Manner of distribution of credit by Input Service Distributor as per Section 20 and rules made thereto with examples , Illustrations and FAQ.
Sub section 1 to Section 20 :
The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central, by way of issue of a document containing, the amount of input tax credit being distributed in such manner as may be prescribed
An Input service distributor (ISD) is a business which receives invoices for services used by its branches. It distributes the tax paid , to such branches on a proportional basis by issuing an ISD invoice.
The branches can have different GSTINs but must have the same PAN as that of ISD.
Illustration: Head office of Lips limited is located at Ahmedabad having branches at Baroda, Jaipur and Delhi. The head office incurred annual Advertisement Exps (service received) on behalf of all its branches and received the invoice for the same. Since Advertisement is used by all its branches, the input tax credit of entire services cannot be claimed at Ahmedabad. The same has to be distributed to all the three locations. Here, the Head office at Ahmedabad is the Input Service Distributor.
As per Rule 39: Procedure for distribution of input tax credit by Input Service Distributor
(1) An Input Service Distributor shall distribute input tax credit in the manner and subject to the conditions specified below-
(a) The input tax credit available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6* in accordance with the provisions of Chapter.
* GSTR-6 is a monthly return to be filed by all the Input Service Distributor’s (ISD) for distribution of credit (ITC) amongst its units. Nil return must be filed in case of no business activity.
(b) The Input Service Distributor shall, in accordance with the provisions of clause (d), separately distribute the amount of ineligible input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount of eligible input tax credit;
(c) The input tax credit on account of central tax, State tax, Union territory tax and integrated tax shall be distributed separately in accordance with the provisions of clause (d);
(d) the input tax credit that is required to be distributed in accordance with the provisions of clause (d) and (e) of sub-section (2) of section 20 to one of the recipients ‘R1’, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula:-
C1 = (t1÷T) × C
“C” is the amount of credit to be distributed,
“t1” is the turnover, as referred to in section 20, of person R1 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;
Illustration: P Ltd having establishments in 3 states engages the services of Advertisements services in respect of its entire operations. Annual Exps were say Rs. 10 lakh and input tax thereon works out say Rs 1.80 lakh. Let us further assume that the enterprise achieved a turnover of Rs. 1000 crore in preceding financial year with following spread in 3 States. Credit Distribution will look as under:
State Turnover ITC
Gujarat : 500 Cr 90,000
Kerala : 250 Cr 45,000
Delhi : 250 Cr 45,000
If In above Example in Gujarat no service received than ITC is 90,000 and 90,000 between Kerala and Delhi Respectively.
(e) The input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient;
(f) The input tax credit on account of central tax and State tax or Union territory tax shall,
(i) in respect of a recipient located in the same State or Union territory in which the Input Service Distributor is located, be distributed as input tax credit of central tax and State tax or Union territory tax respectively;
(ii) in respect of a recipient located in a State or Union territory other than that of the Input Service Distributor, be distributed as integrated tax and the amount to be so distributed shall be equal to the aggregate of the amount of input tax credit of central tax and State tax or Union territory tax that qualifies for distribution to such recipient in accordance with clause (d);
(g) The Input Service Distributor shall issue an ISD invoice, as prescribed in sub-rule (1) of rule invoice-7, clearly indicating in such invoice that it is issued only for distribution of input tax credit.
(h) The Input Service Distributor shall issue an ISD credit note, as prescribed in sub rule (1) of rule Invoice-7, for reduction of credit in case the input tax credit already distributed gets reduced for any reason.
(i) Any additional amount of input tax credit on account of issuance of a debit note to an Input Service Distributor by the supplier shall be distributed in the manner and subject to the conditions specified in clauses (a) to (f) and the amount attributable to any recipient shall be calculated in the manner provided in clause (d) above and such credit shall be distributed in the month in which the debit note is included in the return in FORM GSTR-6.
(j) Any input tax credit required to be reduced on account of issuance of a credit note to the Input Service Distributor by the supplier shall be apportioned to each recipient in the same ratio in which input tax credit contained in the original invoice was distributed in terms of clause (d) above, and the amount so apportioned shall be,-
(i) Reduced (-) from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; or
(ii) Added (+) to the output tax liability of the recipient where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted
(2) If the amount of input tax credit distributed by an Input Service Distributor is reduced later on for any other reason for any of the recipients, including that it was distributed to a wrong recipient by the Input Service Distributor, the process prescribed in clause (j) of sub-rule (1) shall apply, mutatis mutandis, for reduction of credit.
(3) Subject to sub-rule (2), the Input Service Distributor shall, on the basis of the ISD credit note specified in clause (h) of sub-rule (1), issue an ISD Invoice to the recipient entitled to such credit and include the ISD credit note and the ISD Invoice in the return in FORM GSTR-6 for the month in which such credit note and invoice was issued.
Sub section 2 to Section 20 :
The Input Service Distributor may distribute the credit subject to the following conditions, namely:
(a) The credit can be distributed to recipients of credit against a document containing such details as may be prescribed;
(b) The amount of the credit distributed shall not exceed the amount of credit available for distribution;
(c) The credit of tax paid on input services attributable to recipient of credit shall be distributed only to that recipient;
(d) The credit of tax paid on input services attributable to more than one recipient of credit shall be distributed among such recipient(s) to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union Territory of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period.
