The concept of Input Service Distributor (ISD) is into existence since the Service Tax Regime. As per the CENVAT credit rules 2004, ISD means an:
“office of the manufacturer or the producer of final products or provider of output service which receives invoices issued towards the purchase of the input services . This office issues invoice, bill or challan for the purpose of distributing the credit of the service tax paid on services rendered to such manufacturer or producer.”
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Hence, the idea of ISD under GST has its roots in the service tax regime.Therefore, let’s first take a look at how a manufacturing unit’s head office and it’s branch units function to understand the very idea of ISD.
Typically, head office of an organization obtains services that are common for all the company’s units located across the country. As a result, the supplier of such services issues an invoice in the name of the company’s head office. This is because the purchase orders are raised from the headquarters itself.
Say for instance, Kapoor Ltd has head office in Mumbai and branch units in Delhi, Hyderabad and Kolkata. The branch unit at Delhi procures certain services. But, the invoice against such services is issued in the name and address of Mumbai head office.
Now, the head office cannot utilize the input tax credit (ITC) on the services received. This is despite the fact the head office issues the invoice in its own name. It is so because the head office is not the actual recipient of input services. Moreover, the branch units cannot claim the ITC benefit as they do not have a tax invoice. As per the CGST act 2017, establishments can claim ITC only if they have the tax invoice.
Furthermore, there are few set of services that are procured for the entire organization. These services include marketing, insurance, telecommunication, accounting, software services etc.
These services are utilized by all the units of the organization. But a single invoice is issued to the head office of the company. Thus, this expenditure is supposed to be apportioned between branch units that consume the services. It is because this common expenditure is for all the units.
Similarly, the input tax credit received on such services needs to be distributed among the consuming branch units. Hence, the concept of ISD has been introduced in order to apportion the ITC among the units consuming such common services.
What is an Input Service Distributor?
According to section 2 (61) of the CGST act, an Input Service Distributor has the following characteristics:
- It is an office of the supplier of goods or services or both
- This office receives tax invoices under section 31 towards the receipt of input services used by its branches
- It issues a prescribed document for the purposes of distributing tax credit on such services. This credit is against central tax, state tax, integrated tax or union territory tax paid on the said services.
- This document is issued to its branches, who could be supplier of taxable goods or services or both. These branches can have different GSTIN numbers, but must have the same Permanent Account Number (PAN) as the head office (ISD).
Hence, an office of the supplier that intends to act as an Input Service Distributor needs to obtain registration as an ISD separately. This means that the registration number of an organization as an ISD is separate from the registration number obtained by it under section 22 of CGST act, 2017.
Distribution of ITC by Input Service Distributor
An ISD distributes input tax credit in the same month in which it is made available to the central office. Thus, the details of ITC distribution are furnished in form GSTR – 6.
The head office as an ISD needs to issue an invoice in order to distribute ITC. Such a tax invoice should include the following details:
- Name, address and GSTIN of the Input Service Distributor
Invoice Tax Serial Number. This number should not exceed 16 characters and must contain alphabets, numerals or special characters.
- Further, it should be unique for the given financial year. Also, banking companies and financial institutions are exempted from this condition.
- Date of issue of such an invoice
- Name, address and GSTIN of the recipient to whom the credit is distributed
- Amount of credit distributed
- Signature or digital signature of the Input Service Distributor or his authorized representative.
Amount of Credit To Be Given
The amount of credit shall not exceed the amount available for distribution.
Eligible and Non-Eligible ITC
The ISD needs to distribute non-eligible and eligible credit separately. For this, it first needs to identify eligible and ineligible credit. This is achieved by checking section 17(5) of the CGST Act for the credit that is not allowed.
ITC To Be Given To Specific Recipient Only
The credit for tax paid on input services attributable to a specific recipient of credit shall be distributed only to that recipient only.
Distribution of ITC If There Is More Than One Recipient
ITC for input services is attributable to all such recipients to whom ITC is attributable. This is in case there is more than one recipient who has utilized common services. This credit needs to be distributed on pro-rata basis.
ITC needs to be distributed among recipients on pro-rata basis in case ITC is attributable to more than one recipient. The pro-rata calculation is based on a ratio. This ratio is the ratio between following components: (i) the turnover of a recipient in a particular State or Union Territory to (ii) the aggregate of the turnover of all such recipients to whom such input service is attributable. This ITC is distributed provided the recipients or branch units are operational during a relevant period.
Calculation of Turnover
The term “turnover” would also include sale of goods that are not taxable under the CGST Act in order to calculate turnover. However, goods covered under entry 84 of List I and Entry 51 and 54 of the Seventh Schedule to the Constitution shall be excluded.
Meaning of Relevant Period
The term “relevant period” above is defined under two circumstances:
- Firstly, the recipients of credit have turnover in their States or Union territories (UTs). This credit belongs to the financial year preceding the year during which credit is to be distributed. In this case, the said preceding financial year is considered as the relevant period.
