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In this article we will discuss the rules for receiving input tax credit for an Input Service Distributor. But first let us see who an Input Service Distributor is.

Who is an Input Service Distributor?

An Input Service Distributor (ISD) receives credit of input tax for goods and/or services received by him from the supplier to its recipient which supplies goods and/or services and avails the credit so distributed. ITC rules for Input Service Distributor have been prescribed under GST regime for distribution to its recipients

Since an ISD is required to distribute the credit of input tax, it needs to follow the rules prescribed for manner and distribution of ITC. An ISD must state the details of amount of input tax received from supplier in FORM GSTR-6 and distributed the same its recipients in FORM GSTR-6A

A. Conditions for distribution of input tax credit (ITC)

  1. ITC available for a month must be distributed in the same month among the recipients and details furnished in FORM GSTR-6
  2. ISD must separately distribute the credit of eligible and ineligible input tax to recipients
  3. ITC will be distributed among the recipients irrespective of:

a) Being registered or not

b) Effecting exempt or taxable supplies

according to the prescribed formula as explained in the chart below

ITC rules for Input Service Distributor

B. Manner for distribution of input tax credit (ITC)

  1. IGST will be distributed as IGST
  2. Distribution ITC w.r.t. CGST, SGST and Union territory tax is linked to the location of recipient and ISD
  3. If location of recipient and ISD are same ITC w.r.t.

CGST- distributed as CGST

SGST- distributed as SGST

Union territory tax- distributed as Union territory tax

If location of recipient and ISD are not same sum of CGST, SGST and Union territory, tax will be distributed as IGST

ITC rules for Input Service Distributor

C. Rules w.r.t. Invoice, debit note and credit note for ITC

  1. ISD must issue Invoice, debit note and credit note for every distribution of credit
  2. Debit Note must be issued by following all the conditions mentioned above and will have the effect of increasing the amount of ITC
  3. In case an ISD receives a Credit note from his supplier, ISD will issue credit note to recipients which will have effect of reducing ITC already distributed and must be apportioned to recipients in the same ratio in which original ITC w.r.t. that supplier was apportioned
  • Amount must be reduced from ITC already distributed in the month of credit note issued
  • In case after reducing the amount the resulting figure negative, amount involved in the credit note will be added to the output tax liability.

Example

Mr. Sanjay, Input Service Distributor, receives an Invoice from supplier and ITC involved is Rs 10,000.

Total Turnover of all the recipients- 1,00,000

Turnover of Recipient Mr. Avinash- 20,000

Credit distributed to Mr. Avinash

= Credit * (Turnover of recipient / Total Turnover of all recipients)

= 10,000 * ( 20,000 / 1,00,000)

= 2,000

a. Sanjay receives a credit note from supplier and ITC involved is Rs 4,000 w.r.t credit note

Amount to be reduced from ITC w.r.t. Mr. Avinash

= Credit * (Turnover of recipient / Total Turnover of all recipients)

= 4,000 * ( 20,000 / 1,00,000)

= 800

b. Sanjay receives a credit note from supplier against original invoice of prior period and ITC involved is Rs 4,000 w.r.t credit note and no ITC was distributed to Mr. Avinash in the current period,

Amount to be reduced from ITC w.r.t. Mr. Avinash

= Credit * (Turnover of recipient / Total Turnover of all recipients)

= 4,000 * ( 20,000 / 1,00,000)

= 800

Now, since the no ITC was distributed to Mr. Avinash earlier the ITC of Rs 800 will be added to the output tax liability of Mr. Avinash

How will ClearGST help?

ClearTax is a brand trusted by over a million Indians for its breakthrough income tax E-filing solution. We are also determined to deliver a user-friendly GST software to help professionals and enterprises get GST ready.

ClearGST aims to provide the following salient features for a Input Service Distributor:

Rule Engine

You as a user may make rules for location and turnover of recipient which will be considered for every distribution and make it hassle free for the user to determine the amount to be distributed.

You may also make rules to restrict claim of ITC from a specific vendor or restrict distribution to a specific recipient. You can also tag a specific vendor invoice with a distribution claim to a specific recipient

2. Our software provides an interface which makes it very simple for the user to select a particular credit of input tax as eligible or ineligible credit of input tax and accordingly claim such ITC in the return

3. Along with ease of manner of distribution of credit, generation of ISD invoices for recipients would be a matter of blink of an eye.

Conclusion

Under GST regime ITC rules for Input Service Distributor along with format of returns which have been prescribed, where we may conclude that ISD will be required to reconcile each credit available for distribution and credit distributed w.r.t. original invoices and Debit/Credit note received from supplier.

Original Invoices, Amendment in Invoices, Debit/Credit note received from supplier will have to be dealt with due care and furnish in FORM GSTR-6

Here the location of ISD and that of recipient is a major decisive factor for the distribution of different category of taxes, which should be determined for each recipient. However, this would be a onetime procedure to a basis for all the instances of distribution.

 

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