Rule 39 of CGST/SGST Rules

Rule 39 of CGST/SGST Rules

Overview

Companies may have their Head Office at one place and units at other places which may be registered separately. The Head Office would be procuring certain services which would be for common utilization of all units across the country. The bills for such expenses would be raised on the Head Office but the Head Office itself would not be providing any output supply so as to utilize the credit which gets accumulated on account of such input services.

Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units. ISD mechanism enables proportionate distribution of credit of input services amongst all the consuming units. The concept of ISD under GST is a legacy carried over from the service tax regime.

Thus, the concept of ISD is a facility made available to business having a large share of common expenditure and where billing/payment is done from a centralized location. The mechanism is meant to simplify the credit taking process for entities and the facility is meant to strengthen the seamless flow of credit under GST.

Separate registration for an ISD

An ISD is compulsorily required to obtain a separate registration as an ISD even though it may be separately registered. There is no threshold limit for registration for an ISD. The other locations may be registered separately. Since the services relate to other locations the corresponding credit should be transferred to such locations (having separate registrations) as the output services are being provided there.

Section 20 read with Rule 39 of CGST/SGST RulesManner of distribution of credit by an ISD

The ISD is required to maintain arithmetical accuracy and ensure that the credit distributed does not exceed the credit available with it for distribution. Further, in distributing the credit among different locations of the entity which are supplying goods and/or services and have same PAN as that of the ISD(‘recipients’) – it must follow these principles:

1.The credit connected to an input service must be distributed only to the particular recipient to whom that input service is attributable.

2.If the input service is attributable to more than one recipient, the relevant ITC is distributed to such recipients in the ratio of turnover of the recipient in a State / Union Territory to the aggregate turnover of all the recipients to whom the input service is attributable and which are operational during the current year.

3.ITC pertaining to input services which are common for all units, is distributed to all the recipients in the ratio of turnover as described in point no.2 above.

4.Both ineligible and eligible ITC are distributed separately.

5.ITC of CGST, SGST/UTGST and IGST are distributed separately.

Proportionate distribution of credit to more than one recipient/all the recipients

  • For working out such pro rata distribution (as mentioned in point no.2 and 3 above), the turnover during the relevant period is to be considered, both for turnover of the recipient in a State / Union Territory as well as for aggregate turnover of all recipients.
  • “Relevant period” for working out the above distribution is the previous financial year, if all the recipients of credit had turnover in their State / Union Territory during that year. If some or all the recipients did not have turnover in their State / Union territory during the previous financial year, then the last quarter for which details of turnover of all the recipients is available, prior to the month for which credit is to be distributed, will be the “relevant period”.
  • If there are two or more locations of a recipient in a State / Union territory, the sum of their turnover is to be considered in working out the proportion of the credit that will be distributed to that registration.(This is because a PAN number will have a single registration for all its locations within a business vertical in a State / Union territory)
  • The credit attributable to a recipient is distributed even if such recipient is unregistered or is making exempt supplies.
  • Where both taxable and non-taxable goods are supplied, the “turnover” excludes central excise duty, State excise duty, central sales tax and VAT.
  • Formula for distribution of credit

C1 = (t1÷T) × C

where,

  • “C” is the credit to be distributed,
  • “t1” is the turnover of the recipient 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.

Distribution of Taxes

1.ITC of CGST, SGST/UTGST in respect of recipient located in the same State/Union Territory is distributed as CGST and SGST/UTGST respectively.

2.ITC of CGST and SGST/UTGST, in respect of a recipient located in a different State/Union territory, is distributed as IGST (total of ITC of CGST and SGST/UTGST which were to be distributed to such recipient).

3.ITC on account of IGST is distributed as IGST.

Note:

Section 20 provides that credit of integrated tax be distributed as “integrated tax or central tax”. However, rule 39 of CGST Rules provides that “input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient.”

Procedural aspects of distribution of credit

1.The ISD has to issue an ISD invoice, as prescribed in rule 54(1) of the CGST Rules, for distributing ITC. It should be clearly indicated in such invoice that it is issued only for distribution of ITC.

2.The ISD needs to issue a ISD credit note, as prescribed in rule 54(1) of the CGST Rules, for reduction in credit if the distributed credit gets reduced for any reason.

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3.The ISD invoice and ISD credit note must contain the following information:

  • Name, address and GSTIN of the ISD and recipient of credit;
  • A consecutive serial number up to 16 characters, containing alphabets or numerals or special characters or any combination thereof, for a financial year;
  • Date of issue;
  • Amount of the credit distributed;
  • Signature of the ISD or his authorized representative.

Relaxation for banks & FIs:

If the ISD is a banking company/ financial institution including NBFC, the document for distributing credit need not be serially numbered.

4.ITC available for distribution in a month is to be distributed in the same month.

5.Details of distribution of credit and all ISD invoices issued should be furnished by ISD in monthly GSTR-6 within 13 days after the end of the month. The details in the returns are made available to the respective recipients in their GSTR 2A. An ISD is not required to file annual return.

