Input Service Distribution (ISD)

Disclaimer: Copyright infringement not intended.

Context

• Interim Budget 2024: Companies with branches in multiple cities must now register for Input Service Distribution (ISD) to claim input tax credit for services rendered by the head office to branch offices. This is anticipated to notably reduce disputes.

Input Service Distribution (ISD)

• Input Service Distribution (ISD) is a mechanism under the Goods and Services Tax (GST) system in India.
• It allows entities with multiple business locations to distribute the input tax credit (ITC) on services received at the head office to other branches or units.

Definition under GST Act

• As per Section 2(61) of the CGST Act, 2017, an Input Service Distributor (ISD) refers to an office of the supplier of goods or services that receives tax invoices for input services.
• It issues a prescribed document to distribute the credit of central tax, State tax, integrated tax, or Union territory tax paid on these services to a supplier with the same Permanent Account Number (PAN).

Registration under GST:

• ISD is required to obtain a separate registration under GST, with no threshold limit for registration.
• Existing ISD registrations from the Service Tax regime must be re-obtained for GST as they are not migrated automatically.

Relevance of ISD:

• Relevant for businesses with multiple branches operating within India.
• Each branch must have its GSTIN, and ISD ensures proper distribution of Input Tax Credit (ITC) among various branches.

Need for ISD:

• Beneficial for businesses with common expenditure billed centrally.
• Simplifies the credit-taking process and strengthens the seamless flow of credit under GST.

Where ISD Doesn’t Apply:

• ISD mechanism is applicable only for distributing credit on common invoices related to input services, not for input or capital goods.

Ratio of Credit Distribution by ISD:

• Credit is distributed to the unit directly attributable to the supply.
• If services pertain to multiple units, distribution is pro-rata based on turnover in the State/Union Territory.

Returns Filing by ISD:

• ISD files monthly returns in GSTR-6 within thirteen days after the month-end, providing details of ISD invoices.
• Details are made available to recipients in GSTR 2A for credit reconciliation.
• ISD is exempt from filing an annual return and cannot accept invoices subject to reverse charge without separate registration as a normal taxpayer.

Revised Section on Input Service Distributor (ISD) Registration:

Mandatory Registration:

• Any office of the supplier receiving tax invoices for input services, including those liable to tax under specific sections, must register as an Input Service Distributor (ISD) under clause (viii) of section 24.

Distribution Mandate:

• The ISD is mandated to distribute the input tax credit for the received invoices to distinct persons referred to in section 25.

Credit Distribution:

• The ISD shall distribute the credit of central tax or integrated tax charged on the invoices it received.
• This includes the credit of central or integrated tax for services subject to levy under specified sections, paid by a distinct person registered in the same State as the ISD.

Prescribed Manner:

• The distribution of credit shall occur in a manner, within a timeframe, and subject to restrictions and conditions as prescribed.

Significance of ISD

• The implementation of ISD is expected to reduce disputes related to credit distribution among different units, promoting a smoother and more standardized process.
• ISD provides businesses with a centralized approach to manage input tax credits, ensuring a more systematic and efficient utilization of tax benefits across various business locations.

PRACTICE QUESTION Q. Consider the following statements regarding Input Service Distributor (ISD) under GST: 1.ISD registration is mandatory for all businesses, irrespective of their turnover. 2.The ISD is required to distribute the credit of central tax or integrated tax only. 3.The distribution of credit by ISD is not subject to any prescribed conditions or restrictions. 4.ISD is primarily applicable to businesses with a single branch. Which of the statements is/are correct? A. 1 and 2 only B. 2 and 3 only C. 1, 2, and 4 only D. All of the above Answer: A. 1 and 2 only Explanation: Statement 1 is correct. ISD registration is mandatory for businesses with multiple branches, irrespective of their turnover. However, it's not mandatory for all businesses, only those meeting specific criteria. Statement 2 is correct. The ISD is required to distribute the credit of central tax or integrated tax. This includes the credit for services subject to levy under specified sections. Statement 3 is incorrect. The distribution of credit by ISD is subject to prescribed conditions and restrictions, as mentioned in the revised section. Statement 4 is incorrect. ISD is primarily applicable to businesses with multiple branches, not just a single branch.