Input Service Distributor under GST with Example

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What is the concept of Input Service Distributor under GST with Example

The concept of Input Service Distributor (ISD) was present under the Service Tax regime also before the introduction of GST. This old concept is adopted under GST with some modifications. The purpose of introduction of ISD is to distribute input tax credit on services among the units of the same entity having same PAN which supplies goods or services or both.

ISD is  an  office of an entity which requires authorization to distribute the ITC services by way of registration with the authorities. The registration of office of an entity as ISD is different from the branch office registration. Usually Branch office registration facilitates supplies of goods or services or both among the branches and principal place of business. Further the branches in other  States of the same PAN entity are required to be registered in the respective States and they are all distinct persons in the eyes of GST Law.

But ISD is the distinct office and it cannot make any supply and raise invoices for the supply and it is not a place of business. It exists merely to distribute the input services related input tax credit which are received on behalf of the units of the same entity which supplies goods, services or both. ISD shall distribute the input service-related input tax credit in the  same month in which input credit on services is received and shall report the same by filing the return.

Example:

Head office of PQR Ltd. is located at Pune having branches at Kolhapur, Delhi and Mumbai. The head office incurred annual software maintenance expense(service received) on behalf of all its branches and received the invoice for the same. Since software is used by all its branches, the input tax credit of entire services cannot be claimed at Pune. The same has to be distributed to all the three locations. Here, the Head office at Pune is the Input Service Distributor.

Definition of ‘Input Service Distributor’ under GST Law

Section 2(61) of CGST Act defines Input Service Distributor to mean “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”

The definition appears to indicate that ISD shall not raise any taxable invoice. ISD shall only be a recipient and more specifically only  services  and distribute the resultant input tax credit.

ISD must be registered exclusively for receiving input credit service invoice and distribution of the same to related units. ISD cannot involve in any business activity of supply.

From the above it is clear that ISD is an office of an entity which does not involve in supply of goods or services or both but receives invoice of Input service and distributes the credit of CGST, SGST, UTGST and IGST, attributable to the concerned unit only of the supplier having same PAN.

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Sections Applicable to Input Service Distributor under GST

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Section/ RuleSubject
Section 2 (61)Definition of Input Service Distributor
Section 16Eligibility and Conditions for taking Input Tax Credit
Section 17 (5)Ineligible Credit
Section 20Manner of Distribution by ISD
Section 24Compulsory registration
Rule 39Procedure for distribution of Input Tax Credit by ISD
Rule 54Tax Invoice in special cases
Rule 65Form and manner of submission of return by Input Service Distributor
Section 73Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized for any reason other than fraud or any willful mis-statement or suppression of facts.
Section 74Determination of tax not paid or short paid or erroneously refunded or input tax credit wrongly availed or utilized by reason of fraud or any willful mis-statement or suppression of facts.

Registration of Input Service Distributor under GST

Section 24 of CGST Act, specifies, when registration is compulsory. According to it, ISD must be compulsorily registered irrespective of the turnover limit.

Section 25 deals with the procedure involved in registration which specially provides that every person being an Input Service Distributor shall make a separate application for registration as such Input Service Distributor.

The procedure for registration of an Input Service Distributor and registered person is the same under GST. Input Service Distributor shall make a separate application for registration as such Input Service Distributor.

  • The permanent account number shall be validated online by the common portal from the database maintained by the Central Board of Direct Taxes.
  • Mobile number and email shall be validated by sending One Time Password.
  • On successful verification of the permanent account number, mobile number and e-mail address, a temporary reference number shall be generated and communicated to the applicant on the said mobile number and e-mail address.
  • The applicant shall electronically submit an application in Part B of Form GST REG-01. Form REG 1 is the form which needs to be filled  for registration under GST. Serial no 14, sub clause (ix) deals with ISD registration.
  • The application should be duly signed or verified through electronic verification code, along with the documents specified in the said Form.
  • The applicant shall, while submitting an application under sub-rule (4), with effect from 01.04.2020, undergo authentication of Aadhaar  number for grant of registration.
  • On receipt of an application under sub-rule (4), an acknowledgement shall be issued electronically to the applicant in Form GST REG-02.

Example 1:

PQR Ltd has its place of business at Pune, Maharashtra and is registered under GST. It has branches in Belgaum, Chennai and in Mangalore. It has  paid Rs. 2,00,000 as input tax on services. Under the Head “CGST” an amount of Rs.1,00,000 and “SGST” an amount of RS.1,00,000 towards recruitment purpose from Pune. The persons recruited are posted in all its branches at Belgaum, Chennai and Mangalore. Whether the credit can be distributed without ISD registration?

Answer: Separate ISD registration is required at Pune for distribution of input tax credit service of Rs 2,00,000 to various branches place of supply of distinct person. ISD is a registration of an entity for distribution of  services  and is different from registration of the place of business.

Example 2:

ABC Ltd has various lines of business all  over  India. Whether the ISD needs to be registered in all States?

