Input Service Distributor or ISD is one of the type of taxpayer under GST that distributes the Input Tax Credit (ITC) belonging to its GSTIN under the same PAN. This is to say that the ISD distributes the Input Tax Credit to its units or branches having different GSTIN but having registration under the same PAN.
What is the need for Input Service Distributor?
The need for having an Input Service Distributor is mainly for businesses that have large scale of common expenses as well billings or payments from various locations. Having an Input Tax Distributor simplifies the credit taking process for entities. In addition to this, the facility strengthens the seamless flow of credit under GST.
Conditions that the ISD needs to fulfil
Following are the conditions that the ISD needs to fulfill:
Registration: In order to distribute Input Tax Credit, the taxpayer has to compulsorily register himself as Input Tax Distributor. Having said that, this registration of ISD is apart from the registration as a normal GST taxpayer registration. Further, this ISD taxpayer must specify under serial number 14 of the REG-01 form as an ISD. They shall be able to distribute the credit to the recipients only after this declaration.
Distribution by Invoicing: The ISD can distribute the amount of tax credit to recipients by issuing an ISD invoice.
Returns: The amount of tax credit distribution cannot exceed the amount of tax credit available with the ISD at the end of a relevant month. The ISD has to file this by filing the return in the Form GSTR-6 by 13th of the succeeding month. Further, the ISD can fetch the information of ISD from the GSTR-2B return.
In addition to the above, the recipient of the tax credit can view the tax credit so distributed by the Input Service Distributor in GSTR-6A which is auto-populated from the supplier’s return. Accordingly, the recipient branch can claim the same by declaring it in GSTR-3B.
Note:
An ISD need not file annual returns in form GSTR-9.
Restriction wrt Reverse Charge Mechanism: There cannot be distribution of credit of tax payments made under the reverse charge mechanism. Accordingly, the ISD has to utilise such credit only as a normal taxpayer.
Also Read: Latest Rules Related to Setting Off of Input Tax Credit
Cases where ISD is not applicable
| ITC is paid on inputs and capital goods | ITC cannot be distributed to outsourced manufacturers or service providers |
How to distribute Input Tax Credit?
In order to under the concept of distribution of Input Tax Credit, lets consider the following example:
ABC Private Limited is a corporate office in Bangalore and has its principal branches of selling and servicing of goods in Delhi, Kolkata, Chennai and Mumbai. All the offices use the services of software licences and maintenance for their business operations, but the billing (indicating CGST & SGST) of the same is at the address of the corporate office.
Since all the four locations use the service of software licenses, the corporate office at Bangalore alone cannot claim the Input Tax Credit. There has to be proportionate distribution of the ITC among all the four branches. Accordingly, for this reason, the Bangalore office will act as an ISD to distribute the Input Tax Credit.
Suppose the corporate office at Bangalore receives invoice of Rs. 4 lacs of Central GST, Rs, 4 lacs of State GST and Rs. 7 lacs of Integrated GST. The Bangalore office can distribute CGST, SGST & IGST of Rs. 15 lacs as credit of IGST amongst its locations at Delhi, Kolkata, Chennai and Mumbai through an ISD invoice.
Ratio of distribution of ITC
The ratio of distribution of ITC is as per the unit to which the supply is directly attributable to. If input services are attributable to more than one recipient of credit, the distribution shall be in the pro-rata basis of turnover in the State/Union Territory.
For example, if an ISD has 4 units across the country. However, if a particular input service pertains exclusively to only one unit and the bill is raised in the name of ISD, the ISD can distribute the credit only to that unit and not to other units. If the input services are common for all units, then it will be distributed according to the ratio of turnover of all the units.
The following illustration will clarify the issue:
Ram Sons Co., having its head Office in Delhi, is having registration as ISD. It has three units in different states namely ‘Himachal Pradesh’, ‘Punjab’ and ‘Haryana’ which are operational in the current year. Ram Sons Co. furnishes the following information for the month of May, 2024 & asks for permission to distribute the below input tax credit to various units.
(i) CGST paid on services used only for Himachal Pradesh Unit: Rs.300000/-
(ii) IGST, CGST & SGST payment on services used for all units: Rs.1200000/-
Total Turnover of the units for the Financial Year 2022-23 are as follows: –
Unit Turnover (Rs.)
Total Turnover of three units = Rs. 10,00,00,000
Turnover of Himachal Pradesh unit = Rs. 5,00,00,000 (50%)
Turnover of Punjab unit = Rs. 3,00,00,000 (30%)
Particulars
Credit distributed to all units
Total Credit Value
Himachal Pradesh
Punjab
Haryana
CGST paid on services used only for Himachal Pradesh Unit
3,00,000
3,00,000
0
0
IGST, CGST & SGST paid on services used in all units- Distribution on pro-rata basis to all the units which are operational in the current year
12,00,000
6,00,000
3,60,000
2,40,000
Total
15,00,000
9,00,000
3,60,000
2,40,000
Note 1: Credit distribution on the basis of pro rata as per the turnover of all the units is as under: –
(a) Himachal Pradesh Unit: (50000000/100000000) *1200000 = Rs.600000
(b) Punjab Unit: (30000000/100000000) *1200000 = Rs.360000
(c) Haryana Unit: (20000000/100000000) *1200000 = Rs.240000
Conclusion:
Concept of ISD is a facility available to business having a large share of common expenditure and billing/payment is from a centralized location. The mechanism is for simplifying the credit-taking process for entities. In addition to this, the ISD facility is for strengthening the seamless flow of credit under GST.