In & Outs of Input Service Distributor Protecting the Recipient

In & Outs of Input Service Distributor Protecting the Recipient

To ease the doing of business in various locations in India with modest tax compliances, the concept of centralized registration and input service distributor has been taken from the previous indirect tax laws. Both of these notation was envisaged in service tax law i.e. Chapter V of Finance Act, 1994. The method was being initiated to distribute the credit of input services to the distinct units, which has availed those services. Similar is the scenario under GST law with some variations.

INTRODUCTION:-

The concept of Input Service Distributor (ISD) has been introduced in CGST Act, 2017 (hereinafter referred as ‘act’) on similar lines as existed in Service Tax Regime in order to make it convenient to the assessees to transfer their common credit/specific credit to their units/branches located in multiples states/places. The term Input Service Distributor is defined under Section 2(61) of the act, as-.

Sec. 2(61) of CGST Act, 2017 defines the term ISD as “an office of the supplier of goods or services or both which receives tax invoice issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number of that office”.

Therefore, in order to transfer the common credit, an assessee is required to take registration under the category of Input Service Distributor. Generally, the head office having no output accounts for the common expenses of branches or units and sometime branch specific expenses are booked by the Head Office and takes the credit of tax paid on such expenses. Since, the head office generally does not have the output supply and therefore it cannot be able to utilize the tax credit.

In order to make it possible, the head office applies for the ISD registration for availing & distribution of common as well as branch specific tax credit to the respective registered branches. Further, in case head office also engaged in making output supply having tax outlay, then the Head Office is also required to take the normal GST registration along with ISD for payment of tax and distribution of credit respectively. But the normal tax invoice for the supply of goods or services cannot be made from the ISD registration. Reliance can be place in case of Vivo Mobile India (P.) Ltd. (ORDER NO. 46 OF 2019 dated 17/12/2019) wherein AAR-UP has held that as per definition of term input service distributor in Section 2(61), An input service distributor could pass only input tax credit accumulated to him and in accordance with rule 54 of CGST Rule, 2017. Accordingly, input tax credit on basis of invoices issued by service provider from old GST Registration number (ISD) could not be admissible to applicant. Even if a person obtains two separate registrations, on same PAN, they are to be treated as distinct person under CGST Act, 2017. As per section 31(3), read with rule 53 of CGST Rules, any person registered under the act can only revise those invoices which were issued by him previously and that input tax credit is not admissible on invoices issued with new GST registration to applicant.

It is therefore clarified that head office here, refers the place primarily responsible for booking of expenses which are common to units or specific units. It is not compulsory for Head Office to become ISD unit, a branch can also become an ISD unit. The only requisite to become an ISD unit is the frontrunner in booking expense of other units as well as payment thereof. 

INPUT SERVICE DISTRIBUTOR REGISTRATION

It is apparent from the meaning that ISD registration is required where a head office/branch receives input services which are directly or indirectly related to units/branches.  In order to take registration of Input Service Distributor, every person shall make a separate application for registration as Input Service distributor in Form GST REG-01.

The certificate of registration enables ISD to exercise their functions i.e. availing & distribution of input tax credit on input services only.

The AUTHORITY FOR ADVANCE RULINGS, MAHARASHTRA in the application filed by Cummins India Ltd. (NO. GST-ARA-66/2018-19/B-162 dated 19/12/2018) has held that once GST is levied on service of facilitating common input supplies provided by applicant to its distinctly registered units and ITC thereof is availed by recipient unit, applicant is required to register itself as an input service distributor for distribution of ITC on common input supplies as per provisions of section 24.

CONDITIONS TO AVAIL INPUT TAX CREDIT (ITC):-

The cumulative conditions under Section 16 & 17(5) of CGST Act, 2017 read with Rule 36 of CGST Rules are as :-

  1. Possession of tax invoice or debit note
  2. Receipt of goods or services or both
  3. Tax charged has been actually paid to government
  4. Furnished the return u/s 39 of CGST Act, 2017
  5. Payment against supply, to the supplier of goods or service shall be made within 180 days from the date of issue of invoice. Otherwise need to reverse the credit & re-avail the credit on the payment of amount of supply.
  6. No depreciation on the tax component of cost of capital goods.
  7. Reversal of ITC when using for the supply of non-taxable, exempted & non-business purpose.
  8. Place of supply should be in the state of registration.
  9. No credit on the items specified u/s 17(5) of CGST Act, 2017 termed as blocked ITC.

