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An Input Service Distributor (ISD) is an officer under GST who is entrusted with the distribution of GST input tax credits of its own GSTIN or its other units and branches with a different GSTIN but registered under the same PAN number. Registering as an ISD is mandatory under Section 24 of the GST Act. 

Procedure for Distribution of Input Tax Credit by Input Service Distributor

The CGST Rules 39 dictate that an Input Service Distributor must follow this procedure:

 

  • The input tax credit shall be distributed the same month. The details must be shared in form GSTR 6 under Chapter VIII of the Rules

  • The distributor should amounts ineligible and eligible as input tax credit separately 

  • Input tax credit under central, state and union territory taxes should be distributed separately

  • Input tax on integrated tax should be distributed as input tax credit to each recipient

  • Input tax credit on central, state and UT taxes should be distributed in the location where the distributor is located

  • If the recipient is located in a location other than that of the distributor, the input tax credit should be distributed as an integrated tax and the amount should be equal to the aggregate amount of input tax credit of central, state or T tax that qualifies for distribution under clause (d).

  • The distributor should issue an invoice under sub rule 1 of the rule 54 stating that it has been issued only for input tax credit distribution

  • The distributor is required to issue a credit note under sub rule 1 of rule 54 in order to reduce credit in case the input tax credit has already been reduced for some reason.

  • Additional input tax credit amount because of debit note issuance to a distributor should be distributed in a way that is in accordance with clauses a and f. The amount attributed to a recipient should be calculated in accordance with clause d and should be distributed in the same month as the one where the debit note has been included in form GSTR 6.

  • Input tax credit must be reduced if a credit note has been issued to the distributor by the supplier in line with the amount distributed in the original invoice under terms of clause d. The amount should be reduced from the amount distributed in the same month where the credit note has been included in form GSTR 6. The amount should be added to the output tax liability when the amount is negative because the credit amount under distribution is less than the amount needed to be adjusted.

  • If the tax credit amount is reduced later, ISDs should adhere to clause (j) of sub rule (1).

  • The ISD should on the basis of the credit note issue an ISD invoice to the recipient and include the credit note and invoice in the returns in form GSTR 6 in the same month when the credit note and invoice were issued.

Circumstances Where ISD in GST is Not Applicable

The services of ISDs in GST are restricted. This means that there are certain situations where Input Service Distributors under GST are not allowed to distribute input tax credits. 

 

  • ISDs’ services needn’t be engaged when the input and capital goods tax credit is paid for. 

  • ISDs under GST are also exempt from performing this service when capital goods are involved. 

  • Only when the distribution of credit is on common invoices.

Purpose for Registering as a Input Service Distributor in GST

ISD registration under GST is required when an entity has more than one branch or international operations involved in the purchase of goods and services from one industry. GST input tax credits are collected by a purchasing agency and later distributed to branches that need it to remove the GST applicable based on the services they consume.

 

A leading functionary or owner of the operation is required to register with a centralised purchasing office as an Input Service Distributor in GST. The functionary registered as the GST ISD can transfer tax credits under SGST, IGST and CGST to its various branches by raising an invoice after the purchases have been made. ISD GST registration and the tax distributed under it only applies to the tax on input-related services. 

 

The entire point of having ISDs in GST is so that businesses with common expenditures can easily process their taxes. The companies eligible for  Input Service Distributor under gst all have a centralised system in place for the payments and bills. ISD under GST is crucial in facilitating the credit taking process and smooth flow of credit under GST regulation.

Details About Input Service Distributor Pre & Post GST Regime

What’s Different? 

Earlier Regime

GST Regime

Who can register as an Input Service Distributor under GST?

A branch of a particular manufacturer or a business that provides the output service.

Any branch or office of the same supplier of goods or services. 

Which documents are required for issuing credits?

Credit could be issued when an office receives an invoice issued in keeping with the provisions under rule 4A of the Service Tax, 1994.

Credits can now be issued when a branch admits an invoice created by a supplier for the  receipt of input services. 

What is the process to distribute credit under ISD?

Offices could issue invoices and bills for distribution to the manufacturers or providers of goods. 

ISDs can issue invoices for distribution to a supplier who has the same PAN as the office mentioned above.

