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Input Service Distributor (ISD) under GST

An Input Service Distributor (ISD) is a category of taxpayer under the Goods and Services Tax (GST) system responsible for distributing input tax credits (ITC) related to its GSTIN to various branches or units. These branches must have different GSTINs but be registered under the same PAN.

Latest Updates

50th GST Council Meeting

During the 50th GST Council meeting, it was recommended that a Circular be issued to clarify that the ISD mechanism will not be mandatory in certain cases for distributing ITC on common input services procured from third parties to distinct persons, as per the current provisions of GST law.

This decision will take effect once the relevant Circular is issued by the CBIC.

Who is an Input Service Distributor (ISD) under GST?

An ISD is an entity that receives invoices for services used across its branches and distributes the applicable ITC among them proportionally by issuing ISD invoices. The branches can have different GSTINs but must operate under the same PAN.

Example:

M/s XYZ Limited, headquartered in Pune, has branches in Ahmedabad, Mumbai, and Kolkata. The head office incurs annual software maintenance expenses for all branches and receives a consolidated invoice. Since the software is used across multiple locations, the ITC cannot be claimed solely by the Pune office—it must be distributed among all branches. In this scenario, the Pune head office acts as the ISD.

When is ISD Not Applicable?

ISD cannot distribute ITC in the following cases:

  • ITC on inputs (e.g., raw materials) and capital goods (e.g., machinery) cannot be distributed.
  • ITC cannot be distributed to outsourced manufacturers or service providers.

Why Register as an ISD?

The ISD mechanism is designed for businesses with significant common expenses, where billing or payments are managed centrally. It simplifies the process of claiming ITC and ensures a smooth flow of credit under GST.

Comparison: ISD in the Previous vs. Current Regime

AspectEarlier RegimeGST Regime
Who qualifies as an ISD?Office of a manufacturer, producer, or service providerOffice of a goods/services supplier
Basis for credit distributionInvoice under Rule 4A of Service Tax Rules, 1994Tax invoice issued by the supplier
How is credit distributed?Via invoice, bill, or challanVia ISD invoice
Type of credit distributedCredit of service tax paidCredit of CGST, SGST, and IGST paid
Who receives the credit?Units and outsourced manufacturersOnly branches with the same PAN

The key difference in the GST regime is that ITC distribution is limited to branches under the same PAN due to the shift in the taxable event from manufacturing to supply. Under GST, tax liability arises at the time of supply, and ISD distributes ITC accordingly.

Conditions to Qualify as an ISD

  1. Registration: Businesses must register separately as an ISD under GST, in addition to their regular taxpayer registration. The ISD registration must be specified under Serial No. 14 of Form REG-01.
  2. Invoicing: ITC is distributed to branches through ISD invoices.
  3. Returns Filing:
    • The ITC distributed must not exceed the available credit.
    • ISDs must file GSTR-6 by the 13th of the following month.
    • ITC details can be accessed via GSTR-2B.
    • Recipient branches will see distributed ITC in GSTR-6A and must claim it via GSTR-3B.
    • ISDs are not required to file annual returns in GSTR-9.

Restrictions on ITC Distribution by ISD

  • Reverse Charge Mechanism (RCM) Credit: ISDs cannot distribute ITC on tax paid under RCM; they must use it as a normal taxpayer.
  • Service-Specific ITC: If an input service is exclusively used by one branch, the ITC must be allocated only to that branch.
  • Common Services ITC: If multiple branches use an input service, ITC should be distributed proportionally based on their turnover.

Recovery of Wrongful ITC Distribution by ISD

The GST law considers the following as wrongful ITC distribution:

  • Distributing ITC in excess of the available credit.
  • Allocating ITC in an incorrect ratio.
  • Distributing ITC beyond what the entity is eligible for.

In such cases, the wrongly allocated credit will be recovered from the recipient along with applicable interest, following the GST Demand and Recovery provisions.

Frequently Asked Questions (FAQs)

1. Is ISD registration mandatory under GST?

Yes, businesses that intend to distribute ITC among branches must register separately as an Input Service Distributor (ISD) in addition to their regular GST registration.

2. Can ITC on capital goods be distributed through ISD?

No, ISDs are only allowed to distribute ITC on input services. ITC on capital goods and inputs cannot be distributed.

3. Can ISD distribute ITC to a branch registered under a different PAN?

No, ITC can only be distributed to branches that have the same PAN as the ISD.

4. How is ITC distributed among branches?

ITC is distributed proportionally based on the turnover of the recipient branches, ensuring fair allocation of credit.

5. Can an ISD claim ITC on services used for personal purposes?

No, ISD can only distribute ITC on input services used for business purposes.

6. How does an ISD file GST returns?

ISDs must file GSTR-6 monthly by the 13th of the following month to report ITC distribution.

7. What happens if an ISD wrongly distributes ITC?

If ITC is distributed incorrectly or in excess, it will be recovered from the recipient along with applicable interest, following GST demand and recovery provisions.

8. Can an ISD distribute ITC from third-party service providers?

Yes, as long as the input service is commonly used across multiple branches, ITC can be distributed through ISD.

9. What is the difference between ISD and a normal taxpayer under GST?

A normal taxpayer claims ITC for its own use, whereas an ISD distributes ITC to multiple branches based on service usage.

10. Can an ISD claim a refund of excess ITC?

No, an ISD cannot claim refunds. ITC must be distributed to eligible branches as per GST rules.

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