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Input service distributor in GST

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What is the input service distributor in GST?

As per section 2 (56) of MGL, the input service distributor ISD, meaning from the office of supplier of goods and services, receives tax invoice issued under section 23 towards receipts of input services and issue a tax invoice or such other documents for distribution of credit of Taxes (CGST), issue a prescribed document for the disbursement of state tax (SGST) / Union Territory Tax (UTGST) or Integrated Tax (IGST) paid on both the services provided to the supplier of taxable goods or services or having the same PAN as ISD. 

What are the things to remember for ISD?

It is important to remember this ISD rule that ISD is only for distributing credit on general and normal invoices related to input services, it cannot be used on input goods and capital goods of the units.

Companies can have their head office at one place and units at other places that are registered separately. The head office will purchase some services that will be for the general use of all units across the country. Such expenses will be billed raised at head office. But the head office itself will not be providing any input supply so that credit can be used which accumulates due to such input services.

What do common expenses mean for business?

Since common expenses for business mean all units, it is but natural that credit for input services should be appealed in respect of such common invoices among all consumption units. The ISD system enables the proportional distribution of credit of input services among all consumption units.

What is the concept of ISD in GST?

The concept of ISD under GST is a legacy derived from the service tax regime. An ISD will inevitably have to take a separate registration like ISD and apply it in the same manner as GST REG-1. There is no GST Registration limit for ISD.

Other locations may be registered separately. Since the services are related to other locations, the credit concerned should be transferred to such places (having different registrations) as the output services are being provided there.

Why does an ISD have to issue an ISD invoice?

To distribute input tax credit, an ISD has to issue an ISD invoice, as stipulated in Rule 54 (1) of the CGST Rules, 2017, in such an invoice indicating that it is only released for distribution of the input tax credit.

How to distribute input tax credit in GST?

a). The tax credit available for delivery in one month will be distributed in the same month and presented in Form GSTR-6. Besides, an ISD will separately distribute the amount of eligible and ineligible input tax credits.

b). In respect of the recipient located in the same state, the input tax credit on the account of central tax and state tax or UT tax will be distributed as UT tax and state tax or central tax respectively.

c). Input tax credit on the account of Central Tax and State Tax or Union State Tax, in respect of a recipient located in a State or Union Territory other than ISD, shall be disbursed as a unified tax and the amount to be disbursed. Central tax and state tax or central area tax equal to the amount of input tax credit that is eligible for distribution to such recipient. The input tax credit will be distributed as a unified tax due to the unified tax.

To understand this well, we take the help of an example.

ABC Limited has a corporate office in Bangalore, with its trading locations for merchandising and servicing in Bangalore, Chennai, Rajasthan, and Kolkata. Maintenance and software licenses are used at all locations, but invoices for these services (indicating SGST and CGST) are received at the corporate office. Since the software is used at all four locations, an input tax credit of entire services cannot be claimed in Bangalore. All four locations are to be distributed equally. For that reason, Bangalore corporate office has to act as ISD to distribute the credit.

If an ISD based at ABC Limited Corporate Office, Bangalore, receives invoices indicating Rs. 4 lakh of central tax, Rs. 4 lakh of state tax and Rs. 7 lakhs of integrated tax, this central tax, state tax as well as it can integrate and distribute. The amount of loan disbursed was Rs.15 lakhs as an integrated tax credit between its locations in Bangalore, Chennai, Rajasthan, and Kolkata through an ISD challan.

So in what proportion will the loan be disbursed by ISD?

Credit is to be distributed only to the entity for which the supply is directly responsible. If the input services are attributed to more than one recipient of credit, the distribution will be based on the pro rata of the business in the State/UT.

For example, 

ISD has four units in all over India. However, consider that if a particular input service belongs to only one unit and the bill it is raised in the name of the ISD, then the ISD can only distribute credit to the entity in whose name the bill was raised Is, other units cannot. And if the input services are normal/common for all units, then the ISD will be distributed the credit as per the ratio of turnover of all units.

The following illustration will explain the problem.

M / s ABC Ltd, with its head office in Rajasthan, is registered as ISD. It has three units in various states, such as ‘Rajasthan’, ‘Pune’, and ‘Banglore’ which are operational in the current year.

M / s ABC Limited has presented the information for the year 2018 and month July, and seeks permission to distribute the input tax credit of the various units given below.

a). CGST is paid only on services used for Rajasthan unit: Rs.300000 / –

b). IGST, CGST, and SGST are paid on services used for all units: Rs.1200000 / –

The total turnover of the units for the financial year 2016-17 is as follows: –

The total turnover of the three units for the financial year 2016-17 is Rs. 10, 00, 00,000

a). Turnover of Rajasthan unit is Rs. 5, 00, 00,000 (50%)

b). Turnover of Pune unit is Rs. 3, 00, 00,000 (30%)

c). Turnover of Banglore unit is Rs. 2, 00, 00,000 (20%)

  • An ISD must file a monthly return to GSTR-6 within thirteen days after the end of the month and submit all ISD challan information issued. The details in the return will be made available to the concerned recipient in their GSTR 2A.
  • Recipients can include these in their GSTR-2 and take credit. ISD will not be required for filing annual GST returns. Any challan cannot be accepted by the ISD on which tax is to be discharged under the rule of Reverse charge.
  • This is because the ISD mechanism is only to facilitate the disbursement of loans to the taxes paid. The ISD itself cannot discharge any tax liability (as the person responsible for paying the tax) and remit the tax to the government account. If, ISD wants to take reverse charge supply, in that case ISD will have to register separately as a normal taxpayer.

Thus the concept of ISD is a feature that provides a large proportion of normal expenses to businesses and billing/payment is done from a centralized location.


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