CONCEPT OF INPUT SERVICE DISTRIBUTOR IN GST

[Anuj Bansal]

An Input service distributor (ISD) is an office of supplier of goods or services which receives tax invoices for services and distributes the credit in such invoices to its branches having the same PAN in the manner prescribed under the law.  However, in order to distribute credit, following conditions are required to be followed:

1. The credit can be distributed to the recipients of credit against a document containing the details as may be prescribed.
2. The amount of credit distributed shall not exceed the amount of credit available for distribution.
3. The input tax credit available for distribution in a month shall be distributed in the same month. E.G. Input Tax Credit for the month of July shall be distributed in the same month i.e. in the month of July only.

Procedure for distribution of credit:

The procedure for distribution of credit is given in Section 20 read with Rule 39. As per the above provisions, following procedure to be adopted:

1. The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient.
2. If the input services are attributable to more than one recipient of credit, the distribution shall be on the pro-rata basis of the turnover of such recipients in the state / union territory during the relevant period.
3. However, if the Input services are common for all units, then it will be distributed according to the ratio of turnover of all the units in the relevant year.
4. Eligible and ineligible input tax credits are required to be distributed separately.
5. The credit on account of CGST, SGST, UTGST or IGST, each shall be distributed separately.

Therefore, the important points for consideration are the meaning of the “turnover” and “relevant period”.

• turnover – Turnover shall include the value of turnover for all the units whether registered or un-registered engaged in the taxable as well as exempted supply, reduced by the amount of any duty or tax levied.

• relevant period - means –
  • If the recipients of credit have turnover in their states during the FY preceding to the current FY, the Preceding FY; or

 

• If some or all recipients do not have any turnover in their States in the FY preceding the year during which the credit is to be distributed, relevant period will be 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.

 

Therefore, if all the recipients have turnover in the previous year, then turnover for the previous year shall be considered for purpose of calculating the ratio.

However, in a situation, if all the recipient were not having turnover in the previous year, then turnover of the last quarter (in which all recipients having turnover) preceding the month of return shall be considered for computing the ratio E.g. the return for Jan, 2018 is to be filed and all the recipients were neither having turnover in the previous year i.e. 2016-17 nor in the Q.E. Dec, 2017, but during the Q.E. Sept, 2017, turnover was there in all the units, therefore, turnovers for Q.E. Sept, 2017 shall be considered for computing the ratio.    

Ratio of distribution of ITC by ISD:

As stated above, where the input service is directly attributable to a particular unit, the credit has to be distributed only to that unit.

If input services are attributable to more than one recipient of credit, the distribution shall be in the pro-rata basis of turnover in such State / Union Territory. Following formula shall be applied for determining the credit i.e. C1 for each of the recipients:

 

C1 = (t1÷T) × C

where,

“C” is the amount of credit to be distributed,

“t1” is the turnover of the recipient / state 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.

Credit shall be distributed in the following manner:

Location of Branch (recipient of ITC)	Manner of Distribution of Credit
Same state as that of ISD	The credit of IGST, CGST, SGST or UTGST shall be distributed as IGST, CGST, SGST or UTGST respectively.
Different state as that of ISD	The credit of IGST, CGST, SGST or UTGST shall be distributed as IGST.

Input Service Distributor Invoice / Credit Note for the distribution of credit:

The document prescribed for distribution of credit is “Input Service Distributor Invoice”. Moreover, the details required in the invoice are also prescribed in the same Rule. An “Input Service Distributor Invoice / Credit Note” shall be issued to the recipient for distributing the credit and same shall be reported in the ISD Return. Following are the details required to be mentioned on the invoice:

1.  Name, Address and GSTIN of the ISD.
2. Consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as- "-", "/" respectively, and any combination thereof, unique for a financial year.
3. Date of its issue.
4. Name, Address and GSTIN of the recipient i.e. the person to whom the credit is distributed.
5. Amount of the credit distributed:
   1. Eligible and Ineligible Credits shall be indicated separately.
   2. Amount of IGST, CGST and SGST shall be mentioned separately.
6. Invoice shall be signed or digitally signed by the Authorized Signatory.
7. It shall be clearly indicated in such invoice that the Invoice is issued only for distribution of input tax credit.