What is the type of tax allowed to be distributed under ISD in GST?

The service tax credit is distributed on mentioned services.

CGST/ IGST credits are paid on the mentioned input services.

Who can receive the credit distributed?

Outsourced manufacturers and branches of the mentioned office can receive the tax credits.

The supplier with the same PAN is allowed to receive distribution of the input tax credits. 

Conditions to be Fulfilled by an ISD Under GST

In this segment, we discuss the ISD registration under GST procedure, as well as the tasks to be performed by Input Service Distributors in GST.

 

  • ISD Registration Under GST: Any Input Service Distributor is required by Section 24 of the GST Act to register under GST in order to carry out the credit distribution activities entrusted to ISDs. The process to enrol themselves as an ISD is over and above the registration of a business as a regular taxpayer under GST. An ISD GST taxpayer is mandated to register under serial number 14 in the REG-01 form to become an ISD under GST. Registration is extremely crucial for such businesses because only after that can they distribute credits to the recipients. 

 

  • Invoicing: Invoicing is an important part of an ISD’s job because it is only after raising an invoice that they can distribute tax credits.

 

  • Returns: The Input Service Distributor under GST is required to keep in mind a number of things when it comes to issuing credits. For instance, the amount of credit must not go beyond the actual tax credit to which an ISD has access towards the end of a given month. 

 

The amount of credit distributed is required to be filed by the 13th of the next month in the form GSTR 6. The branch standing to receive the tax credit can view its distribution under GSTR 6A, a form that is auto-populated on the supplier side. The branch receiving the return can claim it by stating it in the GSTR 3B. Moreover, any ISD under GST must bear in mind that they need not file the GSTR 9 form each year.

 

  • Distribution of Input Tax Credit: In case of the reverse charge mechanism, tax credit is not to be distributed to the recipient branches or offices. The ISP must, in this case, use these tax credits as an ordinary taxpayer and not a registered Input Service Distributor.

Process of Recovery for Wrong Distribution of Credit by ISD

The distribution of various credits under IGST, CGST and SGST is required to be done in a manner prescribed by the GST. Here are some rules that every Input Service Distributor under gst must be aware of: 

 

  • If tax credit is available against one specific input service that is used solely by just one recipient, it must be sent only to that recipient and none other.

  • In case tax credit is available against the services that are utilised by more than one recipient, the ISD must distribute these amongst all the recipient in a manner proportionate with their turnover ratio

  • When a tax credit is available that is used by all the recipients of the ISD, it should be distributed among all of them in proportion to their turnover ratios during that particular year.

Evidently, the GST Act does not allow for mistakes like credit distribution to any recipient that may be more than the amount available for distribution. It also states that the amount should not be distributed in an inappropriate ratio among any recipients.

 

However, ISDs may at times make mistakes. But thankfully, they can recover any extra amount distributed from the recipient under the GST Act’s provisions of ‘Demand and Recovery’ to initiate such a recovery along with an interest.

 

The job of an ISD comes loaded with a lot of responsibility. They are entrusted with the complex distribution of tax credit among several branches. In fact, in case of mistakes, they may be required to accrue an interest from recipients of inappropriate amounts. So, they must familiarise themselves well with their duties and responsibilities as Input Service Distributor under GST.

FAQs on ISD Under GST

  • ✔️Can a taxpayer have multiple ISD under GST?

    Yes, a single company can have multiple ISD. There is no limit to the registration of ISDs.

  • ✔️Can ISD pay GST under RCM?

    No, an ISD is not allowed to accept any invoices on which tax is to be paid under the reverse charge mechanism (RCM).

  • ✔️Is the Input Service Distributor required to file a GST return?

    ISDs are not required to file an annual return.

  • ✔️Will Input Service Distributors be required to be separately registered other than the existing taxpayer registration?

    Yes. ISD registration is different from normal registration as it is for one office of the taxpayer.

  • ✔️Can credit be distributed to only revenue-generating units?

    Input tax credit on revenue-generating units should be allocated to set off against their GST tax liability.

  • ✔️What are the consequences of credit distributed in contravention of the provisions of the Act?

    If credit is distributed in defiance of the Act, it can be recovered from the recipient along with interest.