- Secondly, if some or all recipients of the credit do not have any turnover in their States or UTs. This credit is in the financial year preceding the year during which the credit is to be distributed. In this case, the relevant period shall be the last quarter previous to the month during which credit is to be distributed. Provided the details of such turnover of the recipients is available.
Formula for Calculation of ITC
The formula used for the calculation of the ITC that needs to be distributed is as follows:
C1 = (T1/T) x C
C = Amount of total credit to be distributed
T1 = Turnover of recipient R1 during the relevant period
T = Sum of the turnover of all recipients to whom the input service is attributable during the relevant period
C1= ITC that is required to be distributed to recipient R1 (whether registered or not)
The above formula is applied for all the taxes under GST. That is Central Tax, State Tax, UT Tax and Integrated Tax.
Distribution of ITC
The ISD is required to distribute ITC in the following manner:
- The first case relates to the one where the ISD and the recipient unit are located in the same State. In such a case,
- The credit of central tax is distributed as central tax (CGST)
- Credit of State tax is distributed as State tax (SGST)
- The credit of UT Tax is distributed as UT Tax (UTGST)
- Credit of Integrated Tax is distributed as Integrated Tax
- The second case relates to the one where ISD and recipient are located in different States. In such a case, the credit of Central Tax, State Tax, UT Tax and Integrated Tax is distributed as IGST.
Credit Notes and Debit Notes Issued By The ISD
There are situations when a supplier of goods or services issues a credit note or a debit note after making a supply and issuing a tax invoice.
Credit Notes Issued By ISD
A credit note is a document that is issued by a supplier of goods or services, after making a supply and issuing a tax invoice, to a recipient. It is issued when:
- The taxable value or the tax charged in the tax invoice is more than the taxable value or tax payable in respect of such a supply
- Goods supplied are returned by the recipient
- Services or Goods supplied are found to be deficient
Debit Notes Issued By ISD
Whereas, a debit note is a document that is issued by the supplier of goods or services, after making a supply and issuing a tax invoice. It is issued when the taxable value or the tax charged in the tax invoice is less than the taxable value or tax payable in respect of such a supply.
Treatment of ITC In Case of Credit Notes
Now, the ITC distributed to the branch units against the original invoice gets reduced when the supplier issues a credit note to an ISD. This is on account of either taxable value charged exceeding the taxable value of supply made. Or it is because of goods returned by the recipient.
Furthermore, the amount of ITC distributed as per the original invoice to the branch units gets reduced. It is reduced in the same ratio in which the ITC was distributed to them originally.
Hence, an ISD is required to issue an “ISD credit note” to branch units to reduce ITC proportionately. This document is issued in the same month in which the credit note issued to ISD is included in GSTR-6 return of the ISD. Thus, this amount is added to the output tax liability of the recipient. This is done in case the amount of ITC apportioned is less than the amount to be adjusted.
However, there are cases where the amount apportioned is added to the output tax liability of the recipient. This is done where the amount so apportioned is in the negative. The negative amount is due to the amount of credit under distribution being less than the amount to be adjusted.
Now, same process shall be followed where the amount of ITC distributed by an ISD is reduced later on for any of the recipients. The distributed ITC is reduced for reasons other than the above mentioned.
Distribution of ITC To A Wrong Recipient
Furthermore, there are cases when any credit is distributed to a wrong establishment. This can be rectified by issuing ISD credit note to the recipient to whom ITC is wrongly distributed. Also, ISD invoice for the said amount is issued to the recipient who is correctly entitled for such credit. Hence, both the documents should be reflected in GSTR-6 of the ISD in the same month.
Treatment of ITC In Case of Debit Notes
Then, there are also cases when a supplier issues a debit note to an ISD. Thus, the ISD shall distribute the ITC arising on account of supplier issuing debit note to ISD. This ITC is distributed to the recipients in the month in which the debit note issued to ISD-office is included in the return in FORM GSTR-6. In this case, it is not necessary to distribute the credit to other establishments in the same portion to which credit pertaining to original invoice was distributed.
Excess Distribution of ITC To One or More Recipients
Section 21 provides deals with a case where ISD distributes credit in contravention of the provisions contained in section 20. This act results in excess distribution of credit to one or more recipients of credit.
Thus, the excess credit so distributed shall be recovered from such recipients along with interest.
Filing of Return By ISD
Every ISD shall furnish electronically the return in FORM GSTR-6 as per Rule 65 of the CGST Rules 2017. This form is filled on the basis of details contained in FORM GSTR-6A. However, certain details contained in FORM GSTR-6A are added, corrected or deleted in order to fill GSTR-6.
Thus, GSTR-6 Contains details of tax invoices on which credit has been received and those issued under section 20. Furthermore, the details of invoices furnished by an ISD in FORM GSTR-6 shall be made available to the recipient of credit. These details are made available to the recipient in Part B of FORM GSTR 2A electronically through the common portal. Thus, the said recipient may include these details in FORM GSTR-2.
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Thus, an ISD needs to follow the compliance as mentioned above with regards to filing returns and distributing ITC. To understand the concept of ISD in a much better way, please read the infographic on What is Input Service Distributor Under GST.