Credit and Debit Note

In case an additional credit is available to the ISD by the Supplier by issuance of Debit Note or any credit is reduced by the supplier to ISD by issuance of Credit Note, the additional credit shall be apportioned to each recipient in the same ratio in which the ITC contained in the original invoice was distributed. However, in case where due to reduction in credit, credit with the recipient becomes negative, the amount shall be added to the output liability of recipient.

Services taken under RCM

The ISD is not permitted to make payment of tax under RCM. Therefore, in a situation where the ISD is taking services which are taxable under RCM, it is suggested that either take a normal registration and take services in such registration and pass on the credit to ISD by raising an invoice on ISD. The other option is that the company can take such services in other existing normal registration and pass it on to ISD. Thereafter, the ISD can distribute the credits to the concerned units.

GST Retuns:

• An ISD is required to file monthly return in GSTR-6 within 13 days after the end of the month and will have to furnish information of all ISD invoices issued. The monthly return can be prepared after adding, correcting or deleting the details on the basis of details of credit available on the GST portal in GSTR – 6A.
• The details in the returns will be made available to the respective recipients in their GSTR 2A. The recipients may include these in its GSTR-2 and take credit.
• An ISD shall not be required to file Annual return.
• Amount of tax credit distributed should not exceed the amount of tax credit available with the ISD as at the end of a relevant month to be filed in GSTR-6
• Tables 6, 7, 8, 9 of GSTR-6 facilitate to amend any mistake committed in previous returns regarding furnishing original invoice details, mismatch, and redistribution of amended credit.

EXAMPLE: ABC Ltd, having its head Office at Delhi, is registered as ISD. It has three units in different states namely ‘Delhi’, ‘Gurgaon’ and ‘Mumbai’ which are operational in the current year. ABC Ltd furnishes the following information for the month of January, 2018 & wants to distribute the below input tax credit to various units.

(i) GST paid on services used only for Delhi Unit: ₹ 5,00,000/-

(ii) IGST, CGST & SGST paid on services used for all units: ₹ 20,00,000/-

Total Turnover of the units for the preceding Financial Year 2016-17 are as follows: -

Unit                                                    Turnover (Rs.)

Total Turnover of three units =      ₹ 10,00,00,000

Turnover of Delhi unit =                 ₹ 5,00,00,000 (50%)

Turnover of Gurgaon unit =           ₹ 3,00,00,000 (30%)

Turnover of Mumbai unit =             ₹ 2,00,00,000 (20%)

Now credit shall be distributed as follows:

                                                                                                                        (Figures in Rs.)      

Particulars	Total	Delhi	Gurgaon	Mumbai
Turnover of units in PY 2016-17	10,00,00,000	5,00,00,000	3,00,00,000	2,00,00,000
GST paid on services used only for Delhi Unit.	5,00,000	5,00,000	-	-
IGST, CGST & SGST paid on services used in all units: Distribution on pro rata basis to all the units which are operational in the current year	20,00,000	10,00,000	6,00,000	4,00,000

Note: Credit distributed on pro rata basis on the basis of the turnover of all the units is as under: -

(a) Unit Delhi: (5,00,00,000/10,00,00,000) *20,00,000 = ₹ 10,00,000

(b) Unit Gurgaon: (3,00,00,000/100000000) *20,00,000 = ₹ 6,00,000

(c) Unit Mumbai: (2,00,00,000/100000000) *20,00,000 = ₹ 4,00,000

Now suppose, Mumbai unit was not operational in the FY preceding the current FY i.e. in 2016-17 and it came into existence in July 2017. Also, there was no turnover in Gurgaon unit for the quarter October 2017 to December 2017. However, all the three units have their turnover details for the quarter July 2017 to September 2017 which is as follows:

Unit                                                    Turnover (Rs.)

