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An Input Service Distributor (ISD) is a type of taxpayer under GST that distributes input tax credits related to its GSTIN to its branches or units with different GSTINs but sharing the same PAN. The GST framework in India facilitates smooth credit flow across business units, allowing businesses with multiple branches to effectively allocate ITC for centrally incurred services. This guide will explore the concept of ISD, its legal framework, operational processes, and frequently asked questions, offering a clear understanding of its importance under GST.
An ISD or Input Service Distributor under GST, as defined under section 2(61) of the CGST Act 2017, is a taxpayer who receives invoices for the services used by its branches. It distributes the tax paid, also known as the input tax credit or ITC. The tax paid is distributed to the branches on a proportional basis by issuing ISD invoices. The branches can have different GSTINs but should have the same PAN as that of ISD. The ISD is designed for businesses across multiple nations that have common expenses, helping them optimize their tax liabilities.
An ISD or Input Service Distributor in GST cannot distribute the input tax credit to other branches in the following cases -
The ISD facility is made available to large organizations operating from multiple locations. The organizations where the billing/payment for common large business expenses are made from a single location can make use of this facility to distribute the tax credit across different branches.
Here’s an example to help you understand better -
The head office of M/s XYZ limited is located in Bangalore and has branches in Jaipur, Mumbai, and Delhi. The software maintenance expenses for the year were incurred by the head office on behalf of all the branches and the invoice was received in the head office. Since all the branches use the software, the entire input tax credit cannot be claimed in Bangalore. The same must be distributed to all the locations. The head office in Bangalore works as the input service distributor.
Given below is the importance of ISD in GST -
Given below are the points of difference between the earlier indirect tax regime and the existing GST regime -
| Point of Difference | Earlier Regime | GST Regime |
|---|---|---|
| Who can be an input service distributor? | Manufacturer or producer of final products or the provider of output service. | Office of the supplier of goods or services. |
| Document based on which credit can be distributed | Received invoices issued under rule 4A of Service Tax Rules, 1994, towards the purchase of input services. | Receives tax invoices issued by suppliers towards the purchase of input services. |
| How to distribute credit? | This applies when issuing an invoice, bill, or challan for distributing ITC to such manufacturers, producers, or service providers. | This applies when issuing an ISD invoice to distribute ITC to a supplier of taxable goods and/or services that share the same PAN as the office mentioned above. |
| Type of tax credit that can be distributed? | The credit of service tax paid on the said services | The credit of CGST or SGST and /or IGST paid on the said services. |
| To whom can it be distributed? | To its units and outsourced manufacturers. | To suppliers having the same PAN, i.e., credit cannot be distributed to service providers or outsourced manufacturers. |
ISD needs to fulfill the following eligibility criteria -
The Input tax credit under GST can be distributed in the following manner -
The input tax credit for input services that have been used entirely by one recipient should be allocated only to that recipient The tax credit for input services used entirely by one recipient must be allocated only to that specific recipient and cannot be distributed to others.
The tax credit available against the input services used by more than one recipients of the ISD shall be allocated to all the recipients on a proportional basis in the ratio of the turnover of all the recipients operational during the year.
Similarly, for input services used commonly by all recipients of ISD must be allocated to all the recipients on a proportionate basis in the ratio of the turnoverof all the recipients operational during an year.
As per the GST Act, if the Input Tax Credit is distributed in the following manner, it shall be deemed to be distributed wrongly -
The Input Service Distributor (ISD) mechanism under GST is crucial for businesses with multiple branches to manage and distribute input tax credits efficiently. By understanding the role of ISDs, the registration process, and compliance requirements, businesses can optimize their tax liabilities and ensure smooth operations.
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An Input Service Distributor (ISD) is an office or establishment of a supplier of goods or services that receives tax invoices for input services and distributes the related input tax credit (ITC) to its branches or units. This mechanism is especially advantageous for businesses with multiple branches or units that share common input service expenses, enabling them to optimize their tax liabilities effectively.
Yes, ISD registration is required for one specific office of the taxpayer, and it is separate from the normal GST registration. This office will handle the distribution of input tax credit (ITC) to various units or branches under the same PAN but with different GSTINs.
The revenue-generating units have a GST liability, so the ITC for services used by them should be allocated to those units. This allows them to use the tax credit to offset their GST liability appropriately.
Yes, different offices or divisions, such as the marketing division or security division, can apply for separate ISD registrations. Each division can distribute the input tax credit (ITC) related to the services they receive to the relevant units or branches under the same PAN.
Credit distributed in violation of the provisions of the Act can be recovered from the recipient to whom it was distributed, along with applicable interest.
No, ISDs are only required to file a return in Form GSTR-6. This return includes details of the credit received from the service provider and the credit distributed to the recipient units. Since these aspects are covered in their return, there is no need to file a separate statement of inward and outward supplies.
