Input Service Distributor (ISD) under GST

Who is an Input Service Distributor 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.

When is Input Service Distributor (ISD) Not Applicable?

An ISD or Input Service Distributor in GST cannot distribute the input tax credit to other branches in the following cases -

• When the ITC has been paid on capital goods and inputs. For example, machinery purchased and raw materials.
• ITC or input tax credit cannot be distributed to outsourced manufacturers or service providers.

What is the Purpose of Registering as an Input Service Distributor (ISD)?

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 -

• Efficient Credit Distribution - It allows businesses to distribute the input tax credit for for services at a central level to various branches, thus, reducing the burden of tax liability.
• Compliance - ISD ensures that there is a proper record of the distribution of input tax credits and that businesses comply with the GST regulations.
• Seamless Flow of Credit - It fosters a smooth credit flow across different units, thus, increasing operational efficiency.

What is the Difference Between the Earlier Tax Regime and GST Regime?

Given below are the points of difference between the earlier indirect tax regime and the existing GST regime -

What are the Eligibility Criteria for ISD?

ISD needs to fulfill the following eligibility criteria -

• Registration - An Input Service Distributer has to compulsorily register themselves as ‘ISD’ under GST apart from its registration as a normal taxpayer under GST. Such taxpayer is required to specify under serial number 14 of the REG-01 form as on ISD. After this declaration, the taxpayers become eligible to distribute credit to the recipients.
• Invoicing - An ISD can distribute the amount of tax credit to the recipients, as stated earlier, by issuing an ISD invoice.
• Returns - The tax credit distributed by the ISD should not exceed the available tax credit at the end of the relevant month, as reported in GSTR-6, which must be filed by the 13th of the following month. The ISD can obtain ITC details from the GSTR-2B return.
  The recipient of the tax credit can view the distributed credit in GSTR-6A, which is auto-populated from the supplier’s return. The recipient branch can then claim the credit by declaring it in GSTR-3B. Additionally, an ISD is not required to file annual returns in form GSTR-9.
• Restriction in the Distribution of Input Tax Credit - The credit of the tax paid under the reverse charge mechanism cannot be made available to recipients. Therefore, each credit can only be utilized as a normal taxpayer.

How is Input Tax Credit Under GST Distributed?

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.

What is the Process of Recovery for Wrongful Distribution of Credit by ISD?

As per the GST Act, if the Input Tax Credit is distributed in the following manner, it shall be deemed to be distributed wrongly -

• If the credit is distributed to any recipient in excess of the available amount.
• If the credit is distributed in an incorrect ratio to any recipient.
• If the credit is distributed in excess of what the supplier is entitled to, then the excess amount is recovered from the recipient, along with interest, and the 'Demand and Recovery' provisions apply to enforce the recovery.

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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