A significant revision to the GST regulations is under implementation, making the Input Service Distributor (ISD) framework mandatory, effective from April 1, 2025. GST-listed businesses that have various identification numbers – GSTINs belonging to the same PAN need to register as an ISD. This amendment or revision has been incorporated to streamline Input Tax Credit (ITC) distribution and facilitate compliance. Through a proportionate distribution of the GST Input Tax Credit among its branches, an ISD raises its operational efficiency and makes the credit-taking procedure less complex and simpler.
Moreover, this new GST regulation will also allow for centralized credit management across different branches or office sites. Businesses need to prepare their ISD registration properly in advance to prevent any interruptions in ITC distribution and the claiming of input tax credit processes.
Definition of an Input Service Distributor (ISD) under GST
An ISD under the GST mechanism plays a crucial role in distributing input tax credit (ITC) for the services or utilities a business receives. It is a business office responsible for allocating Input tax credits to various divisions or branches operating under the same PAN. As a business unit that processes or receives invoices for input services, the Input Service Distributor distributes the ITC among its branches without supplying services or goods directly.
ISDs submit GST returns exclusively for the distribution of input tax credits and must allocate ITC to the relevant branches, depending on their utilization. They cannot claim Input tax credit for their use, but can redistribute the input tax credit received on input services among the other branches.
The input Service distribution is responsible for ascertaining the precise allocation of input tax credit (ITC) and conforming to the ISD-specific regulations under GST, which includes filing returns and maintaining records of credit distribution.
The New ISD Provision under GST
Until now, ISD registration was optional; however, the new provision under GST requires registration as an input service distributor (ISD) for all businesses with multiple GSTINs involving the same PAN, effective from April 1, 2025, onwards.
Effects of Non-ISD Registration
If an Input Service Distributor remains unregistered after April 1, 2025, it can result in significant effects on the business.
- Companies not adhering to the compulsory ISD registration will incur penalties for inaccurate ITC distribution. If a business claims surplus ITC, which is beyond acceptance, it can be recovered from the recipient with levied interest as per Section 21 of the Goods and Services Act. The aim behind it is to prevent businesses from claiming more credit than they are entitled to, ensure adherence, and uphold fiscal discipline within the GST framework.
- Non-compliance also amplifies the risk of audits under GST and examination of returns and records by tax authorities. Any inconsistency in ITC claims can initiate inquiries resulting in further probes and likely legal issues.
- ISD operations that are inaccurate or go unrecorded can lead to a reversal of ITC claims, thereby nullifying them. This can substantially alter an organization’s cash flow and working capital, as branches remit taxes rather than utilizing the available Input Tax Credit (ITC).
- By not registering for ISD, businesses can also receive intimation of tax notices for false claims made at the head office, which can lead to an increase in financial burden and operational setbacks.
- An improper ISD registration also results in ITC allocation problems across various locations, leading to inefficiency and potential conflicts among branches regarding credit distribution.
Steps For ISD Registration
An ISD is a registered taxpayer under GST who acquires invoices for services availed across different branches or business units. For ISD registration under GST:
The taxpayer must select the ISD status and specify it under Serial No. 14 of the GSTReg-01 form during registration. They can start distributing the credit amount to the recipients or branches after this declaration has been made, through the issuance of an ISD invoice.
ISD Taxes and Observances
- The ISD is not allowed to distribute ITC beyond the remaining credit for the relevant month.
- GSTR-6 filing: ISD’s must submit GSTR-6 by the 13th of each month to report the distribution of input tax credits.
- Observation of ITC in GSTR-2B: The branches receiving the ITC will view their assigned ITC in GSTR-2B and claim it in their monthly GSTR-3B returns.
- No Yearly Return: Unlike other GST taxpayers, the ISD is exempt from submitting its GSTR-9 annual return, thereby streamlining the compliance process.
How the ITC Distribution Function Under ISD
Distribution depending on turnover:
ITC is assigned in proportion to the turnover of the receiving offices or branches in the relevant timespan.
Formula for ITC allocation: C1= (T1/T) x C
Where:
C1 = Assigned ITC for a particular unit
T1 = Turnover of the unit during the specific period
T = Aggregate turnover of all units
C = Total ITC present for distribution
Distribution based on tax classification:
- CGST and SGST: Allocation to branches within the same state.
- IGST: Allotted when branches operate in different states.
Eligible versus ineligible credit:
ITC needs to be divided for distribution into:
- Eligible ITC (totally claimable)
- Ineligible ITC (Prohibited credits as per Section 17(5)).
Issuance of ISD invoice and reduction of distributed credit via credit note:
- Issuing an ISD invoice by the ISD prescribed by Rule 54 during ITC distribution
- If a need arises for ITC reduction, an issuance of a credit note is made.
Work Out On ISD Compliance As ISD Registration Is Mandatory
With the compulsory ISD registration coming into force on April 1, 2025, business ventures should proceed with their preparations.
Review your ongoing system.
- Find out whether your business obtains centralized service invoices to be utilized across all the branches
- Assess if they satisfy the ISD benchmark and finalize registration promptly.
- Evaluate if there is any requirement for ITC distribution among several GSTINs.
Maintain accurate documentation and a plan of action
- Upkeep GSTR-6 filings in a timely manner every month to prevent incurring late fees and credit inaccuracies.
- Verify detailed documentation of ISD invoices and credit notes.
Automate and combine the GST setup.
- Employ technology-enabled solutions to process ISD invoices and automate tax filings.
- Ensure that your financial accounting software accurately tracks ITC distribution.
Subscribe to the best practices.
- Levy ITC to the exact branches
- Maintain productive interaction between the tax and finance departments.
Upskill your Finance and Tax teams.
Educate your internal team on managing ISD invoices and processes, credit notes, documentation, filing of GST, and mandatory ISD regulatory standards.
Oversee the implementation and stay informed.
- Routinely evaluate the allocations of ITC to guarantee compliance.
- Stay updated on any current GST regulation updates and revisions from CBIC.
Significant Findings
- Compulsory ISD registration comes into operation from April 1, 2025, regarding businesses involved in ITC distribution.
- ISD relates exclusively to input services and does not cover capital goods or inputs.
- ITC allocation should be in proportion to the turnover.
- ISD needs to file GSTR-6 on a monthly basis, and recipient branches can claim ITC in GSTR-3B.
- Businesses must reconcile their Standard Operating Procedures (SOPs), with staff training, and automate the process of Input tax credit tracking to ensure a smooth and integrated compliance.
With the ISD directive in effect, businesses need to prepare in advance. Revisiting the system of taxation, upgrading systems, and ensuring precise monitoring of Input Tax Credit (ITC) will help companies address last-minute setbacks involving compliance and registration issues.
We at Kanakkupillai are always ready to assist with ISD registration and GST compliance by securing timely filings and streamlining the ITC management process of your business!
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