Artcile on ISD Unleashed: A Deep Dive into Its Meaning and Functionality

ISD Unleashed: A Deep Dive into Its Meaning and Functionality

In large, multi-location businesses, managing input tax credits (ITC) for services shared across various branches can become a challenge. The Input Service Distributor (ISD) mechanism under the Goods and Services Tax (GST) addresses this issue by enabling the centralized distribution of ITC for common input services used by multiple branches. In this article, we will explore the concept of ISD in depth.

What is an ISD?

As per Section 2(61) of the 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.

NOTE: The ISD mechanism applies only to services, not goods.

Purpose of an ISD

An ISD allows businesses to centralize the receipt of common services (like legal, advertising, or IT support) at one location, such as the headquarters, and then allocate the ITC on these services to different branches that benefit from them. This ensures that the tax paid on services meant for the entire organization is properly distributed and utilized.

Example for better understanding

Consider Mehta Electronics, which has its head office in Ahmedabad and branches in Pune and Gurgaon. The head office receives an invoice for ERP system maintenance services (used by all branches). To claim the ITC on this service:

The Ahmedabad office registers as an ISD.
It distributes the GST amount among branches based on their turnover ratios.

For instance:

The ERP maintenance cost is INR 1,00,000 with 18% GST (INR 18,000).
The ITC is distributed among Ahmedabad, Pune, and Gurgaon based on their turnover ratios (4:5:1).
Thus, the GST credit will be allocated accordingly through an ISD Invoice containing the amount of credit distributed.

Registration of ISD under GST

Section 24 of the CGST Act (read with rule 8 of CGST Rules, 2017), requires an office of the supplier which intends to act as Input Service Distributor (ISD), to separately obtain registration as ISD. In other words, the registration number of an establishment as an ISD is different from its registration number u/s 22 of the Act. Notably, there is no threshold limit for ISD registration under GST.

Manner of distribution of credit by an ISD (Section 20 of the CGST Act read with Rule 39 of the CGST Rules)

1. ISD can distribute the amount of tax credit to recipients by issuing an ISD invoice in accordance with Rule 54(1).

2. The ISD invoice shall clearly indicate that it is issued only for distribution of input tax credit.

3. The amount of credit distributed ≤ the amount of credit available for distribution.

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

5. ITC pertaining to input services which are common for all units, is distributed to all the recipients in the ratio of turnover in the prescribed manner.

6. If the input service is attributable to more than 1 recipient, the relevant ITC should be distributed to such recipients in the ratio of turnover in a state/territory of such recipient during the relevant period, to the aggregate turnover of all the recipients to whom the input service is attributable and which are operational during the current year.

Where,

"Turnover in State" or "turnover in Union territory"

aggregate value of all taxable supplies (excluding inward RCM supplies)
+
exempt supplies made within a State or Union territory
+
exports and inter-State supplies made from that State or Union territory
-
amount of central, State, Union territory, integrated taxes, cess
-
amount of any duty or tax imposed under entries 84 and 92A of List I and entries 51 and 54 of List II of the Seventh Schedule to the Constitution.

Relevant period
All recipient having turnover in the preceding financial year	Financial year preceding the current period for which input tax credit is to be distributed
All recipients not having turnover in the preceding financial year	The last quarter preceding the current period for which input tax credit is to be distributed.

7. ITC available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in the prescribed form i.e. GSTR-6.

8. Both ineligible and eligible ITC are to be distributed separately.

9. ITC of CGST, SGST /UTGST and IGST are to be distributed separately.

10. The ISD shall distribute the credit of:

a) Central Tax (CGST): As Central Tax or Integrated Tax

b) State Tax (SGST) / Union Territory Tax (UTGST): As State tax/ Union territory tax or Integrated Tax, and

c) Integrate Tax (IGST): As Integrated tax or Central tax or State Tax/ Union territory tax

Further, the ITC of central tax and State tax or Union territory tax shall be distributed as follows:

Where ISD & recipient of credit are in the same state:

The credit is distributed as Central Tax (CGST) and State Tax (SGST) or Union Territory Tax (UTGST) respectively.

