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Input Service Distributor

An ‘Input Service Distributor (ISD)’ is defined in Section 2(61) of CGST Act 2017, as an office of the supplier of goods or services or both who receives Tax Invoice issued under Section 31 towards the receipt of "Input Services" and issues a prescribed document (Invoices) for the purposes of distributing the credit of CGST, SGST, IGST or UTGST paid on the said services to a supplier (A Unit of same company) of taxable goods or services or both having the same Permanent Account Number as that of the said office.

The concept of ISD is a facility provided to business incurring common expenditure and doing billing/ payment 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.

 

Key characteristics of ISD are as follow:

 

  • Such Office (ISD) must receive tax Invoicesfor inward supply of Services, if such person receiving only bill of supply then such person can’t be called as ISD 
  • Such Office must have registered as ISD this is apart from general registration as an tax payer
  • Such office should issue a prescribed document for the purposes of distributing credits indicating the amount of credit distributed
  • Supplier (whom Credit is being distributed) must have same PAN as ISD

 

Let’s understand 

Step 1:

Inward Supply of Taxable Service by third party to ISD

Step 2:

ISD will issue a prescribed document for the purposes of distributing credits 

Step 3:

Supplier will become eligible to avail linput credit

Note:  ISD & Recipient must have same PAN

 

Credit Distribution:

  • The Credit available for distribution in a month shall be distributed in the same month
  • The amount of Credit distributed can’t exceed ITC Available for Distribution
  • Credit of only Input Services can be distributed; Credit of Goods or capital goods can’t be distributed 
  • Credit of Input Services attributable to more than one unit shall be attributed to all those units on pro-rata basis
  • If the amount of Credit distributed by an ISD is reduced later on, the procedure for reducing the credit will be the same as for the reduction in case of credit note.
  • Eligible and ineligible Credit amount should be separately distributed
  • The ITC of IGST, CGST & SGST/UGST must be distributed separately.

 

Basis of Credit Distribution:

The credit has to be distributed only to that unit to which such inward supply/services is directly attributable to. If input services are attributable to more than one recipient of credit, the distribution shall be on the pro-rata basis of turnover in the State or Union Territory as the case may be.

Let’s take an example: VC Limited registered as ISD in Delhi and having 3 units in Punjab, Maharashtra & Haryana. These units have made supply in particular months as follows

 

Punjab: INR 2,00,000

Maharashtra: INR 3,00,000 

Haryana: INR 5,00,000 

 

ISD received Input services of 1 Lac on which ISD paid tax of 18000 and these services was commonly used for all three units. Credit Distribution will be as follows:

 

Punjab:  3600 (200000/1000000*18000)

Maharashtra:  5400 (300000/1000000*18000)

Haryana: 9000 (500000/1000000*18000)

 

 

Return Filling:

 

ISD is require to file their return on monthly basis in form GSTR 6

 

Reverse Charge Liability of ISD:

 

An ISD cannot accept any invoices on which tax is to be discharged under reverse charge mechanism. This is because that ISD mechanism is only to facilitate distribution of credit of taxes paid. The ISD itself cannot discharge any tax liability like a 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 and have to compliance with all the provisions of law separately like other registered person

 

Conclusion:

 

Input Service Distributor concept is taken from Service Tax Regime with some changes which allow an supplier to take registration in single state as an ISD, Generally a place where Head office or corporate office is situated, to pass on the credit on input services taken at such head office or corporate office. By doing so overcall cost can be reduced as generally head office or corporate office doesn’t make any outward supply hence they will not be eligible for Input Credit but once they will register as an ISD then they can pass such credit to all eligible units on whose behalf services availed. Please be noted that Input credit of goods can not be pass on through ISD, only credit of Input Services can be pass on.

 

 

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