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 under GST and its significance for businesses.
Meaning of Input Service Distributor
In GST, an Input Service Distributor is 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.
Conditions for Distribution
The input service distributor may give the recipient of such credit an IGST, CGST, SGST, or UTGST credit under the following conditions:
Credit can be issued against a document with the required information.
The credit to be distributed shouldn’t be greater than the credit to be distributed.
When a specific recipient of credit is responsible for the credit on an input service, only that recipient should receive the credit.
The credit is to be distributed amongst the recipients on a pro-rata basis of the turnover of the recipients in their state during the relevant period to the sum of the turnover of all such recipients as applicable if the credit on input service is attributable to more than one recipient or all recipients.
These recipients ought to be operational in the ongoing year.
Manner of Distribution of ITC
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:
What can be used to offset the payment of production tax is eligible.
Anything that cannot be used to offset an output tax due is ineligible.
Amount of Credit to be Distributed
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.
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:
If a state or union territory has many locations, the total of those locations’ turnover in that state or union territory should be taken into account instead of the recipient’s turnover ( in the numerator)
Even if a recipient is unregistered or providing exempt goods, credit pertaining to that recipient is distributed.
VAT, State excise duty, and Central excise duty are not counted toward “turnover” if both taxable and non-taxable supplies are made.
Suppose two or more recipient locations exist in a state or union territory. In that case, the combined turnover of those locations must be taken into consideration when calculating the percentage of the credit that will be allotted to registration.
Issuing of Debit note or Credit Note by the Supplier to ISD
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.
Manner of Recovery
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.
Recovery Procedure for Wrong Distribution
According to the GST Act, the following is considered an incorrect distribution of reduction by an input service distributor:
Credit was issued to any recipient in substantially more significant amounts than was allowed for distribution.
Distributed to all or any recipient in an improper ratio.
The “Demand and Recovery” provisions shall apply for such recovery. The distribution of more than what a provider is entitled to shall be recovered from such recipients along with interest.
Conclusion
ISD 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 a powerful GST Accounting Software like BUSY for claiming 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.