Answer: ISD registration at each State may be required if the office of the entity at all States receive invoice of input services on behalf of other units or place of business. For example, if one ISD is registered at Pune and it alone receives all invoices of input service of its business, then one ISD registration is sufficient. If various offices at different places receive invoices on behalf of other units at various places then ISD registration is required at each such State to distribute the ITC services having nexus with their outward supply.

Distribution of Input Tax Credit on Services

The credit of tax paid on input services attributable to a recipient of  credit shall be distributed only to that recipient.

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.

ISD shall distribute the input credit in the same month and its details must be furnished in Form GSTR 6.

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Method of Calculation of  Input Tax Credit to be Distributed

Input tax credit is required to be distributed in  accordance with the  provision of clause (d) and (e) of sub section (2) of Section 20 to one of the recipient ‘R1’ whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable including those who supply the exempt supply.

C1= (t1 / T) x C where,

  • “C” is the amount of credit to be distributed.
  • “t1” is the turnover of recipient
  • “T” is the aggregate of the turnover, during the relevant period, of  all recipients to whom the input service is attributable in accordance with the provisions of section 20.

Relevant Period Means

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

Notes:

  1. If IGST is to be distributed, then it will be distributed as IGST only.
  2. If SGST/ CGST/ UTGST has to be distributed to a recipient in the same State in which the ISD is located then it will be distributed as  SGST/  CGST/UTGST respectively. If it is to be distributed to a recipient in other State/  Union Territory, then the credit can be distributed as IGST.

Also Read: What is Statement of Financial Transaction(SFT)?

Returns of Input Service Distributor under GST

ISD should file monthly returns in Form GSTR-6 (give details of ISD tax invoices) within 13 days after the end of the month. These details will be reflected in Form GSTR 2A of respective branches/unit.

Notes:

Form GSTR-6 can be filed only after 10th of the month and before 13th of the month succeeding the tax period.

ISD will not have any reverse charge supplies. If ISD wants to take reverse charge supplies, then ISD has to separately register as normal taxpayer.

ISD will attract late fee and any other liability only.

Mismatch liability between GSTR-1 of supplier and GSTR-6 of ISD will be added to ISD and further ISD taxpayer has to issue ISD credit note to reduce the ITC distributed earlier to its registered recipient units.

Refund claimed from cash ledger through Table 11 will result in a debit entry in electronic cash ledger.

Also Read: Why capital gain tax is charged.How to avail exemptions of capital gain?

Consequence of Excess Distribution of Credit by ISD

Circular No 71/45/2018-GST dated 26.10.2018 clarifies the consequence of excess distribution of credit by ISD to one unit.

  1. According to Section 21 of the CGST Act where the ISD distributes the credit in contravention of the provisions contained in section 20 of the CGST Act 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 penalty, if any.
  2. The recipient unit (s) which has received excess credit from ISD may deposit the said excess amount voluntarily along with interest if any by using Form GST DRC-03.
  3. If the said recipient unit/ units does/ do not come forward voluntarily, necessary proceedings may be initiated against the said unit(s) under the provisions of section 73 or 74 of the CGST Act  as  the case may  be. Form GST DRC-07 can be used by the tax authorities in such cases.
  4. The ISD would also be liable to a general penalty under the provisions contained in section 122(1)(ix) of the CGST Act.

Example 1:

The total credit available to ISD is Rs 5,00,000/- and the credit shall be distributed equally to Pune and Mumbai. If the ISD distributes the credit of Rs.3,00,000/- to Pune and Rs.2,00,000 to Mumbai, what would be the consequence?

Answer: The excess credit of Rs.50,000/- distributed to Pune would be recovered from the recipient Pune along with interest and provisions of section 73 or 74 shall apply mutatis mutandis for effecting such payment of tax. Further the ITC of Rs.50,000/- recovered from Pune shall lapse and it will not be available to the Mumbai unit.

Frequently Asked Questions(FAQ’s)

What is Input Service Distributor under GST with example?

Input Service Distributor is an office of a business which receives tax invoices for input services and distributes available ITC to other branch offices of the same business. ISD and the branches may have different GSTIN’s, but they must have same PAN.

What are Input Services in GST?

Input Services are services which are used or intended to be used in the course or furtherance of business.

How do I distribute ITC under GST?

Distribute with the help of following formula:
C1= (t1 / T) x C where,
1.“C” is the amount of credit to be distributed.
2.“t1” is the turnover of recipient
3.“T” is the aggregate of the turnover, during the relevant period, of  all recipients to whom the input service is attributable in accordance with the provisions of section 20.

What to do after Excess Distribution of Credit by ISD?

Read Circular No 71/45/2018-GST dated 26.10.2018 which clarifies the consequence of excess distribution of credit by ISD to one unit.

I hope you understood what is “Input Service Distributor under GST with Example”.If you have any queries,feel free to ask in the comments section.

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