(e) The credit of tax paid on input services attributable to all recipients of credit shall be distributed among such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union Territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.
Explanation –For the purposes of this section,
(a) The “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;
(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.
(b) The expression of ‘recipient of credit’ means the supplier of goods or services or both having the same Permanent Account Number as that of Input Service Distributor.
(c) The term ‘turnover’ in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entry 51 and 54 of List II of the said Schedule.
- What are the pre-conditions for filing GSTR-6?
Ans. Pre-conditions for filing of GSTR-6 are:
- The receiver taxpayer should be a Registered ISD and should have an active GSTIN.
- Receiver taxpayer should have valid login credentials (i.e., User ID and password).
- Receiver taxpayer should have valid and non-expired/ unrevoked Digital Signature Certificate (DSC which is mandatory for companies, LLPs and FLLPs).
- Receiver taxpayer should have a valid Aadhaar number with mobile number, in case they want to use the E-Sign option.
- A receiver taxpayer should have with him an active mobile number which is indicated in his registration details furnished to GST Portal at the time of enrollment/ registration or amendment to registration details for signing through EVC.
- A receiver taxpayer will have an option to file Form GSTR-6 for cancelled GSTINs for the period in which it was active.
- Due date for filing of Form GSTR-1 and GSTR 5 of the same tax period should have lapsed.
2. What happens after Form GSTR-2 is filed?
Ans. After Form GSTR-6 is filed:
- ARN is generated on successful submission of the Form GSTR-6 Return. In case, the return is filed through an offline utility, a Temporary ID is generated when the taxpayer uploads the .JSON file. On successful submission of the Form, an ARN is generated.
- An SMS and an email are sent to the taxpayer on his registered mobile and email on successful submission of Form GSTR-6.
- Once the Form is submitted after affixing DSC or E-sign or EVC as the case may be, the Form is passed on to:
- The CBEC (Central Board of Excise and Customs – the central tax authority)
- Tax authority of jurisdictional State or UT of
- In case of modifications or additions in Form GSTR-6, such details are auto-populated in Form GSTR-1/1A/5 of counterparty supplier taxpayers.
- ISD Ledger is updated.
3. What are the Situations where ISD is not applicable?
Ans. It cannot distribute the input tax credit :
- paid on Inputs e.g Raw materials and capital goods
- to outsourced manufacturers or service providers.
4. Who can be Input service distributor?
Ans. An office of the supplier of goods and/or services
5. How to distribute credit?
Ans.By issuing an ISD invoice for the purposes of distributing to a supplier of taxable goods and/or services having the same PAN as that of the office referred to above.
6. What is the Type of tax credit that can be distributed?
Ans. The credit of CGST (SGST in State Acts) and/or IGST paid on the said services
7. How to distribute common credit among all the units of a ISD?
Ans. The common credit used by all the units can be distributed by ISD on pro rata basis i.e. based on the turnover of each unit to the aggregate turnover of all the units to which credit is distributed
8. Can credit be distributed to only revenue generating units?
Ans. The revenue generating units have GST liability, so rightly the ITC on those services used by them must be allocated to them to use the tax credit to set off against their tax liability.
9. Can a taxpayer have multiple ISDs?
Ans. Yes. Different offices of a taxpayer can apply for ISD registration.
10. Can a company have multiple ISDs?
Ans. Yes, different offices like marketing division, security division etc. may apply for separate ISD.
11. Whether CGST and IGST credit can be distributed by ISD as IGST credit to units located in different States?
Ans. Yes. CGST credit can be distributed as IGST and IGST credit can be distributed as IGST by an ISD for the units located in different States.
12. What are the consequences of credit distributed in contravention of the provisions of the Act?
Ans. The credit distributed in contravention of provisions of Act could be recovered from the recipient to which is distributed along with interest.
13. Do Input Service Distributors need to file a separate statement of outward and inward supplies with their return?
Ans. No, the ISDs need to file only a return in Form GSTR- 6 and the return has the details of credit received by them from the service provider and the credit distributed by them to the recipient units. Since their return itself covers these aspects, there is no requirement to file a separate statement of inward and outward supplies.
14. When GSTIN registration is obtained in one State, is there any need to also obtain ISD in the same State or is GSTIN and ISD registrations mutually exclusive in a given State?
Ans. Yes, GSTIN registration does not permit distribution of credit. If taxes are paid that is not related to the business of that registered taxable person in that State, then for want of ‘nexus’, credit cannot be availed by him. And to save from loss of credit, ISD registration is the only option to distribute this credit whichever registered taxable person (called ‘recipient of credit’) satisfies this nexus test.
15. Will ISD registration be required for each registered taxable person in ‘all but one’ States?
Ans. No. One entity-level ISD registration in all States will suffice for credit distribution requirement of all registered taxable persons having same PAN.
16. When GSTIN registration is obtained in one State, is there any need to also obtain ISD in the same State or is GSTIN and ISD registrations mutually exclusive in a given State?
17. Is it possible, when GSTIN registration is already available in any given State, for the Company to completely avoid ISD registration?