Total Turnover of three units =      ₹ 5,00,00,000

Turnover of Delhi unit =                 ₹ 2,00,00,000 (40%)

Turnover of Gurgaon unit =           ₹ 1,25,00,000 (25%)

Turnover of Mumbai unit =             ₹ 1,75,00,000 (35%)

Now credit shall be distributed on prorata basis on the basis of turnover of the last quarter for which the details are available for all the units to whom credit has to be distributed. So the information of the quarter July 2017 to September 2017 shall be used:

(Figures in Rs.)

Particulars	Total	Delhi	Gurgaon	Mumbai
Turnover of units during quarter July 2017 to September 2017	5,00,00,000	2,00,00,000	1,25,00,000	1,75,00,000
GST paid on services used only for Delhi Unit.	5,00,000	5,00,000	-	-
IGST, CGST & SGST paid on services used in all units: Distribution on pro rata basis to all the units which are operational in the current year	20,00,000	8,00,000	5,00,000	7,00,000

On the basis of above, it would have been observed that compliances under ISD requires great efforts like maintaining credits, mismatching of credits, distributing credit, issuing Input Services Distributor Invoices, etc.  Moreover, the determination of ratios for distribution is also a cumbersome process. Though it’s a legacy brought forward from erstwhile law but no attempt has been made to simplify the process. Even after going through the provisions, the following questions are unanswered:

1. Credit is to be distributed to the units which are operational in the current year. The meaning of operational is not provided under the law. The question is, if the unit is registered but not engaged in any supply activity, whether the credit is to be distributed to such unit?

2. We have entered into the GST regime and credit will be distributed on the basis of last year turnover, in the last year the we were selling goods which were covered under the sales tax laws and we were also providing services on which we were paying services tax, now the question is how we can determine state-wise turnover for goods and services? State-wise Turnover for goods may be determined on the basis of the returns under sales tax law but service tax was central law so no state-wise data is available.

3. If all the recipients during the preceding year were not operational, the turnover for the last quarter in which all the recipients were operational shall be taken for determining the ratio for distribution. Now, there was no Quarter in common when all the units were operational, then on what basis the ratio to be determined?

Discussions to this article

[MAHESH MAIYA]

Dear Sir,

We are GST registered Pvt Ltd co in Karnataka, have marketing offices in Chennai, Mumbai, Kolkata, Pune & Delhi. The rent is being paid by the company to un-registered landlords. Should we discharge RCM for such rent paid by the company ? if so, whether the GST paid under RCM can be taken credit in Karnataka ?

Mahesh. M

[Ganeshan Kalyani]

presently there is no tax under reverse charge on inward supply of goods or services from an unregistered dealer. hence you are not liable to pay gst as a recipient accordingly no question of distribution of tax paid.

[RAVINDER GAMBHIR]

Dear Sir,

Is it mandatory to take ISD registration. To be specific

-a pvt ltd company is having Regd/Head office in Delhi,registered in GST, and having Branch in Haryana(GST registered).

- Both the offices are making taxable supplies

- Can the Registered Office take credit(full) of Rent, Audit fees etc. OR it will have to take ISD registration in Delhi and transfer credit proportionately

Ravinder Kumar

[balaji aa]

Dear Sir/Madam

Need urgent help on below doubts

1.For ISD Distribution do we need to take Stock transfer Amount from one unit to other unit for calculating turnover?

2.Can we file the return without distributing credit (Assume we are keeping pending which will be taken in subsequent month) or is it mandatory to distribute credit of the month in the same month?

3.We have closed Books upto 31-12-2017 (Globally audit completed),we cant raise any invoice or credit/debit notes upto 31-12-2017 in books.Question is from july to dec17 credit available in ISD can be taken in JAN18 month return?

Please replay me it is urgent.If you need further information please contact me on below provided mobile number and e mail ID

Thanks & Regards

Balaji.S

9341252895

[email protected]