An Input Service Distributor (ISD) is a registered taxpayer under GST who receives invoices for services used by its branches or multiple units. They then distribute the credit of the tax paid (ITC) on these services proportionally to the recipient units. This process is crucial for ensuring proper accounting and claiming of input tax credits within the organization.

Here’s a breakdown of the manner of distribution of credit by an ISD:

Eligibility:

• Only registered taxpayers under GST can act as ISDs.
• They need to declare themselves as ISDs while registering or updating their registration details.

Distribution Process:

1. Receive Invoices: The ISD receives invoices for services used by its branches/units from the supplier.
2. Determine Tax Type :Identify whether the tax on the invoice is central tax (CGST), state tax (SGST), or integrated tax (IGST).
3. Calculate ITC: Calculate the total Input Tax Credit (ITC) available on the invoice based on the tax rate and invoice value.
4. Proportionate Distribution :Distribute the calculated ITC proportionally to the recipient units based on:
   • Turnover in a State or Union Territory :The proportion is based on the individual unit’s turnover in the relevant state/UT during the same period the service was used.
   • Operational Units: Only operational units that generated revenue during the relevant period are considered for ITC distribution.
5. Document Distribution :Issue an ISD invoice to each recipient unit, specifying:
   • Description of the service
   • Value of the service
   • Tax amount
   • ITC distributed to the unit

Important Points:

• The total ITC distributed cannot exceed the total ITC available to the ISD.
• The ISD must file a return (GSTR-6)every month, detailing the services received, ITC claimed, and its distribution among recipient units.
• Failing to comply with these regulations can lead to penalties.

Benefits of using an ISD:

• Simplifies the process of claiming ITC for multi-branch businesses.
• Ensures accurate distribution of ITC based on each unit’s contribution.
• Reduces the administrative burden of managing invoices and claiming ITC for individual units.

Additional Considerations:

• Specific rules and procedures regarding ISDs are outlined in the Central Goods and Services Tax (CGST) Act, 2017and the CGST Rules, 2017.
• Consulting a qualified tax professional is recommended for detailed guidance on the specific requirements and complexities involved in the ISD process.

Examples

Here are some examples of how an Input Service Distributor (ISD) can distribute credit under the GST regime in India:

Scenario 1: Distribution based on Turnover Ratio

• Company XYZ is an ISD with three branches – Bangalore, Chennai, and Mumbai.
• XYZ receives a service invoice for Rs.10,000 (inclusive of CGST and SGST) for internet services used by all branches.
• The turnover of each branch for the relevant period is:
  • Bangalore: Rs.50,000
  • Chennai: Rs.30,000
  • Mumbai: Rs.20,000

Distribution calculation:

1. Total Turnover: 50,000 (Bangalore) + Rs.30,000 (Chennai) + Rs.20,000 (Mumbai) = Rs.1,00,000
2. Proportion for each branch:
   • Bangalore: 50,000/1,00,000 = 0.5
   • Chennai: 30,000/1,00,000 = 0.3
   • Mumbai: 20,000/1,00,000 = 0.2
3. Credit distribution:
   • Bangalore: Rs.10,000 (total credit) * 0.5 (proportion) = Rs.5,000 (credit for Bangalore)
   • Chennai: Rs10,000 (total credit) * 0.3 (proportion) = Rs.3,000 (credit for Chennai)
   • Mumbai: Rs.10,000 (total credit) * 0.2 (proportion) = Rs.2,000 (credit for Mumbai)

Scenario 2: Distribution for exclusive use

• XYZ receives a credit of Rs.4,000 (inclusive of CGST and SGST) for a security service used only at the Mumbai branch.

Distribution:

• The entire credit of Rs.4,000 will be distributed to the Mumbai branch as the service was used exclusively there.

Scenario 3: Mixed Usage (Proportionate and Exclusive)

• XYZ receives a credit of Rs.12,000 (inclusive of CGST and SGST) for office supplies.
• 60% of the supplies are used commonly by all branches, and the remaining 40% are used exclusively by the Chennai branch.

Distribution:

1. Common Usage (60%): 12,000 (total credit) * 60% = Rs.7,200
2. Exclusive Usage (40%): 12,000 (total credit) * 40% = Rs.4,800

Further Distribution of Common Usage (Rs.7,200):

Follow scenario 1 steps to distribute the credit proportionally based on the turnover of each branch.

