With the gradual emergence of the Goods and Services Tax (GST) in India, a significant transformation has occurred in the indirect tax regime, which has a major impact on it. One of the key elements and mechanisms under the GST structure that ensures the seamless and smooth flow of credit is the concept of the Input Service Distributor (ISD). ISD is designed to help large organizations efficiently manage input tax credit (ITC) when services are centrally received but utilized by different branches or units spread across the country.
This article delves into the meaning, purpose, mechanism, registration, compliance, and practical aspects of the Input Service Distributor under the GST regime.
What is an Input Service Distributor (ISD)?
As per the Section 2(61) of the Central Goods and Services Tax (CGST) Act, 2017, an Input Service Distributor is an office of the supplier of goods or services (or both) that receives tax invoices towards the receipt of input services and is liable to distribute the input tax credit to its branches or units having the same PAN.
It is important to note that only input services (not input goods or capital goods) can be distributed under the ISD mechanism.
Why is ISD Required?
In large organizations, it is common for services such as advertising, legal consultation, software services, or security to be centrally procured at the head office (HO), but consumed across multiple branches. Without a mechanism like ISD, such distributed usage of centrally procured services could lead to loss or inefficient use of input tax credit.
For example, if the HO in Delhi receives a consultancy service meant for operations in Delhi, Mumbai, and Bangalore offices, the GST charged on that consultancy can be distributed proportionately to all three locations through the ISD mechanism.
Key Features of ISD under GST
- Only Input Services Covered: ISD can distribute credit only for input services. Input goods and capital goods are not covered.
- Separate Registration Required: An entity intending to act as an ISD must obtain a separate registration as an ISD, even if it is already registered under GST as a regular taxpayer.
- Credit Distribution: The distribution of credit must be done through a document (invoice or credit note) and only to units with the same PAN.
- Same PAN, Different GSTINs: ISD can distribute ITC only among units registered under the same PAN, though they may be located in different states (with different GSTINs).
- Distribution Formula: The ITC is distributed on a proportionate basis depending on the turnover of the respective units in the relevant financial year.
Registration as an ISD
To operate as an ISD, the business must obtain an ISD registration by filing Form GST REG-01 on the GST portal. The registration is required even if the business is already registered under GST for other purposes.
It’s important to note that:
- One entity can have multiple or numerous ISDs in different states.
- The ISD registration is exclusively for distributing ITC and not for making taxable supplies.
Distribution of Credit: Rules and Conditions
The distribution of credit must adhere to certain guidelines as per the GST Input Tax Credit Rules:
1. Distribution Document
Credit must be distributed using an ISD invoice that contains:
- Name, address, and GSTIN of the ISD
- Serial number and date of invoice
- Name, address, and GSTIN of the recipient unit
- Amount of credit distributed
- Signature/digital signature
2. Proportionate Distribution
Credit is basically distributed in proportion to the turnover of the respective units during the relevant period:
Formula:
ITC to be distributed to a unit =
(Turnover of a unit in a state ÷ Aggregate turnover of all units) × Total ITC to be distributed
3. Type of Tax
- CGST and SGST/UTGST must be distributed as CGST and SGST/UTGST, respectively, if the recipient is located in the same state.
- If the recipient is in a different state, the credit is distributed as IGST.
Return Filing for ISD
ISDs are required to file a monthly return in Form GSTR-6 by the 13th of the following month. This return contains details of the input tax credit received, and the same is distributed to various units.
Additionally, ISDs receive inward supply details in GSTR-6A, which is auto-populated from GSTR-1 filed by suppliers. The ISD can accept, reject, or modify the entries while filing GSTR-6.
Example to Illustrate the ISD Mechanism
Let’s assume ABC Ltd. has its head office (HO) in Delhi and two branch offices in Maharashtra and Karnataka. The HO receives an invoice of ₹3,00,000 (₹54,000 GST @18%) for advertising services used for marketing campaigns across all offices.
Turnover:
- Delhi: ₹10 crore
- Maharashtra: ₹5 crore
- Karnataka: ₹5 crore
- Total: ₹20 crore
Distribution of ITC:
- Delhi: (10/20) × 54,000 = ₹27,000
- Maharashtra: (5/20) × 54,000 = ₹13,500
- Karnataka: (5/20) × 54,000 = ₹13,500
The HO (ISD) issues ISD invoices and distributes the ITC accordingly.
Benefits of ISD Mechanism
- Efficient Credit Utilization: Ensures input service credit is rightly allocated, preventing blockage at one location.
- Centralized Procurement: Enables companies to continue centralized procurement of services.
- Improved Compliance: Aligns with GST’s goal of a streamlined, transparent tax credit system.
- Reduced Litigation: Helps avoid disputes regarding the utilization of centralized service invoices.
Common Mistakes to Avoid
- Distributing ITC of goods or capital goods, which is not allowed under ISD.
- Not obtaining a separate ISD registration.
- Wrong tax type distribution (e.g., distributing CGST/SGST as IGST incorrectly).
- Failing to file GSTR-6 on time leads to compliance issues and penalties.
Conclusion
The Input Service Distributor mechanism is a very thoughtful inclusion in the GST regime to ensure that businesses can seamlessly avail and distribute input service credit across different locations. It supports centralized service procurement without compromising the correct apportionment of input tax credit.
However, to reap the benefits, it is very essential for businesses to understand the basic rules and regulations properly, obtain appropriate registration, and maintain accurate records and timely return filing. With the right compliance, ISD becomes a powerful tool to optimize tax credit and streamline GST operations across a multi-location business.
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