Where ISD and Recipient of credit are in different state:

The credit is distributed as Integrated Tax (IGST).

The amount distributed is equal to the combined ITC of Central Tax and State Tax (or UT Tax) that qualifies for distribution to such recipients, calculated using the formula below.

Credit Distribution

ITC available for distribution	ITC to be distributed as
ITC available for distribution	Same State	Different State
IGST	as IGST	as IGST
CGST	as CGST	as IGST
SGST	as SGST	as IGST

11. If ITC needs to be distributed to one of the recipients, say ‘R1’, the formula to calculate the amount of credit ‘C1’ is:

C1 = (t1/T) * C

Where,

“C” is the amount of credit to be distributed,

“t1” is the turnover of person R1 during the relevant period (refer to point 5), and

“T” is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable.

12. Issue of debit note- If any debit note is issued to the ISD by the supplier of service, the additional credit of tax that he gets on such debit note should be distributed by him attributable to any recipient in the month in which he includes the Debit note in GSTR-6.

13. Issue of credit note-

a) If a supplier issues a credit note to an ISD, it reduces the ITC that was originally distributed by the ISD to the recipients.

b) For this purpose, the ISD shall issue an “ISD credit note” as per Rule 54(1), in the same month in which the credit note issued by the supplier, is included in GSTR-6 return of the ISD.

c) The reduced ITC shall be apportioned to each recipient in the same ratio as the original ITC was distributed.

d) The apportioned amount is then either:

Reduced from the amount to be distributed in the current month’ GSTR-6 return, or
Added to the output tax liability of the respective recipient if the apportioned amount is in negative (i.e. if the ITC to be distributed is less than the amount to be adjusted).

e) If the ITC distributed by the ISD is reduced for any other reasons, the same procedure as above applies.

f) If any credit is distributed to a wrong recipient, it can be rectified by issuing ISD credit note to the recipient to which it was wrongly issued and issuing an ISD invoice for the said amount to the recipient which is correctly entitled for such credit. Both the documents should be reflected in GSTR-6 of the ISD in the same month.

Recovery of excess credit distributed by ISD to recipients (Section 21 of the CGST Act)

Where the Input Service Distributor distributes the credit in contravention of Section 20 resulting in excess distribution of credit to one or more recipients, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74 as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered. Further, Circular No.71/45/2018 GST dated.26.10.2018 was issued to provide clarification of the same which is reproduced below:

S.No.

Issue

Clarification

Representations have been received regarding the manner of recovery of excess credit distributed by an Input Service Distributor (ISD) in contravention of the provisions contained in section 20 of the CGST Act.

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) who have 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(s) does 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. It is further clarified that the ISD would also be liable to a general penalty under the provisions contained in section 122(1)(ix) of the CGST Act.

Returns (Section 39 read with Rule 65 of the CGST Rules)

An ISD shall file monthly return in FORM GSTR-6 on the basis of data contained in GSTR-6A. The due date for filing of GSTR 6 is 13th of next month. GSTR 6 has to be filed by every ISD even if it is a nil return.
Form GSTR-6A- It is an automatically generated form based on the details provided by the suppliers of an Input Service Distributor in their GSTR 1. GSTR-6A is a read-only form. Any changes to be made in GSTR-6A have to be done while filing GSTR-6.
Annual return is not applicable for ISD.
As per Rule 60(3) of the CGST Rules, the details of invoices furnished by an ISD in FORM GSTR-6 shall be made available to the recipient of credit in Part B of Form GSTR-2A and the said recipient may include the same in FORM GSTR-2.

Conclusion

The ISD mechanism is an essential tool for businesses with multiple branches, ensuring fair distribution of ITC on services. Properly understanding and applying ISD rules can streamline ITC management across locations, helping businesses utilize credits efficiently and comply with GST regulations.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.