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One of the provisions of GST is the concept of an Input Service Distributor (ISD). ISD is a mechanism that allows taxpayers with multiple branches to distribute the input tax credit on the input services received by the head office or central administration to the respective branches. This article aims to provide an in-depth understanding of the Input Service Distributor in GST and its significance for businesses.
Input Service Distributor, meaning a taxpayer who receives tax invoices for services utilised on behalf of its branches. Thereafter, the ISD distributes the input tax credit to its various branches through issuing ISD invoices. All branches must have the same Permanent Account Number (PAN) as the ISD, though the GST Identification Numbers (GSTINs) can be different.
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The input service distributor may give the recipient of such credit an IGST, CGST, SGST, or UTGST credit under the following conditions:
As per Section 20(1) of the CGST Act 2017, the distributor of input grants is responsible for distributing the input tax credit as a central or integrated tax by releasing a document that includes the specified input tax credit amount.
ITC accumulation may take two different forms:
Some services, for instance, may be billed to the head office but used by the units. There are three possibilities:
In case one, one receiver unit uses the service. Only one of its units and none of the others utilise the services. As a result, the entire ITC for expenses precisely due to one unit must be given to that unit. Therefore, the ITC of such bills must be allocated to one unit.
In the second case, more than one receiver unit, but not all of them, consumes the service that was billed. Two or more units, but not all, use the services. The units that were operating and making money during the relevant month must be given credit.
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The following is how tax credits will be allocated: The overall tax credit is divided pro-rata according to the turnover of the recipient in the state or union territory and the combined turnover of all operational recipients to whom the input service pertains.
Formula: C1 = C*(T1/T), where
C1 equals ITC that will be given to the receiver.
C is the total ITCs that are available for distribution
T1 denotes the recipient’s turnover.
T is the total turnover of all beneficiaries to whom ITC relates.
The following are included in the term “turnover”:
The service billed is used by all of the recipient units in Scenario 3. All of the units use the services in this situation. Credit must be given to the units that were running and making money during the pertinent month.
The following is how tax credits will be allocated: The overall tax credit is divided pro-rata according to the turnover of the recipient in the state or union territory and the combined turnover of all operational recipients to whom the input service pertains. The proportion is the same as that specified in scenario 2.
Key points to note:
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Issuing a debit note:
Suppose a service provider issues a debit note to an ISD. In that case, the additional tax credit obtained on that debit note must be distributed by the service provider in the month that the debit note is included in GSTR-6.
Issuing a credit note:
Suppose the service provider issues any credit notes to the ISD. In that case, the tax credit reduced by those credit notes must be paid to the beneficiaries in the same ratio as the original credit. The tax credit distributed in the month that the credit note is contained in GSTR-6 is deducted from the proportionate credit in question.
The excess must be added to the recipient’s output tax liability; nevertheless, if the amount to be lowered exceeds the amount of tax credit to be distributed. The same procedure must be followed in every situation where the amount of distributed credit must be reduced for whatever reason.
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As per section 21 of the CGST Act of 2017, when the input service distributor distributes credit in violation of section 20’s provisions, resulting in an excess distribution of credit to one or more recipients of credit, the extra credit so distributed shall be recovered from such recipients along with interest. As a result, the provisions of sections 73 or 74 shall apply since the same is mutatis mutandis and applies to the sum’s determination.For instance,
According to Section 21’s requirements, if a corporation had a unit in Gujarat and another in West Bengal, the unit in Gujarat would receive Rs. 1 lakh, and the unit in West Bengal would receive Rs. 2 lakhs. However, the Gujarat unit received a credit of Rs 1.2 lakh due to a mathematical error, and the West Bengal unit received a credit of Rs. 1.8 lakh. As a result, the West Bengal jurisdictional officer will issue a show-cause notice and reclaim the excess of the Rs. 20,000 credit provided to the unit in Gujarat.
According to the GST Act, the following is considered an incorrect distribution of reduction by an input service distributor:
Input Service Distributors (ISD) are not applicable in certain situations, such as when the services received are not used for business purposes, or if the recipient does not have an active registration under GST. ISD is also not relevant for the distribution of input tax credits related to exempt supplies or non-GST supplies. Furthermore, if the services are utilized exclusively for a specific branch that does not qualify for input tax credit, ISD provisions will not apply. Lastly, businesses that do not incur input services for their operations cannot use ISD.
Under the earlier tax regime, input service distribution was managed through different laws, often leading to confusion and discrepancies in credit distribution. Companies had to follow complex procedures to allocate input tax credits for services used across various branches or units. However, the GST regime introduced a simplified and centralized approach through the concept of Input Service Distributors (ISD).
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In the GST framework, ISDs are designed to facilitate the seamless transfer of input tax credits related to services consumed by different units of a business. This ensures that businesses can efficiently manage their tax credits, enhancing compliance and reducing administrative burdens. An ISD can distribute credits for eligible input services to its registered branches, promoting better cash flow management and tax efficiency. This change represents a significant improvement in how businesses handle input credits, allowing for a more streamlined process compared to the previous regime.
After learning what is input service distributor, you may have understood that ISD under GST is a mechanism made available to businesses with a high proportion of shared expenses, and billing and payment is handled from a single location. The facility intends to strengthen the seamless flow of credit under GST, and the method is designed to simplify the credit-taking process for organisations. Using powerful GST accounting software like BUSY to claim input tax credit is a great idea, as there are a lot of compliances that need to be maintained in order to claim maximum ITC.
BUSY is a simple, yet powerful GST / VAT compliant Business Accounting Software that has everything you need to grow your business.