ITC rules for Input Service Distributor

One of the fundamental features of GST is the seamless flow of input credit across the chain (from the manufacture of goods till it is consumed) and across the country. In this article, we will understand the ITC rules for input service distributors.

Latest Updates on GSTR-6

28th May 2021
The due date to file GSTR-6 for April and May 2021 is extended up to 30th June 2021.

1st May 2021
The due date to furnish GSTR-6 for April 2021 has been extended up to 31st May 2021.

Who is an Input Service Distributor?

The concept of ISD under GST is a legacy carried over from the service tax regime.  It is an office meant to receive tax invoices towards receipt of input services and further distribute the credit of CGST, SGST/UTGST or IGST to supplier units  (having the same PAN) proportionately.

The CGST Rules, 2017 prescribes the procedural conditions to be complied with by ISD,  the Manner and Quantum of Input tax credit ( ITC ) to be distributed by Input Service Distributor  to the eligible recipients, the invoice to be issued, return to be filed by ISD and how to deal with ITC on the credit and debit notes issued to the ISD.

Conditions to be compiled by ISD

• Tax paid on the services used in course of business by the units of the registered person can only be distributed by ISD to them.
• ITC available in a month must be distributed in the same month. So, Deferment of the credit distribution is not allowed. It must be ensured by ISD not to distribute credit in excess of what is available with him.
• An ISD cannot accept any invoices on which tax is to be paid on reverse charge basis. It is to be noted that a recipient of service taxable under reverse charge mechanism is responsible to discharge the tax liability and then only take the credit of the same.

So, if it wants to take reverse charge supplies, it should make sure to get registered as  a normal taxpayer but cannot distribute the tax credit available thereof.

• The credit of CGST, SGST/UTGST or IGST needs to be distributed separately. Also ,the eligible and ineligible credit needs to be apportioned separately.
• The credit that is attributable to a particular recipient unit is distributed to it even when the unit is unregistered or makes exempt supplies.

• It is mandatory to register separately as ISD even though it has obtained the registration as a normal taxpayer in REG-01 by check-marking under Serial number 14 of the form that it is registering as ISD.
• It is possible for different offices of a company to have separate registrations as ISD. In other words, a company can have multiple registrations for its offices as ISD
• ISD is supposed to issue an invoice known as ISD invoice to those units to whom it intends to distribute the credit of tax paid on services. It should clearly indicate in such invoice that it is issued only for distribution of ITC.
• He needs to issue ISD credit note if the credit that is already distributed gets reduced for any reason.

Salient points to include in the Invoices by ISD – (For ISD Invoice and ISD credit note)

• Name, address and GSTIN of the ISD and the recipient unit
• A consecutive serial number which is either alphabets or numbers or special characters or combination thereof
• Date of issue
• Amount of the credit distributed
• Signature of the ISD or his authorised representative.

Exception: If the ISD is a banking company/ financial institution including NBFC then it is not required to serially number the document.

• ISD have to file GSTR-06 by the 13th of the month succeeding the relevant month indicating the credit distributed for the relevant month to the recipient units and the ISD invoices issued in the relevant month.

For the month of July 2017, the due date has been deferred to 31st December 2017.

• The details in the returns are made available to the respective recipient units in GSTR-2A. Accordingly, credit can be claimed by the recipient unit by filing GSTR-2 by including the invoices received by ISD matched with the GSTR-2A. ISD need not file annual returns.

Manner of distribution of ITC by ISD

ITC accumulated could be of two sorts :

1. Eligible: that which can be utilised for setting off against output tax liability
2. Ineligible: that which cannot be utilised for setting off against output tax liability

Note: To read more on distribution of ITC by ISD. Both the sorts need to be distributed in the same manner. ITC on any goods or services or both used by the taxable person for the construction of immovable property (other than machinery or plant) on his own account including any goods or services or both used in the course or expansion of business has to be distributed separately for the ineligible ITC and eligible ITC.

ITC on account of IGST has to be distributed as IGST only ITC of CGST and SGST/UTGST in respect of recipient located in the same State/Union territory is distributed as it is respectively. ITC of CGST, SGST/UTGST in respect of recipient located in different states is to be distributed as IGST i.e CGST+SGST/UTGST=IGST

Amount of distribution of ITC by ISD

For instance, Some services can be billed on Head office but used by its units. There are three scenarios:

Scenario 1: Service billed is used entirely by one recipient unit : Here, the services are used only by one of its units and none other. So, ITC of such bills that are specifically attributable to one unit must be allocated to that unit entirely.

Scenario 2: Service billed is used by more than one recipient unit but not all  Here, the services are used by two or more units but not all. Credit has to be distributed to those units that were operational and generated revenue during the relevant month.

Tax credit shall be distributed as follows: Total credit of tax is apportioned on a pro-rata basis based on the turnover of the recipient in the state/ union territory to the total turnover of all the recipients that are operational and to whom the input service relates.

Formula

C1 = C*(T1/T)

C1 =ITC to be distributed to the recipient
C =Total ITC available for distribution
T1 =Turnover of the specific recipient
T =Total Turnover of all recipients to which ITC relates

The ‘turnover’ here refers to the following:

Scenario 3: Service billed is used by all the recipient units : Here, the services are used by all the units. Credit has to be distributed to those units that were operational and generated revenue during the relevant month. 

Tax credit shall be distributed as follows: Total credit of tax is apportioned on a pro-rata basis based on the turnover of the recipient in the state/ union territory to the total turnover of all the recipients that are operational and to whom the input service is relates. The proportion is same as laid down in scenario 2. 