MECHANISM TO DISTRIBUTE TAX CREDIT:-

Based on the conditions stated above, a registered person would be eligible to avail the ITC on Capital Goods, Inputs & Input Services. But as the nomenclature signifies, Input Service Distributor is allowed to avail the ITC of Input Services only. The availment & distribution of credit by ISD shall be made by way of GSTR-6 required to be filed monthly. The manner of calculation would be as follows:-

C1 = (t1÷T) × C

where,

  • “C” is the amount of credit to be distributed,
  • “t1” is the turnover, as referred to in section 20, of recipient of credit during the relevant period, and
  • “T” is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of Section 20;
  • “Relevant Period” shall be––
    • (i) if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or
    • (ii) if some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed;

Illustration 1: – XYZ Ltd. having its head-office at Mumbai, is registered as ISD. It has 4 units in different cities situated in different states namely Mumbai, Jabalpur, Delhi & Patna which are operational. The company commences its business in Patna in the month of January 2019. The company furnishes the following information for the month of January 2019:-

  • Branch Specific Credit: CGST & SGST paid on input services used only for Mumbai unit: Rs. 3,000/-
  • Common Credit: IGST, CGST & SGST paid on input services used for all units:  Rs. 4,000/-, 12,000/- & 12,000/- respectively.
  • Branch Turnover: The turnover of 3 units for last quarter are Rs. 5,00,000/-, Rs. 3,00,000/- & Rs. 2,00,000/- for Mumbai, Jabalpur and Delhi respectively. The unit of Patna has no turnover during the month of January 2019.

The distribution of credit would be in the following manner:-

UnitsTurnoverIGSTCGSTSGSTTotal availed ITC
MumbaiN.A.Nil300030006,000
Total ITC for distributionN.A.4,00012,00012,00028,000
Mumbai5,00,000/-
Jabalpur3,00,000/-
Delhi2,00,000/-
Bihar

The total ITC availed by Mumbai is Rs. 6,000/-, no distribution of the common credit can be made because one of the unit located in Patna, has used the common input service but was not available in preceding FY/quarter. By virtue of the aforesaid interpretation of the definition of relevant period, the distribution of common credit would only be available when all the turnover of all the recipients are available.

Illustration 2:- To distribute the credit in case of opening of new branch having no turnover in the relevant period, first credit of all the branches for the quarter in which new branch is opened is accumulated and subsequently distributed in next quarter.

Location / TurnoverAprilMayJuneSub-Total (qtr1)JulyAugustSepte-mberSub-Total (qtr2)
Jaipur100000300000200000600000200000100000300000600000
Udaipur200000150000100000450000100000200000150000450000
Mumbai250000200000300000750000300000250000200000750000
Baddi150000200000350000200000300000150000650000
Total55000080000080000021500008000008500008000002450000
Common-ITC-IGST1500020000400007500020000400003000090000

In this case, distribution will be done only in Quarter ending September including the accumulated ITC of previous quarter. There will be no availment in the month of April, May and June in GSTR-6 because of non-existence of Baddi unit in the previous FY/quarter ending March.  And ITC would be accumulated for all units for the quarter ending June. Therefore, the accumulated credit for Qtr. ending June is availed and distributed in the month of July when there is a turnover in the relevant period as stated in the sec. 20 of the act.

Column1Ratio of relevant  turnover*(Qtr.1 + July)AugustSeptemberTotal
 ITC for Distribution  ITC for Distribution95,00040,00030,0001,65,000
Jaipur28%26,51211,1638,37246,047
Udaipur21%19,8848,3726,27934,535
Mumbai35%33,14013,95310,46557,558
Baddi16%15,4656,5124,88426,860

*The aforesaid ratio is calculated on the basis of turnover of previous quarter ending June. As per the definition of relevant period, it shall be the quarter in which all the units are having turnover.

POINT TO BE REMBERED WHILE DISTRIBUTUION OF CREDIT [Sec. 20 of the act read with Rule 39 & 54 of CGST Rules, 2017]:-

The other relevant points to be considered while distributing the tax credit:-

  1. Recipient unit should be one who has the same PAN as that of ISD.
  2. For availing the ITC, ISD need to receive the tax invoice from the supplier of service by mentioning the Name, address & GSTIN of ISD.
  3. Place of supply of all such input service should be the registered place of ISD. 
  4. Both eligible & ineligible ITC would distribute separately under the cover of an ISD invoice in the same month in which inward supplies have been received.
  5. Credit distributed shall not exceed the credit available for distribution.
  6. Distribution shall be made to the units to whom the input service is attributable & which are operational in current year.
  7. ITC of Integrated tax, central tax & state tax shall distribute separately.
  8. Simply putting the credit availed in the proportion of the turnover of the unit to arrive the distribution amount.
  9. If the recipient units have the turnover in the preceding financial year, then the pro-rata of the credit shall be made based on the turnover of that preceding financial year.
  10. If any of the recipient units does not have the turnover in the preceding financial year, then the pro-rata of the credit shall be made based on the turnover of the last quarter previous to the month during which credit is to be distributed.
  11. The recipient unit must be operational in current year in which credit is going to distribute.
  12. The ITC on account of integrated tax shall be distributed as ITC of integrated tax to every recipient.
  13. The ITC on account of central tax and State tax or Union territory tax shall-
  • Be distributed as central tax & state tax, if the recipient unit & ISD locate in the same state or union territory.
  • Be distributed as integrated tax, if the recipient unit & ISD locates in the different state or union territory. Such distribution amount shall equal to the aggregate of central tax & state tax.