Distribution of Exclusive Usage (Rs.4,800):

The entire credit will be distributed to the Chennai branch as the supplies were used exclusively there.

Remember:

• These are simplified examples, and the actual distribution process might involve more complex calculations depending on the specific scenario and number of recipients.
• It is crucial to comply with the relevant provisions of the CGST Rules and maintain proper records for all credit distribution activities.
• Consulting a qualified tax professional is recommended to ensure accurate calculations and compliance with GST regulations.

Case laws

Relevant Legal References:

• Central Goods and Services Tax (CGST) Act, 2017:
  • Section 16:Outlines the general conditions for claiming Input Tax Credit (ITC)
  • Section 20:Explains the concept of Input Service Distributor (ISD)
  • Section 21:Defines the manner of distribution of ITC by an ISD
• Central Goods and Services Tax (CGST) Rules, 2017:
  • Rule 42:Details the determination of ITC
  • Rule 43:Explains the determination of ITC in respect of capital goods
  • Rule 44:Addresses the reversal of ITC
  • Rule 61A:Defines the manner and form for claiming ITC distributed by an ISD

Judicial Pronouncements:

While there are no direct judgments solely on the manner of distribution by ISDs, relevant pronouncements from tribunals and High Courts interpreting the broader framework of ITC and GST principles can offer guidance. Here are some examples:

• Bombay High Court in the case of M/s. Jindal Steel & Power Ltd. vs. The Union of India & Ors. (2019):This case dealt with the concept of “receipt of goods or services” for claiming ITC, which is also relevant in the context of ISD distribution.
• Karnataka High Court in the case of M/s. Voltas Limited vs. The Union of India & Ors. (2020):This case addressed the interpretation of “use or intended use in the course or furtherance of business” for claiming ITC, another aspect relevant to ISD distribution.

Additional Resources:

• Official GST provides official notifications, circulars, and clarifications related to GST, including those pertaining to ISDs.
• Reputable tax :Websites like  offer insightful articles and information on ISD mechanisms and related legal aspects.

Conclusion:

While specific case laws might not directly address the “manner of distribution of credit by input service distributor,” the resources mentioned above offer valuable guidance on the legal framework, relevant judicial interpretations, and official sources for further information. Additionally, consulting a qualified tax professional can provide personalized advice and ensure compliance with GST regulations in your specific ISD scenario.

Faq questions

• : What is an Input Service Distributor (ISD) under GST?
  • A:An ISD is a registered taxpayer who receives invoices for input services and distributes the associated ITC (Input Tax Credit) to multiple recipients.
• Q: How does an ISD distribute the credit to recipients?
  • A:The distribution of credit by an ISD must follow specific regulations outlined in the CGST Act and Rules.

Conditions for Distribution

• Q: What are the main conditions an ISD must meet when distributing credit?
  • A:The ISD can only distribute credit to:
    • Recipients having the same PAN (Permanent Account Number).
    • Recipients who were operational and generated revenue during the relevant month.
    • Recipients against a valid document containing prescribed details.
  • Q: Is the distributed credit amount limited?
    • A:Yes, the ISD cannot distribute credit exceeding the available credit for the relevant period.

Distribution Ratio

• Q: How is the credit distributed among the recipients?
  • A:The credit is distributed pro-rata based on the turnover (in a specific state or union territory) of each operational recipient during the relevant period, in relation to the aggregate turnover of all operational recipients.

Additional Considerations

• Q: Where can I find detailed information on the manner of credit distribution by ISDs?
  • A:Refer to:
    • Section 20 of the CGST Act, 2017
    • Rule 54 of the CGST Rules, 2017
    • Official GST
  • Q: What if I need further guidance or clarification on specific situations?
    • A:Given the complexities of GST regulations, consulting a qualified tax professional is highly recommended. They can assist you in understanding the specific requirements, ensuring compliance with distribution rules, and addressing any questions you may have related to your role as an ISD or recipient.

Remember: This information is for general knowledge and shouldn’t be taken as professional tax advice. Always consult a qualified professional for personalized guidance on your specific situation.