Important points to remember:

• Suppose there are more than one locations in a state or union territory, sum of their turnover in that state/ union territory is to be considered  in place of turnover of the recipient ( in the numerator)
• Credit attributable to a recipient is distributed even if such recipient is unregistered or making exempt supplies
• Where both taxable and non-taxable supplies are made, the “turnover” shall exclude Central excise duty, State excise duty and VAT
• If there are two or more locations of a recipient in a state/ Union Territory, the sum of their turnover is to be considered in working out the proportion of the credit that will be distributed to that registration.

Implication of Issuing Debit note or Credit note by supplier to ISD

Issue of debit note :

If any debit note is issued to the ISD by the supplier of service, the additional credit of tax that he gets on such debit note should be distributed by him in the month in which he includes the Debit note in GSTR-6.

Issue of credit note :

If any credit note is issued to the ISD by the supplier of service, the credit of tax that gets reduced in such credit note should be apportioned by him to the recipients in the same proportion as the original credit that was distributed. Such apportioned credit gets reduced from the credit of tax distributed in themonth in which the credit note is included in GSTR-6.

However, if the amount to be reduced exceeds amount of tax credit to be distributed, then such excess shall be added to the output tax liability of the Recipient. Same process shall be followed for all those cases where the credit distributed needs to be reduced for any reason.

For example, credit distributed to wrong person 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.

Recovery of excess credit distributed by ISD to recipients

Provisions of Demand and Recovery gets attracted as if the tax was not paid, in a situation when excess credit has been distributed to any recipient. Recovery of the excess credit distributed along with interest shall be initiated against the recipient and not the ISD.

Illustration on Input service distributor

Example 1

XYZ Ltd. has it’s head office located in Mumbai (Maharashtra) which is a registered ISD. It has four units in different cities : one in Bangalore (Karnataka), one in Delhi, one in Chennai and one in Pune(Maharashtra)Bangalore unit operates from another location in Karnataka at Belgaum. Delhi unit was not operational during the year. Turnover generated at different locations is as follows:

1. Bangalore: Rs. 50,00,000
2. Belgaum: Rs. 30,00,000
3. Pune: Rs. 80,00,000
4. Chennai: Rs. 40,00,000

Total turnover for the year is Rs. 200,00,000 We have three situations:

1. XYZ Ltd. receives an invoice from supplier ‘A’ with an Input tax credit-IGST of Rs. 1,80,000 for December 2017, services used by all units.
2. Also, XYZ Ltd received an invoice from supplier ‘B’ with an input tax credit -CGST and SGST Rs. 10,000 each that is used entirely by the Pune unit.
3.  Also, XYZ Ltd received an invoice from supplier ‘C’ with an input tax credit

CGST and SGST both amounting to Rs. 2,40,000 that is used entirely by all units except the Chennai unit. Distribution of Tax credit is as follows: 

Note: If there are two or more locations of a recipient in a state/ Union Territory, the sum of their turnover is to be considered in working out the proportion of the credit that will be distributed to that registration. In this case, turnover of Belgaum and Bangalore needs to be clubbed and shown as turnover of Bangalore.

1. XYZ Ltd Head office(ISD) shall distribute Rs. 1,80,000 among all units except Delhi as it is not operational in the ratio in 2:1:2(^) as follows :

Pune: in the form of IGST Rs. 72,000 i.e (1,80,000/200,00,000) x 80,00,000 

Chennai: in the form of IGST Rs. 36,000 i.e (1,80,000/200,00,000) x 40,00,000 

Bangalore: in the form of IGST Rs. 72,000 i.e (1,80,000/200,00,000) x 80,00,000 (*) (^) Being ratio of turnover as – 80,00,000 : 40,00,000 : 80,00,000 i.e. 2:1:2 (*) Inclusive of the turnover at Belgaum as the turnover as it is not a  separate unit but extension of Bangalore unit within the same state

1. XYZ Ltd Head office(ISD) shall distribute Rs. 10,000 to Pune only in the form of  CGST and SGST of Rs. 5,000 each as the supply from supplier ‘B’ was exclusively for Pune Unit
2. XYZ Ltd Head office(ISD) shall distribute Rs. 2,40,000 among all units except:
   • Delhi as it is not operational
   • Chennai as Input services are not used by this unit

Pune: in the form of CGST and SGST Rs. 60,000 each i.e [(2,40,000/160,00,000) x 80,00,000]/2 Chennai: NIL Bangalore: in the form of IGST Rs. 1,20,000 i.e (2,40,000/160,00,000) x 80,00,000 (*) (*) Inclusive of the turnover at Belgaum as the turnover as it is not a  separate unit but extension of Bangalore unit within the same state

Example 2 

XYZ Ltd. received a credit note from the supplier ‘A’ in January 2018 in respect of supplies made in December for ITC Rs 80,000/-Now, this ITC mentioned in credit note will be reduced from January month total ITC distributed, in the same ratio in which the original ITC was distributed i.e. 2:1:2 (to be furnished in part 6B of the GSTR-6 of January 2018)

Pune: in form of IGST of Rs. 32,000

Chennai: in form of IGST of Rs. 16,000

Bangalore: in form of IGST of Rs. 32,000

Example 3

XYZ Ltd. received a credit note from the supplier ‘C’ in February 2018 in respect of supplies made in December for ITC Rs 50,000/-Now, this ITC mentioned in debit note will be added to January month total ITC distributed, in the same ratio in which the original ITC was distributed i.e. 1:1 between Pune and Bangalore (to be furnished in part 6B of the GSTR-6 of February 2018)

Pune: in form of CGST and SGST of Rs. 12,500 each

Chennai: NIL

Bangalore: in form of IGST of Rs. 25,000 (#) Being ratio of turnover as – 80,00,000 : 80,00,000 (*) Inclusive of the turnover at Belgaum as the turnover as it is not a separate unit but extension of Bangalore unit within the same state

How will ClearTax GST help?

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

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