Input Service Distributor (ISD) under GST

UPDATE: From 1st April 2025, Businesses must take Input Service Distributor (ISD) registration for distribution of common Input Tax Credit (ITC). They no Longer have option of cross charge method.

What is ISD under GST?

The concept of Input Service Distributor (ISD) under GST has being emerged from Service tax law, which provides the supplier of goods or services or both to distribute common Input Tax Credit available to his other units located in different states having separate GSTIN on same PAN, since there is no concept of centralized registration in GST.

Definition of ISD

As per Section2(61)of CGST Act, 2017, “Input Service Distributor” means an office of the supplier of goods or services or both whichreceives tax invoicesissued under section 31 towards thereceipt of input servicesand 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

It is important to note that the ISD mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods (inputs or capital goods).

Manner of Distribution of Credit by Input Service Distributor

As per Section 20 of CGST Act, 2017The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.

ISD may distribute the credit in the following manner:

(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely :

(a) the credit can be distributed to the 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 a recipient of credit shall be distributed only to that recipient; (in simple terms If one to one reference of credit is available, then 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 amongst such recipients 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; (In simple term If credit is attributable to more than one recipient, then credit shall be distributed onPRO RATA basisof the turnover in a state of such recipient, during the relevant period, to the aggregate turnover of all such recipient.)

(e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst 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. (In simple terms, If credit is attributable to more than one recipient, then credit shall be distributed on a pro rata basis of the turnover in a state of such recipient, during the relevant period, to the aggregate turnover of all such recipient.)

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; 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;

(b) the expression recipient of credit means the supplier of goods or services or both having the same Permanent Account Number as that of the 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 entries 51 and 54 of List II of the said Schedule.

Recovery of Excess Credit Distributed: As per Section 21 of CGST Act, 2017

Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74, as the case may be, shall, mutatis mutandis, apply for determination of amount to be recovered.

Procedure for distribution of ITC by ISD [Rule 39]

Rule 39 of CGST Rule. 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 following conditions, namely,-

(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 VIII of these rules;

(b) The ISD shall, in accordance with clause iv, separately distribute the amount of

• Ineligible ITC [Section 17(5) of CGST Act, 2017
• Eligible ITC;

(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 = (t1T) C

where,

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;

(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) If the recipient is in the same state as CGST, SGST and UTGST, respectively.

(ii) If the recipient is in other states, then as IGST.

(g) the Input Service Distributor shall issue an Input Service Distributor invoice, as prescribed in sub-rule (1) of rule 54, clearly indicating in such invoice that it is issued only for distribution of input tax credit;

(h) the Input Service Distributor shall issue an Input Service Distributor credit note, as prescribed in sub-rule (1) of rule 54, for the 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) 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 the input tax credit contained in the original invoice was distributed in terms of clause (d), 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 specified 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 Input Service Distributor credit note specified in clause (h) of sub-rule (1), issue an Input Service Distributor invoice to the recipient entitled to such credit and include the Input Service Distributor credit note and the Input Service Distributor invoice in the return in FORM GSTR-6 for the month in which such credit note and invoice was issued.

Tax Invoice for Credit Distribution

As per Rule 54 of CGST Rules, 2017, an ISD have to issue an ISD Invoice for the distribution of credit to his other units having separate GSTIN.

Submission of Return by an ISD

Every ISD shall, on the basis of details contained in FORM GSTR-6A [Auto Populated], and where required, after adding, correcting or deleting the details, furnish electronically the return in FORM GSTR-6, containing the details of tax invoices on which credit has been received and those issued under section 20.

Frequently Asked Questions

(i) Whether CGST can be distributed as SGST and whether SGST can be distributed as CGST within the states and between the states

Ans. No. Section 20(1) does not permit the distribution of CGST as SGST and vice versa. This flows from the fundamentals of the GST law, wherein the credit of CGST cannot be utilized against SGST and vice versa.

(ii) Whether the Input Service Distributor is liable to furnish details of inward and outward supplies

Ans. Input Service Distributor is not liable to furnish the details of inward and outward supplies. Input Service Distributor is liable to file a return in GSTR-6 on or before the 13th of the month succeeding the tax period. The details relating to input tax credit distributed are communicated to the recipient in Part B of GSTR-2A.

(iii) Is ISD required to file an Annual Return

Ans. No, ISD is not required to file an Annual Return.

Examples

1. XYZ Ltd as an ISD has input service credit of 55 lakhs used by more than one location, to be distributed among recipients locations X, Y and Z. The turnover of X, Y, and Z in the preceding financial year was 30 crores, 15 crores and 5 crores, respectively. The credit of 5 lakhs pertains to input service received only by Z. The credit attributable to X, Y, and Z are as follows:

2. M/s ABC Ltd, having its head Office in Mumbai, is registered as ISD. It has three units in different states, namely Mumbai, Jaipur, and Delhi, which are operational in the current year. M/s ABC Ltd furnishes the following information for the month of July 2018 & asks to distribute the credit to various units.

TURNOVER

Ans: Computation of Input Tax Credit Distributed to various units: –

Note 1:Credit distributed pro rata basis based on the turnover of all the units are as under: –

Relevant period for distribution of credit:

DOWNLOAD Input Service Distributor in PDF FOR GST