Procurement of services like an advocate, auditor, etc. by the head office on behalf of all entities is a common practice nowadays. Entities of a company in different states are considered as a distinct entity under GST, is well known to all, therefore GST charged on these types of services needs to be allocated to the respective entities. In the pre-GST era, there were settled provisions to tackle such a situation known as Input Service Distributor (ISD). The Same concept is adopted in the GST regime which is discussed below:
Definition – Section 2(61)
“Input Service Distributor” – an office of the supplier of goods or services (or both) which receives tax invoices issued under section 31 towards the receipt of input services and release an authorized and a prescribed document to allot the credit of central tax, State tax, integrated tax, or Union territory tax paid on the said services to a supplier of both (taxable goods and services) having the same PAN as that of the said office.
Take Away: As per the above definition, it is quite clear that the ISD can distribute ITC concerning input services only and not in relation to goods. Furthermore, the ISD shall issue invoices for the distribution of ITC for the services procured by the ISD for utilization by various entities under the same PAN.
Entity distributing credit as ISD shall mandatorily make a separate application for registration as per Section 24 i.e., taxpayers are required to take two separate registrations one as a normal taxpayer and another as ISD.
Points to Understand
- ISD invoice or ISD credit note:
The ISD mechanism is a good way for the distribution of ITC on the services availed by various entities under the same PAN. But if the ISD mechanism is not handled properly then it can lead to the wrong distribution of ITC thereby leading to the financial burden on the entity.
Against a document, the credit can be distributed to the recipients of credit.
- Maximum distribution:
The amount of credit distributed shall not surpass the amount of credit available for distribution.
- Time limit:
The Input Tax Credit shall be distributed in the same month in which it is available for distribution.
The credit for input services used exclusively by one recipient can be allocated to that recipient only.
- Basis of Distribution:
The credit attributable to more than one recipient shall be distributed amongst such recipients proportionately based on the turnover of such recipients to the aggregate of the turnover of all recipients during the relevant tax period.
For filing GSTR 6, ISD is required which contains all the details of tax invoices on which credit has been received and those issued for distributing the credit by the 13th of the succeeding month.
Recovery of excess credit distributed
Excess distribution of credit by one or more recipients of credit happens when the ISD distributes the credit in violation of the provision. From such recipients, the excess credit shall be recovered along with interest and the provision of section 73 or section 74 shall apply for determining the amount to be recovered.
1. Many organizations leave behind the basic concept of the ISD mechanism, i.e., ISD can distribute ITC of Services only, by distributing the credit of Goods.
2. Services procured through ISD and regular invoices need to be accounted for separately, as many assess had claimed and distributed ITC of Regular invoice through ISD GSTN and vice versa.
This content is meant for information only and should not be considered as an advice or legal opinion, or otherwise. AKGVG & Associates does not intend to advertise its services through this.
Posted by: CA Tarun Kapoor
AKGVG & Associates