Introduction:
The distribution of input tax credit (‘ITC’) through input service distributor (‘ISD’) route is a familiar concept since the erstwhile service tax regime. However, the concept of ‘cross charge’ deeming supply between GSTINs has created uncertainty among the taxpayers on the option to be followed for common input services. The mixed practices among the taxpayers were remedied by the GST Council with consequential amendments to make ISD mandatory for common input services.
The amendment made in the ISD provisions will be effective from 1 April 2025. With a month around a corner to implement ISD, it is imperative for the companies to understand the basics of ISD, evaluate the applicability of ISD for common input services, supplies attracting reverse charge, distribution in relation to SEZ and implement the mechanism for smooth transition. This article will focus on some practical aspects related to ISD implementation.
What is an ISD office?
The definition of ISD means an office of the supplier which receives tax invoices towards receipt of input services for or on behalf of its distinct person and liable to distribute ITC. Any office receiving common input service invoice towards receipt of services for or on behalf of other GSTIN will qualify as an ISD.
The company may have multiple GSTINs based on supply chain and procurement patterns. The determination of recipient GSTIN for distribution of ITC based on function carried out by such recipient needs to be done, at ISD level.
Is ISD mandatory?
The amended phrase mandatorily casts an obligation on the person to obtain ISD registration and distribute ITC in respect of invoices received. The eligibility of ITC under cross charge mechanism itself under Section 16 might not be aligned for common input services.
Manner of distribution
The words ‘towards receipt of input services’ and ‘for or on behalf’ of its distinct person is relevant for the purpose of distributing ITC through ISD mechanism. ITC is required to be distributed to the recipient units to whom input services are attributable in terms of specific clauses of Rule 39 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules’). Rule 39 of the CGST Rules deals with the procedure for distribution of ITC through ISD. The identification and attribution of ITC in terms of amended Rule is relevant for the correct distribution of ITC instead of adopting default turnover method provided in the residuary Rule. ITC wrongly availed by HO and not distributed to recipient units may attract penal implications at the end of HO.
While going through the new rule, certain doubts may arise which need to be evaluated.
Practical implementation challenges under the amended Rule:
ITC available for distribution in a month shall be distributed in the same month:
It would be interesting to see as to how the phrase ‘ITC available for distribution’ would be interpreted. The various questions may arise:
- When should ISD distribute ITC to the recipients?
- Whether ISD is required to evaluate the satisfaction of all the conditions prescribed under Section 16 of the CGST Act at its own end?
- Whether ISD should distribute ITC after booking is made in the books or post reflection of details in GSTR-6A or cumulative satisfaction is mandated?
- Whether ISD can keep the amount for distribution on hold once it gets reflected on GSTR-6A?
Computation of Turnover during the relevant period:
The Rule provides that ITC of tax paid on input services attributable to more than one recipients or all the recipients, shall be distributed amongst such recipients pro rata on the basis of turnover of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year.
Relevant period can be the preceding financial year if turnover of all the recipients is available or the quarter preceding the month during which credit is to be distributed.
The doubt may arise on the computation of turnover of the unit which is operational in the month of distribution but was not in existence in the preceding financial year or quarter. Such situation may arise due to reconstitution of business, addition of new GSTIN etc.
Issuance of credit note to ISD:
The Rule provides that ITC pertaining to credit note issued to ISD by the supplier shall be apportioned to each recipient in the same ratio in which ITC contained in the original invoice was distributed.
The question may arise on the treatment in case of discontinuance of business/ unit in the month of receipt of credit note by ISD. Whether ISD unit or HO or the discontinued recipient unit can, at all, be made liable to pay excess distributed ITC in cash?
Issuance of debit note to ISD:
The Rule inter alia provides that additional ITC on account of issuance of debit note to ISD by the supplier shall be distributed in the month in which the debit note is included in the return in FORM GSTR-6.
The Rule does not provide for distribution of additional ITC in the same ratio in which ITC contained in the original invoice was distributed. The question arises on the different treatment for computation of ‘turnover’ for the purpose of credit note and debit note. Whether a debit note issued to ISD should be treated as a fresh invoice? What should be treatment on account of reconstitution of business (merger/ de-merger)?
Distribution of ineligible ITC (ineligible under Section 17(5) or otherwise):
The Rule requires the ISD to distribute the ineligible ITC to the recipient unit. The input services for distribution of ineligible ITC needs to be thoroughly evaluated. There can be some input services on which availability of ITC is either restricted or on which ITC reversal is required. For e.g. transaction in securities, brokerage expenses, IPO expenses etc.
The expense will be incurred at the head office. However, it needs to be seen as to whether ineligible ITC pertaining to such input services should be distributed through ISD or not.
Input services on which GST is payable under RCM:
The Rule provides the manner for distribution of ITC in respect of input services on which tax is payable under RCM. The registered person, having the same PAN and State code as ISD, is required to issue an invoice/ credit note/ debit note as per Rule 54 (1) (A) to transfer ITC to ISD for distribution. Thereafter, ISD to distribute ITC to the respective recipient unit.
The question arises as to whether the supplier of such input services can raise an invoice on the regular GSTIN? Whether tax paid under RCM by regular GSTIN is required to be disclosed in GSTR-1? Whether regular GSTIN can avail ITC? Whether turnover of such input services needs to be included in the aggregate turnover of regular GSTIN?
Whether tax to be transferred to ISD as IGST or CGST/ SGST? Whether payment of RCM by regular GSTIN would impact its cash outflow?
ITC distribution to SEZ unit:
GST law provides that SEZ unit is required to obtain separate GST registration.
It would be interesting to see whether ITC is required to be distributed to SEZ unit through ISD or not? In case, ITC is required to be distributed to SEZ unit, then whether refund of unutilised ITC can be claimed by SEZ unit. Presently, SEZ units are facing an issue on availability of refund of excess ITC available by SEZ unit[1].
Conclusion
It is necessary for the companies to analyse and study the input services procured at the head office for its own or on behalf of its distinct persons. The existing practices should be evaluated by the companies based on the activity undertaken at their recipient unit. The proper identification of input services/ expenses should be made for distribution of ITC through ISD. The required changes in IT / SAP/ should be accordingly undertaken. The vendors should be informed about the change of GSTIN and employees located at each GSTIN office should be well educated /trained.
The future practices should be aligned intentionally with the past practices adopted by the company, in order to avoid disputes.
[The authors are Partner and Associate Partner in Indirect Tax Team at Lakshmikumaran & Sridharan Attorneys, Mumbai]
[1] Britannia Industries [2020 (42) GSTL 3], Meghmani Organochem [2024-VIL-911-Guj]
