The distribution of credit by an Input Services Distributor (ISD) under the Goods and Services Tax (GST) Act 2017 is governed by Section 28 of the Act and Rule 39 of the CGST Rules, 2017. Here’s a breakdown of the key points:

General Principles:

• The ISD distributes the credit of tax paid on input services to eligible recipients.
• The credit is distributed in the same month as it is received.
• The ISD must issue a document specifying the amount of credit distributed to each recipient(GST) Act, 2017.

Distribution to Multiple Recipients:

• If the input service benefits more than one recipient, the credit is distributed pro rata on the basis of their turnover.
• Only the turnover of operational recipients during the relevant period is considered.
• The relevant period is the current year, unless specified otherwise (GST) Act, 2017.
• Turnover refers to the aggregate turnover in a State or Union territory.

Calculation of Pro Rata Share:

1. Calculate the individual recipient’s turnover during the relevant period.
2. Sum up the turnovers of all operational recipients.
3. Divide each individual recipient’s turnover by the total turnover of all recipients.
4. Multiply the resulting percentage by the total input tax credit (GST) Act, 2017available for distribution.
5. This provides the individual recipient’s pro rata share of the credit.

Types of Credit:

• The ISD distributes the credit of central tax as central tax or integrated tax.
• Similarly, the credit of integrated tax(GST) Act, 2017 is distributed as integrated tax or central tax.

Prescribed Manner of Distribution:

• The specific format and method of issuing the document distributing the credit are (GST) Act, 2017 prescribed by the CGST Rules.
• This ensures consistency and transparency in the process.

Reporting Requirements:

• The details of invoices issued by the ISD must be furnished in Form GSTR-6.
• This information is then made available to the recipients in Part B of Form GSTR-2A under (GST) Act, 2017.
• The recipient can then include this information in their own Form GSTR-2.

EXAMPLES

Example 1: Same State

Input Service Distributor (ISD): Located in Chennai, Tamil Nadu Recipients:

• Recipient A: Operational in Chennai, Tamil Nadu. Turnover for the relevant period = 100,000.
• Recipient B: Operational in Bangalore, Karnataka. Turnover for the relevant period = 50,000.
• Recipient C: Operational in Goa. Turnover for the relevant period = 25,000.

Input Service: Consulting services availed by the ISD for 100,000 with 18% GST, resulting in ITC of 18,000.

GST type: IGST (since the ISD operates in Tamil Nadu but avails the services from outside the state)

Distribution:

• Total turnover of recipients in the state: 100,000 (A) + 0 (B) + 0 (C) = 100,000
• Total turnover of all recipients: 100,000 (A) + 50,000 (B) + 25,000 (C) = 175,000
• Recipient A: Proportionate share = 100,000/175,000 = 0.5714
• Recipient B: Proportionate share = 50,000/175,000 = 0.2857
• Recipient C: Proportionate share = 25,000/175,000 = 0.1429

Distributed ITC:

• Recipient A: 18,000 * 0.5714 = 10,285 (IGST)
• Recipient B: 18,000 * 0.2857 = 5,143 (IGST)
• Recipient C: 18,000 * 0.1429 = 2,572 (IGST)

Example 2: Different State

Input Service Distributor (ISD): Located in Pune, Maharashtra Recipient:

• Recipient A: Operational in Delhi. Turnover for the relevant period = 150,000.
• Recipient B: Operational in Hyderabad, Telangana. Turnover for the relevant period = 75,000.

Input Service: Security services availed by the ISD for 200,000 with 18% GST, resulting in ITC of 36,000.

GST type: CGST (since the ISD and recipient are in the same state)

Distribution:

• Total turnover of recipients: 150,000 (A) + 75,000 (B) = 225,000
• Recipient A: Proportionate share = 150,000/225,000 = 0.6667
• Recipient B: Proportionate share = 75,000/225,000 = 0.3333

Distributed ITC:

• Recipient A: 36,000 * 0.6667 = 24,001 (CGST)
• Recipient B: 36,000 * 0.3333 = 12,000 (CGST)

FAQ QUESTIONS

Q: What is an Input Service Distributor (ISD)?

A: An ISD is a registered person who receives input tax credit (ITC) on common input services used by multiple recipients, (GST) Act, 2017and then distributes the credit to those recipients on a pro-rata basis.

