How ISD will distribute the ITC of RCM

An Input Service Distributor (ISD) is a taxpayer who receives tax invoices for the services which are used by its branches. It distributes the tax paid known as the Input Tax Credit (ITC), to such branches on a proportional basis by issuing ISD invoices. The branches can have different GSTINs but must have the same PAN as that of ISD. It is important to note that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods (inputs or capital goods). In the Finance Act 2024 (No. 8 of 2024) and in the Finance Bill 2025  the many changes were proposed in relation to ISD and all these changes would be effective from 1st April 2025. In this article we will discuss the proposed changes w.r.t  RCM in the ISD provisions which were not present earlier in the ISD regime and will also get to know how the ISD will distribute the ITC of RCM among their units.

(A). Proposed changes vide Finance Act 2024 w.r.t to RCM in the ISD provisions (to be effective from 1st April 2025):

Vide section11 of Finance Act 2024 it was proposed to amend the definition of "Input Service Distributor" that ISD means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax u/s 9 (3) or 9 (4), for or on behalf of distinct persons and liable to distribute the ITC in respect of such invoices in the manner provided in section 20".

Also vide section 12 of Finance Act 2024 it was proposed to amend the section 20 of CGST Act 2017 i.e., any office receiving the tax invoices towards input services, on behalf of branch offices, including the services liable under RCM u/s 9(3) & 9(4) of CGST Act i.e., (intra state RCM supplies) is mandated to be registered as ISD u/s 24 and the ISD shall distribute the credit of invoices received by him, including the credit of services subject to levy of tax u/s 9 (3) or 9(4) paid by a distinct person registered in the same State as the said ISD.

Impact of this amendment:  Earlier in the definition of ISD, there was no mention of services covered u/s 9 (3) or 9(4). Similarly, in section 20 of CGST Act there was no mention of RCM services.  Thus from the above amendment it is clear that now the ISD has to distribute the credit of (intra state RCM supplies) also. Further, the ISD provisions are mandatory with effect from 1st April 2025.

(B).  Proposed changes vide Finance Bill 2025 w.r.t to RCM in the ISD provisions (to be effective from 1st April 2025):

Vide section 116 & 120  of Finance Bill 2025 the Inter state RCM supplies are also included in the ISD definition given u/s 2(61) of CGST and similarly in section 20 of CGST Act the Inter state RCM supplies are also included.

Impact of this amendment:  The ISD has to distribute the credit of inter state RCM supplies also.

Till now we have discussed that with effect from 1st April 2025, if any office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under RCM for or on behalf of distinct persons and liable to distribute the ITC in respect of such invoices in the manner provided in section 20. Now, we are going to discuss how the ITC of RCM would be deposited by the ISD.

Rule 39 of CGST Rules 2017 prescribes the procedure for distribution of input tax credit by Input Service Distributor but there is no procedure prescribed under rule 39 for distribution of ITC of RCM. Thus vide Notification No. 12/2024 CT dated 10th July, 2024 a new sub rule 1A was inserted (not yet notified) after sub rule 1 of rule 39 of CGST Rules. The said sub rule 1A is laid down as follows;

"(1A) For the distribution of credit in respect of input services, attributable to one or more distinct persons, subject to levy of tax under sub-section (3) or (4) of section 9, a registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note as per the provisions of sub-rule(1A) of rule 54 to transfer the credit of such common input services to the Input Service Distributor, and such credit shall be distributed by the said Input Service Distributor in the manner as provided in sub-rule (1).";

The said sub rule 1A of rule 39 of CGST Rules 2017 is inserted to provide a clear mechanism for distribution of ITC of RCM by the input service distributor.  The said rule 1A states that for distribution of credit in respect of input services covered u/s 9 (3) or 9(4), the registered person (having same pan and same state code as of ISD) will issue an invoice to transfer the credit of common services to ISD and the ISD will distribute such ITC.

This new sub-rule has been inserted to link the rule 54(1A) with rule 39 of the CGST Rules to enable the transfer of credit of taxes paid under RCM by the Head Office, to the ISD, which was absent in the erstwhile rule 39 of the CGST Rules.

Rule 54(1A) of CGST Rules 2017 states that when a registered person (having the same PAN and State code as of ISD) is required to issue an invoice to transfer the credit of common input services to the ISD, shall contain the following details:-

Name, address and GSTIN of registered person having the same PAN and same State code as the ISD

A consecutive serial number not exceeding sixteen characters

Date of its issue;

GSTIN of supplier of common service and original invoice number whose credit is sought to be transferred to the ISD

Name, address and GSTIN of ISD

Taxable value, rate and amount of the credit to be transferred

Signature or digital signature of the registered person or his authorised representative.

Conclusion: For distribution of credit in respect of RCM, the registered person (having the same pan and same state code as of ISD) will deposit the tax under RCM and then said registered person will issue an invoice to transfer the credit of common services to ISD and the ISD will distribute such ITC.

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.