14. ISD shall issue an ISD invoice for the purpose of distributing the tax credit clearly indicating the following particulars:-

  • Name, address & GSTIN of ISD
  • A serial number not exceeding 16 alphanumeric character or special character i.e. hypen, dash, slash
  • Date of its issue
  • Name, address & GSTIN of the recipient unit
  • Amount of the credit distributed
  • Signature or digital signature of ISD or his authorized representative

15. No cross utilization can be happened i.e. credit lying in Delhi unit can’t be utilized by the Jabalpur unit for the payment of its tax liability.      

16. ISD shall issue an ISD credit note for reduction of credit already distributed. Such credit note clearly indicates all the particulars of original invoice issued for distribution.

17. Distribution of tax arise from the receipt of debit note from the supplier shall be made in the similar as that of receipt of tax invoice.

18. Distribution of the credit note received from the supplier shall be apportioned to all the units in the same ratio in which ITC of original invoice was distributed & reduced from the distributed amount in GSTR-6. Where the distribution amount is in negative, then it should be added to the output tax liability of the recipient unit via GSTR-3B of respective unit.

19. A non-ISD registered person having the same PAN & state code can also transfer the credit to his ISD unit for the common input services by issuing an invoice or credit note or debit note. [Inserted vide Notification no. 03/2018- CT dt. 23.01.2018]

20. The taxable value of the invoice raised by non-ISD registered person to ISD unit shall be same as the value of the common services.

21. In case, any amount of ITC distributed by ISD has wrongly apportioned to the units by any reason, and then the process of reversing the credit would be followed. The unit may transfer the ITC of common input service by issuing an invoice containing all details of ISD invoice.

22. ISD invoice, ISD credit note & ISD debit note shall be reported separately in GSTR-6.

WHAT IF WRONG DISTRIBUTION OF ELIGIBLE ITC HAS BEEN MADE:-

The distribution of credit by ISD is to be made in bifurcation of eligible credit and ineligible credit. This means that it is the responsibility of the ISD to arbitrate whether the invoice of the said input service is eligible to avail by the units or not by scrutinizing all the 9 conditions as stated in Para 3 above. If not eligible, then it is to be categorized as ineligible ITC & separate ISD invoice is to be issued.

Now the question has arisen, what remedy an ISD can adopt to correct the mistake of wrong distribution of ineligible ITC as eligible ITC. The ISD is the sole person who knows the every element of the invoices for the input service received, therefore it is his duty to identify the invoices as eligible or ineligible. On the phenomenon to err is the human, the ISD can have two remedy:-

  • Issuance of credit note of the amount wrongly distributed.
  • Amending the supplier’s invoice available for distribution & then re-distribution is to be made correctly.

In case, no identification of such type of mistake has been made by ISD & excess/wrong distributed credited has been availed by the recipient unit, then it would be deemed that the recipient units is in contravention of the sec.  20 of the act and so excess credit would be recovered from such recipient unit under the provision of demand & recovery of the act. [Sec. 21 of CGST, Act, 2017].

In case of Mahindra & Mahindra Ltd. v. Commissioner of Service Tax, Mumbai, [2018] 95 taxmann.com 358 (Mumbai – CESTAT), wherein CESTAT-Mumbai has held that rule 14 of CENAVT Credit Rule,2004 could be made applicable only on person who availed CENVAT credit wrongly or utilized same and, therefore, appellant being an input service distributor could not be issued any show-cause notice of demand under rule 14. The demand raised on the appellant being an input service distributor is not sustainable in law.

RETURN RELATED COMPLIANCE:-

ISD registered person need to file GSTR-6 wherein following details are required to be reported:-

  1. Total ITC available for distribution whether eligible or ineligible,
  2. Distributed credit to other units both eligible & ineligible,
  3. Detail of any mismatch,
  4. Reclaim of distributed ITC,
  5. Any amendment thereof need to report.
  6. Redistribution of ITC distributed to a wrong recipient
  7. Late fee, if any
  8. Refund claimed from electronic cash ledger

GSTR-6 is required to file on the monthly basis. GSTR-6 can only be filed after 12th of the succeeding month and before 13th of the succeeding month. On late filing, ISD will have to pay the late fee or other liability also.

CONSLUSION:-

ISD is a facility available to businesses having a large share of common expenditure on input services and where billing/payment is done from a centralized location. The concept of ISD has been introduced to simplify the credit taking process for various business houses and the facility helps the concerned to have a smooth flow of input tax credit under GST.

also read : Section 11 – Made Easy – Never Before Ever After – Comprehensive

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