Table of contents
Definition
Analysis
Role of ISD
Method of Distribution
First Example
Second Example
Key Takeaway
Definition of Input Service Distributor
As per section 2 (61) of The Central Goods and Services Tax Act, 2017 -
"Input Service Distributor" means an office of the supplier of goods or services or both which receives tax invoices 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 as that of the said office.
Analysis
Businesses may have their head office located at one place and branches at other places. Branches may be registered separately under GST act, however both the head office and its branches share the same Permanent Account Number (PAN).
GST is a destination based consumption tax which means that the consumer has the final burden to bear the tax. Since businesses aren't final consumers, they get their amount refunded on GST paid by them for inputs, be it raw material or services or any other goods, with some obvious exceptions.
This mechanism is called input tax credit.
However only and only the receiver of such goods or services have the right to claim Input Tax Credit.
The Head Office would be procuring various services which would be for common utilisation of all branches across the country. The bills or invoices for such expenses would be raised on the Head Office.
But the Head Office can't claim ITC on such invoices because it's not the actual receiver of such services. Only the branches can claim ITC because they are the actual receivers of such service.
Since the common expenditure is meant for the business of all branches, it is natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming branches.
The person apportionating or distributing (The Head Office) such amount is called Input Service Distributor.
Role of Input Service Distributor (ISD)
Head office of a business concern will have to compulsorily take a separate registration as Input Service Distributor and apply for the same in form GST REG-1. There is no threshold limit for registration for an ISD. The other locations shall be registered separately.
The head office distributes such amount by raising an invoice called ISD Invoice, clearly indicating in such invoice that it is issued only for distribution of input tax credit. The input tax credit available for distribution in a month shall be distributed in the same month and details are to be furnished in form GSTR-6.
The input tax credit on account of central tax and State tax or UT tax in respect of recipient located in the same state shall be distributed as central tax and State tax or UT tax respectively.
The input tax credit on account of central tax and State tax or UT tax shall, in respect of a recipient located in a State or Union territory other than that of the ISD, be distributed as integrated tax.
Method of distributing/ apportionating
If an expenditure is incurred solely for a particular branch, the ISD Invoice should be raised on that branch only.
If a common expenditure is incurred on multiple/all branches it should be distributed on a pro-rata basis of turnover in the state/ union territory.
Making it cool
Let’s take an example to understand this concept.
The Corporate office of ABC Ltd., is at Bangalore, with its business locations of selling and servicing of goods at Bangalore, Chennai, Mumbai and Kolkata.
Software licence and maintenance is used at all the locations, but invoices for these services (indicating CGST and SGST) are received at the Corporate Office at Bangalore.
Since the software is used at all the four locations, the input tax credit of entire services cannot be claimed at Bangalore. The same has to be distributed to all the four locations. For that reason, the Bangalore Corporate office has to act as Input Service Distributor to distribute the credit.
If the corporate office at Bangalore receives invoices indicating Rs. 4 lakhs of Central tax, Rs.4 lakhs of State tax and Rs. 7 lakh of integrated tax, it can distribute it as credit of integrated tax amongst its branch locations.
Making it cooler
Let’s take another example to understand this concept.
M/s XYZ Ltd, having its head Office at Mumbai, is registered as ISD. It has three units in different states namely Mumbai, Jabalpur and Delhi which are operational in the current year.
M/s XYZ Ltd furnishes the following information
i. CGST paid on services used only for Mumbai Unit: Rs.30,000/-
ii. IGST, CGST & SGST paid on services used for all units: Rs.1,20,000/-
Total Turnover of the units for the Previous Year are as follows: -
Total Turnover = Rs. 1,00,00,000
Turnover of Mumbai unit = Rs. 50,00,000 (50%)
Turnover of Jabalpur unit = Rs. 30,00,000 (30%)
Turnover of Delhi unit = Rs. 20,00,000 (20%)
Since Rs 30000 is exclusive for Mumbai Unit, the entire amount shall be distributed to Mumbai Unit.
The amount of 1,20,000 shall be distributed as follows:-
Mumbai Unit = 60,000 (50% of 1,20,000)
Jabalpur Unit = 36,000 (30% of 1,20,000)
Delhi Unit = 24,000 (20% of 1,20,000)
Key Takeaway
As the name Input Service Distributor suggests, credit on common invoices pertaining to only input services and not to the goods can be claimed. The reason behind this is goods can be directly purchased by the branches, whereas there are exceptions to services as in the first example.