Eligibility:

• An ISD is an office of a supplier registered under the same PAN as its branches/units, which have separate GSTINs.
• The ISD receives invoices for input services used by its branches/units.

Distribution Process:

1. Credit Attribution:
   • ISD identifies the input services used by each recipient unit.
   • Services specifically used by one unit are attributed entirely to that unit.
   • For services used by multiple operational units, the credit is distributed proportionally based on the:
     • Turnover in the State/Union Territory:This refers to the taxable supplies made by each recipient unit in the relevant state/UT during the period.
     • Aggregate Turnover of All Recipients:This is the sum of the individual turnovers of all recipient units.

2. Credit Distribution:
   • The ISD cannot distribute more credit than available.
   • The credit is distributed through an ISD invoice(as per Rule 54(1) of CGST Rules, 2017). This invoice clearly states it’s for ITC distribution.
   • The ISD must distribute both eligible and ineligible ITC separately.
   • For recipients in the same state, the credit is distributed as:
     • Central Tax (CGST) as Central Tax or Integrated Tax (IGST)
     • State Tax (SGST) or Union Territory Tax (UTGST) as respective taxes

3. Time Limit:
   • The ITC available for distribution in a month must be distributed in the same month.
4. Record Keeping:
   • Details of invoices furnished by the ISD are included in their GSTR-6 return.
   • This information is electronically shared with recipients through Form GSTR-2A, allowing them to include it in their GSTR-2 return.

EXAMPLE

Absolutely! Here’s an example of how an Input Service Distributor (ISD) might distribute Input Tax Credit (ITC) under the GST Act of 2017, with a focus on the state of Tamil Nadu:

Scenario:

• ISD Name:ABC Services Pvt. Ltd. (Chennai, Tamil Nadu)
• Recipient Units:
  • Manufacturing Unit 1 (located in Chennai, Tamil Nadu)
  • Manufacturing Unit 2 (located in Coimbatore, Tamil Nadu)
  • Sales Office (located in Bangalore, Karnataka)

Common Input Services:

• Head office rent in Chennai
• Legal consulting services (used by all units)
• Software subscription (used by all units)

Procedure:

1. Invoice Receipt: ABC Services receives invoices for the common input services along with the applicable GST (CGST, SGST/UTGST, or IGST).
2. Determining Eligible ITC: ABC Services determines the portion of ITC eligible for distribution. ITC on expenses exclusively related to a single unit is not distributed and is instead used directly by that unit.
3. ITC Distribution Method: ABC Services must choose a suitable method for distributing the eligible ITC. The most common method is proportionate distribution based on turnover:
   • Calculate the turnover of each recipient unit during the relevant month.
   • Calculate the percentage share of each unit’s turnover in relation to the total turnover of all recipient units.
   • Distribute the ITC based on these percentages.
4. ISD Invoice: ABC Services issues an ISD invoice as per Rule 54(1) of the CGST Rules (2017). This invoice clearly states:
   • It’s an ISD invoice for credit distribution only.
   • Amount of eligible ITC being distributed.
   • Amount of ineligible ITC (if any).
   • CGST and SGST (Tamil Nadu) components of the ITC being distributed.
5. Filing GSTR-6: By the 13th of the following month, ABC Services files its GSTR-6 return, which includes details of the ISD invoices issued.

FAQ QUESTIONS

1. Who can be an Input Service Distributor (ISD)?

Any taxpayer registered under GST can become an ISD. There’s no separate registration required, but they need to declare their intention as an ISD during the initial registration or through subsequent amendments.

2. How is input tax credit distributed by an ISD?

An ISD can distribute the credit in two ways:

• Proportionate Distribution:If the input service benefits multiple recipients, the credit is distributed proportionally based on their turnover in the relevant state or union territory during the period.
• Direct Distribution:If the input service benefits a single recipient, the entire credit is distributed to them.

3. What documents are required for distribution?

• ISD Invoice:The ISD must issue a specific invoice, called an ISD invoice, clearly mentioning it’s solely for distributing input tax credit. This invoice follows the format prescribed in rule 54(1) of the CGST Rules, 2017.
• ISD Credit Note:In case the distributed credit is reduced later, the ISD needs to issue an ISD credit note to the recipient and adjust the credit accordingly.

4. What are the timelines for distribution?

• The input tax credit available for distribution in a month needs to be distributed and reported in the GSTR-6 form by the 13th of the following month.
• Both eligible and ineligible credit need to be distributed separately.

5. How are different types of taxes handled?

• The credit of central tax (CGST) paid on input services is distributed as CGST or integrated tax (IGST).
• Similarly, the credit of state or union territory tax (SGST/UTGST) paid on input services is distributed as the respective state or UT tax.

6. What are some restrictions on distributing input tax credit?

• Credit received through the reverse charge mechanism cannot be distributed by an ISD and needs to be utilized by them as a regular taxpayer.

CASE LAWS

The concept of Input Service Distributor (ISD) and the procedure for distribution of input tax credit (ITC) by them is governed by the Central Goods and Service Tax (CGST) Rules, 2017, specifically rule 54.

Here’s a summary of the relevant provisions:

Distribution of ITC:

• Timeframe:The ITC available for distribution in a month needs to be distributed and details furnished in Form GSTR-6 for the same month. [Rule 54(3)]
• Manner of distribution:
  • Specific attribution:If the service billed is specifically attributable to one recipient unit, the ITC must be allocated entirely to that unit. [Rule 54(1)(j)]
  • Proportionate distribution:If the service benefits multiple recipient units, the ITC is distributed proportionately based on the:
    • Turnoverof the recipient in the state/union territory to the
    • Total turnover of all recipientsthat are operational and to whom the input service relates. [Rule 54(1)(j)]
  • Separate distribution:Both eligible and ineligible ITC must be distributed separately. [Rule 54(2)]
  • Tax component distinction:ITC on account of central tax (CGST) and State/UT tax (SGST/UTGST) for recipients in the same state needs to be distributed as central tax and State/UT tax [Rule 54(4)]

Documentation:

• ISD invoice:An ISD invoice, as prescribed under rule 54(1), must be issued to the recipient entitled to the credit. This invoice needs to clearly mention that it is issued solely for ITC distribution. [Rule 54(3)]
• Credit and debit notes:If the ITC distributed by an ISD is reduced later, the process specified in clause (j) of sub-rule (1) needs to be applied mutatis mutandis for reduction of credit. [Rule 54(2)]

Return filing:

• ISD credit note and invoice:These documents need to be included in the Form GSTR-6 return filed for the month in which they were issued. [Rule 54(3)]