distribution by ‘ISD’ even if these purchases are in the course of furtherance of business.


Conditions to distribute credit by ‘ISD’

(a) the credit can be distributed to the recipients of credit against an invoice;

(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 under SAME PAN;

(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.

Meaning of “Recipient of Credit”

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.

From this definition, it is clearly inferred that recipient of credit should be only that unit which is supplying any goods or services or both.

Meaning of Relevant period for the purpose of clause (d) and (e):

the “relevant period” shall be–

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

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 detail of such turnover of all the recipients are available, previous to the month during which credit is to be distributed


Procedure for distribution of input tax credit by Input Service Distributor

  • First, identify eligible and ineligible input tax credits.

  • Secondly, identify each eligible/ineligible credits attributable to recipients. For example, an ‘ISD’ has six recipients in total. Some credits are attributable to first four recipients only, some credits are attributable to another set of three recipients only and some credits are attributable to all six recipients. So, in this step, it is required to segregate each credit into separate set of recipients.

  • Thirdly, extract the turnover amount for relevant period (meaning of relevant period as per above) for each recipient covered under each set of recipients.

  • Calculate amount to be distributed to each recipient under each set by using following mathematical equation:

Credit to be distributed to a recipient

=

Turnover of a recipient for relevant period ÷ Total turnover of all recipients in this set x Credit amount


  • ‘ISD’ shall issue an invoice to recipients for distributing credits.

  • Input tax credits available for distribution in a month shall be furnished in same month.

  • Input tax credits on account of central tax, State tax, UT Tax and Integrated tax shall be distributed separately in the manner given below:

Tax Credit Type

Tax Credit Distribution type

(where recipient of Credit in Same State/UT as that of ‘ISD’)

Tax Credit Distribution type

(where recipient of Credit in different State/UT than that of ‘ISD’)

Central Tax (CGST)

CGST IGST

IGST

IGST

IGST

SGST SGST

IGST

UTGST

UTGST

IGST


Contents of Invoice/Credit Note to be issued by ‘ISD’

  1. name, address and Goods and Services Tax Identification Number of the Input Service Distributor;

  2. a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters- hyphen or dash and slash symbolised as- “-”, “/” respectively, and any combination thereof, unique for a financial year;

  3. date of its issue;

  4. name, address and Goods and Services Tax Identification Number of the recipient to whom the credit is distributed;

  5. amount of the credit distributed; and

  6. signature or digital signature of the Input Service Distributor or his authorized representative:

Provided that where the Input Service Distributor is an office of a banking company or a financial institution, including a non-banking financial company, a tax invoice shall include any document in lieu thereof, by whatever name called, whether or not serially numbered but containing the information as mentioned above.


Contents of Invoice where one ISD transfer Credit to another ISD of same “PAN and State Code”

A registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note to transfer the credit of common input services to the Input Service Distributor, which shall contain the following details:-

(i) name, address and Goods and Services Tax Identification Number of the registered person having the same PAN and same State code as the Input Service Distributor;

(ii) a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters -hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;

(iii) date of its issue;

(iv) Goods and Services Tax Identification Number of supplier of common service and original invoice number whose credit is sought to be transferred to the Input Service Distributor;

(v) name, address and Goods and Services Tax Identification Number of the Input Service Distributor;

(vi) taxable value, rate and amount of the credit to be transferred; and

(vii) signature or digital signature of the registered person or his authorized representative


What if, after distribution, there is any change in tax credits by any reason?

In case of reduction of tax credits after being distributed:

  • The Input Service Distributor shall issue an “Input Service Distributor credit note” for reduction of credit in case the input tax credit already distributed gets reduced for any reason.
  • 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.

In case of increase in tax credits after being distributed

  • 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 to distribute original tax credits (i.e. after satisfying all conditions and after complying all procedural requirements).

What if, after distribution, it is found that credit was distributed to wrong recipient?

In case, credit was distributed to wrong recipient, ‘ISD’ will reduce such amount of credit from next distribution amount for such recipient in same month as and when such incidence comes to knowledge of ‘ISD’.

In case, there is no distribution or shorter than wrong distributed amount, such variance will be added to the output tax liability of the recipient.

To effect this transaction, ISD will:

  • Issue an ISD invoice to the actual recipient; and
  • Issue an ISD Credit note the wrong recipient

And will reflect both of these transactions in monthly return in form GSTR-6.


Returns to be submitted by ‘ISD’

As per section 39(4) of CGST Act, monthly return to be submitted by ‘ISD’ within thirteen days (13 days) after the end of month.

Rule 39(1) of CGST Rules prescribed Form GSTR-6 as monthly return by ISD.


Registration of ‘ISD’

As per Section 24 of CGST Act, it is mandatory to get registration under GST if any person wishes to act as ‘ISD’ without considering monetary turnover limit.

Further, as per proviso to Rule 8, every person being an Input Service Distributor shall make a separate application for registration as such Input Service Distributor.

Procedure for registration is same for ‘ISD’ as of normal registration. Please note that if a person is also supplying goods or services or both in the course of furtherance of business, he shall obtain GST number separately.

 

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