6.An ISD cannot accept any invoices on which tax is to be discharged under reverse charge mechanism. This is because the ISD mechanism is only to facilitate distribution of credit of taxes paid. The ISD itself cannot discharge any tax liability (as person liable to pay tax) and remit tax to Government account. If ISD wants to take reverse charge supplies, then in that case ISD has to separately register as normal taxpayer.

Issue of debit note and credit note on ISD

Issue of a debit note

  • The additional ITC on account of issue of a debit note to the ISD is distributed by the ISD, in accordance with the provisions discussed above, in the month in which such debit note is included in GSTR-6.

Issue of a credit note

  • If a credit note is issued to the ISD, the ITC to be reduced is apportioned amongst the relevant recipients in the same ratio in which the original credit was distributed.
  • Such apportioned credit is reduced from the credit to be distributed in the month in which the credit note is included in GSTR-6. If the apportioned credit exceeds the credit to be distributed, the same is added to the output tax liability of the recipient.
  • This process is also followed in case of reduction of credit already distributed for any other reason e.g., when the credit is distributed to a wrong recipient.

Recovery of excess credit distributed to a recipient

If the ISD has distributed excess credit to any recipient, the excess will be recovered from the recipient with interest as if it was tax not paid by initiating action under section 73 or 74. Penalties may be applicable depending on the circumstances. Circular No. 71/45/2018 GST dated 26.10.2018 has clarified that the ISD would also be liable to a general penalty under section 122(1)(ix).

Summary

ParticularsISDUnit IUnit IIUnit IIIUnit IV
(location = Mumbai)(location = Mumbai)(location = Delhi)(location = Chennai)(location = Bihar)
DistributionIGSTIGSTIGSTIGSTIGST
CGSTCGSTIGSTIGSTIGST
SGST/UTGSTSGST/UTGSTIGSTIGSTIGST

Examples

1.PQR Ltd. has following units:

A: Factory in Hassan, Karnataka; closed from 2017-18 onwards, no turnover.

B: Factory in Tumkur, Karnataka; turnover of Rs. 27 crores in 2017-18;

C: Service centre in Hyderabad, Telangana; turnover of Rs. 1 crore in 2017-18;

D: Service centre in Chennai, Tamil Nadu; turnover of 2 crores in 2017-18;

PQR Ltd.’s corporate office functions as ISD. It has to distribute ITC of Rs. 9 lakh for December, 2018. Of this, an invoice involving tax of Rs. 3 lakh pertains to technical consultancy for Tumkur unit. What should be the distribution of the credit?

Ans. As per Rule 39(d) of CGST Rules relating to ITC,

1.Rs. 3 lakh is attributable to Tumkur unit, and will be transferred to Tumkur unit only as per Sec. 20(2)(c).

2.Of the remaining Rs. 6 lakh, Hassan unit will not be entitled to any credit as ITC is distributed to only those recipients which supply goods and /or services.

3.Rs. 6 lakh have to be distributed among Tumkur unit and the service centres in Hyderabad and Chennai in proportion of their turnover in the previous FY, that is, in 2017-18.

  • Tumkur unit will get (27 crore / 30 crore) x 6 lakh = Rs. 5.4 lakh;
  • Hyderabad service centre will get (1 crore /30 crore) x 6 lakh = Rs. 20,000; and
  • Chennai service centre will get (2 crore /30 crore) x 6 Lakh = Rs. 40,000.

2.PQR Ltd, having its head Office at Mumbai, is registered as ISD. It has three units in different cities situated in different States namely ‘Mumbai’, ‘Jabalpur’ and ‘Delhi’ which are operational in the current year.

M/s PQR Ltd furnishes the following information for the month of July 2020:

  • CGST paid on services used only for Mumbai Unit: Rs. 3,00,000/-
  • IGST, CGST & SGST paid on services used for all units: Rs. 12,00,000/-

Total turnover of the units for the previous financial year are as follows: –

UnitTurnover (Rs.)
Total Turnover of three unitsRs. 10,00,00,000
Turnover of Mumbai unitRs. 5,00,00,000
Turnover of Jabalpur unitRs. 3,00,00,000

Determine the credit to be distributed by PQR Ltd. to each of its three units.

Ans.

ParticularsTotal credit availableMumbaiJabalpurDelhi
CGST paid on services used only for Mumbai Unit3,00,0003,00,00000
IGST, CGST & SGST paid on services used for all units Distribution on pro rata basis to all the units which are operational in the current year12,00,0006,00,0003,60,0002,40,000
Total15,00,0009,00,0003,60,0002,40,000

Notes:

Credit distributed pro rata on the basis of the turnover of all the units is as under: –

(a) Unit Mumbai: (Rs. 5,00,00,000/ Rs.10,00,00,000) * Rs. 12,00,000 = Rs.6,00,000

(b) Unit Jabalpur: (Rs. 3,00,00,000/ Rs. 10,00,00,000) * Rs. 12,00,000 = Rs.3,60,000

(c) Unit Delhi: (Rs. 2,00,00,000/ Rs.10,00,00,000) * Rs. 12,00,000 = Rs.2,40,000

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