FAQ’s on Input Service Distributor (Section 28 of the CGST Act, 2017 and Rule 39 of the CGST Rules, 2017)

1. Who is an Input Service Distributor (ISD)?

• Companies may have their head office in one place and units in other places which may be registered separately. The Head Office would be procuring certain services which would be for the common utilization of all units.
• The bills for such expenses would be raised on the Head Office but the Head Office itself would not be providing any output supply to utilize the credit which gets accumulated on account of such input services.
• Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units.
• Such apportionment can be made by the head office after getting registered with the GST law as an Input Service Distributor.

2. Is it mandatory for an ISD to get registered under the GST act?

• Yes, an ISD is required to obtain a separate registration. Registration is mandatory if the entity wants to distribute the credit on account of common expenditure to other units.

3. Should the recipient to whom the ITC is being distributed be registered under GST Law?

• No, registration of the recipient is not mandatory. An ISD can distribute ITC to an unregistered person also.

4. How is the input distributed by an ISD?

• As per Rule 54 of the CGST Rules, 2017 The ISD has to issue an ISD invoice for the purpose of distributing credit.
• The invoice must clearly state that it is being issued only for the purpose of distributing the credit.

5. What are the underlying conditions for distributing credit by the ISD?

• The credit should be distributed against a valid document (ISD invoice) only.
• The credit distributed by an ISD to any recipient or all the recipients should not exceed the credit that is available for distribution.
• The input tax credit available for distribution in a month shall be distributed in the same month and such details should be furnished in Form GSTR-6.
• The eligible and ineligible credits should be distributed separately.

6. Manner of distribution of ITC

7. What is the ratio in which the credit should be distributed?

• If the ITC is attributable to a single unit, such credit should be distributed in entirety to that unit only.
  1. For example – A Ltd has two branches, B Ltd and C Ltd. A Ltd is engaging an auditor to do physical verification of inventory in B Ltd. The auditor is raising an invoice to A Ltd for the services rendered. In such case, the input service pertains to B Ltd and hence the ITC pertaining to such service has to be distributed in entirety to B Ltd.
• In case of input services that are attributable to more than one recipient the distribution shall be done in the pro-rata basis of state turnover.

8. What do you mean by the term “pro-rata distribution”?

• It essentially translates to “in proportion” which means a process where whatever is being allocated should be distributed in equal portions.
• As per section 28 of the CGST Act, 2017 read with Rule 39 of the CGST Rules, in cases where ITC is attributable to two or more recipients, the ISD shall distribute the same on a pro-rata basis based on the turnover of the recipients.
• Rule 39 provides a formula for distribution in such cases,

C1 = (t1/T) * C

Where,
C = Total credit available for distribution to two or more recipients
C1 = ITC that is required to be distributed to a particular recipient
t1 = Turnover of that recipient
T = Total turnover of all the recipients to whom “C” is attributable

9. What are the compliances to be followed by an ISD?

• Any person registered as an Input Service distributor should file Form GSTR 6 on a monthly basis on or before the 13^th of the succeeding month containing details of all the invoices issued to distributing credit for that period.
• The details given by the ISD in GSTR 6 will be reflected in the recipient’s GSTR 2A.
• An ISD is not required to file an annual return (i.e. GSTR 9 is not applicable for an ISD)

10. What are the Restrictions imposed on an ISD?

• An ISD cannot raise any invoices for the supply of goods or services, it can only raise invoices to distribute credit.
• The ISD in its own capacity cannot discharge any tax liability. (i.e. pay tax to the government)
• The ISD cannot avail any service on which tax is liable to be paid on a Reverse charge basis. For eg., if A Ltd has got an ISD registration, it cannot receive any legal services on which tax is liable to be paid on a reverse charge basis.
• However, if an ISD wants to receive any services on which tax is liable to be paid on an RCM basis, it has to separately register as a normal taxpayer.

11. How to deal with a subsequent increase or decrease in ITC?

• The ISD shall issue an Input Service Distributor credit note, as prescribed in sub-rule (1) of rule 54, for reduction of credit in case the input tax credit already distributed gets reduced for any reason.
• In case of a debit note, the ISD shall follow procedures similar to distributing credit in case of an original invoice as given above.
• any ITC required to be reduced on account of the issuance of a credit note to the ISD by the supplier shall be apportioned to each recipient in the same ratio in which the ITC contained in the original invoice was distributed.

12. What are the documents required for the distribution of credit by ISD?

• Input service distributor invoice (or)
• Input service distributor credit note (or)
• Any other document issued by ISD by the provision of rule 54(1) of the CGST act rules, 2017.

13. What are the contents of an input service distributor invoice (or) credit note?

• Name, addresses, and GSTRIN of the Input Service Distributor,
• A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters or dash respectively, and any combination thereof, unique for a financial year,
• Date of its issue,
• Name, address, and GSTIN of the recipient to whom the credit is distributed,
• Amount of the credit distributed, and
• Signature or digital signature of the Input Service Distributor

14. What is the course of action in cases where excess ITC has been distributed by the ISD?

The excess credit so distributed shall be recovered from such recipients along with interest by ISD

15. ITC that cannot be distributed by an ISD

• ITC relating to inputs and capital goods (raw materials or capital goods like machinery, equipment, etc) cannot be distributed.
• An ISD can distribute ITC relating to input services only.

16. Can ISD distribute the ITC of the previous month in subsequent months?

No, ITC can be distributed by ISD to the recipient in the same month and cannot be in the subsequent month.

17. Can an entity possess multiple ISD registrations?

• Yes, an entity may have an admin division, marketing division, etc in other locations without providing any output supply.
• Such divisions can be registered as ISD’s to distribute the ITC on account of receipt of various input services.

18. What is GSTR 6A?

• It is an auto-populated form based on information filed in Form GSTR 1 by the suppliers to the Input service distributors.
• Just like GSTR 2A, ISD’s can distribute credit which are reflected in their GSTR 6A only.