GST Paid On Advance For Services- How ISD will distribute the ITC

ISD registration is mandatory with effect from 01.04.2025. Accordingly, if you have multiple units like A, B and C on same the PAN but having different GSTIN and all three units are receiving any service from third party and a single tax invoice is received from such third party in the name of unit A, then in such situation unit A has to obtain ISD registration compulsory for distributing the credit of such invoice to their other units B and C. In this respect a question can arise that if the advance is paid against any service which is to be received in future, then how ISD will distribute the credit of GST paid on such advance.

As we know that if the advance is received in respect of the supply of services to be made in future, GST would be payable at time of receipt of advance. For example an ISD has made an advance payment in respect of advertisement service to be commonly availed by their separately registered branches over the PAN India basis. In said situation the supplier (Advertisement Agency) will issue a tax invoice in the name of ISD for collecting GST on advance received. The supplier will deposit the GST on such advance to the Government. Now, ISD has to distribute the credit such GST paid to their branches but here the problem is that since the said services are yet to be received in future hence how the credit of the same can be distributed by ISD and claimed by branches since the service is not yet received.

There are some conditions for claiming the ITC which are given under section 16(2) of CGST Act 2017 and these are laid down as follows;

“(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,

(a) He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(aa) the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement of outward supplies and such details have been communicated to the recipient of such invoice or debit note in the manner specified under section 37;

(b) he has received the goods or services or both.
Explanation.- For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services-
(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;
(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person.

(ba) the details of input tax credit in respect of the said supply communicated to such registered person under section 38 has not been restricted

(c) Subject to the provisions of section 41 or , the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

(d) He has furnished the return under section 39”

Thus as per section 16(2)(b) it is clear that the ITC can be availed by the registered person only when the goods or services are received by him. In our example the advertisement services are to be received in future, then how the credit of GST paid on said advance will be distributed by the ISD to their branches.

Rule 39 of CGST Rules 2017 prescribes the procedure for distribution of input tax credit by Input Service Distributor and as per the language of Rule 39(1) “An Input Service Distributor shall distribute input tax credit in the manner and subject to the conditions prescribed therein. Hence from the wording of rule 39(1) it is also clear that the ISD has to distribute the “input tax credit”.

When the services are not yet received and the tax is paid on the advance given to the supplier, then such amount of GST paid can’t be treated as ITC as per section 16(2)(c). Since it is not considered as ITC then how can ISD distribute the same to their branches.

In respect of the distribution of ITC by ISD for GST paid on advances, there is no clarification given by the Government. Due to lack of clarification the following two options are left with ISD:
To defer the ITC of such GST paid on the advance OR
To distribute such ITC even though the services are not received.

As the services are yet to be received hence the ISD can defer the ITC of GST paid on the advances and can distribute the same to their branches as and when such services are received.

However, the major issue that will be faced by ISD in this case is that the GST Portal does not allow the ISD to defer any ITC in GSTR-6 as there is no table specified in GSTR-6 through which the ITC can be deferred by ISD and distributed in subsequent months.

On other hand the option to defer the ITC is available in GSTR-3B i.e., the taxpayer can defer the ITC which he does not want to claim in a particular month. The taxpayer can show the said ITC in table 4B(2) of GSTR-3B and he can claim the same in the next month by showing it in table 4A(5) and table 4D(1)of GSTR-3B.

Since the ISD is not required to file GSTR-1 and GSTR-3B, he is required to file GSTR-6 for distribution of ITC and in GSTR-6 there are no tables specified through which ITC can be deferred. Hence due to non availability of the option to defer the ITC for distribution by ISD, the ISD has to distribute all the ITC to their branches irrespective of the fact that the services are yet to be received.

Conclusion: The ISD has to distribute all the ITC to their branches even if the services in respect of the same are yet to be received, as there are no tables prescribed under GSTR-6 through which the ITC can be deferred by the ISD.

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.