Q: When is ISD registration required?

A: ISD registration is required if you:

• Receive input services used by multiple recipients.
• The ITC on such services cannot be directly attributed to any specific recipient.
• The value of such services exceeds Rs. 50 lakhs in a financial year under (GST) Act, 2017.

Q: How is the ITC distributed by the ISD?

A: The ITC is distributed to the recipients on a pro-rata basis based on their turnover. The turnover considered is the taxable turnover under (GST) Act, 2017 of the recipient in the state/union territory to which the input service relates.

Q: What documents are required for distribution of ITC by ISD?

A: The ISD needs to issue an Input Service Distributor (ISD) invoice in the prescribed format to each recipient. This invoice should clearly indicate that it is issued only for the distribution of ITC (GST) Act, 2017.

Q: What are the time limits for issuing ISD invoices?

A: The ISD invoices should be issued within 30 days from the end of the month in which the ITC is availed.

Q: Can the ISD charge any fees for distribution of ITC?

A: Yes, the ISD can charge a reasonable fee for the services rendered in distributing the ITC under (GST) Act, 2017. However, the fee should be documented and clearly communicated to the recipients.

Q: How does the recipient claim the ITC received from the ISD?

A: The recipient can claim the ITC received from the ISD in their GSTR-3B return. The details (GST) Act, 2017 of the ISD invoice should be reflected in Part B of Form GSTR-2A.

Q: What happens if the ITC distributed by the ISD is subsequently reduced?

A: In case the ITC distributed by the ISD is subsequently reduced for any reason, the ISD must issue an ISD credit note to the (GST) Act, 2017recipient to adjust the ITC claimed.

Q: What are the consequences of non-compliance by the ISD?

A: Non-compliance with the provisions of the (GST) Act, 2017and Rules related to ISD can result in penalties and denial of ITC.

CASE LAWS

Case Laws on Manner of Distribution of Credit by Input Services Distributor under GST Act 2017

Several case laws have addressed the manner of distribution of credit by Input Service Distributors (ISDs) under the GST Act, 2017. Here are some key takeaways from relevant judgments:

Pro-rata basis on turnover:

• Section 28 of the CGST Act and Rule 39 of the CGST Rules mandate ISDs to distribute ITC on a pro-rata basis based on the turnover of eligible recipients.
• Cummins India Ltd. (AAAR – Maharashtra) held that the distribution of ITC by HO to BOs through ISD mechanism qualifies as supply and attracts (GST) Act, 2017
• B G Shirke Construction Technology (P.) Ltd. (AAR – Maharashtra) clarified that managerial services provided by HO to group companies/sites are “supply of service” and liable to(GST) Act, 2017. The HO can charge a lump sum amount, but ITC must be distributed through ISD mechanism.
• FAQ: Would Input Tax Credit (ITC) be available to a GST registrant though the services procured from a third-party vendor are also directly used by various ‘distinct persons’? states that ITC (GST) Act, 2017  is available in such scenarios, and mandatory distribution through ISD is required.

Turnover considered for distribution:

• CGST Rules, 2017, Rule 39(2) specifies that the turnover considered for distribution is the total turnover of the recipient in the state/union territory to the total turnover of all operational recipients to whom the input service relates (GST) Act, 2017.
• Pioneer One Consulting LLP emphasizes that the distribution is pro-rata based on the state turnover of the recipients.

Common Portal and GSTR forms:

• CGST Rules, 2017, Rule 60(5) states that details of invoices furnished by an ISD in GSTR-6 are electronically made available to the recipient in Part B of GSTR-2A,  (GST) Act, 2017allowing them to include it in GSTR-2.
• ICMAI – INPUT SERVICE DISTRIBUTOR (ISD) UNDER GST LAWS highlights that ISDs must issue an ISD invoice as per Rule 54(1), clearly stating it’s for ITC distribution.

Additional points:

• ITC distribution should be documented properly, including invoices and supporting records (GST) Act, 2017.
• ISDs must comply with all relevant provisions of the CGST Act and Rules.
• Recipients should ensure the accuracy of information received from the ISD and properly account for the distributed ITC.

Case laws are evolving, so it’s crucial to stay updated on the latest rulings and interpretations to ensure compliance with the(GST) Act, 2017.