Input Service Distributor : Plenty of Compliances

The concept of Input Service Distributor (hereinafter in this article referred as “ISD”) is not new in Goods and Service Tax law. It carries the legacy from the Service Tax law.

The Concept

The need for ISD arose for providing a chance to the businesses who have multiple units in different locations to receive common invoice for the services attributable to different units at centralised location, in doing so the input credit is accumulated at the centralised unit. The ISD then distributes the common input on services to the recipient unit(s). On the other hand, through ISD mechanism businesses could plan their business activities in such manner that the Input credits in the businesses do not become part of their cost.

The definition of ISD transcribes the following tenets:

1. an office of the supplier of goods or services or both
2. which receives tax invoices issued under section 31 towards the receipt of input services
3. issues a prescribed document to a supplier of taxable goods or services having same Permanent Account Number as that of the ISD, for
4. distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services

The other units of the supplier of goods or services may be registered at different locations. ISD does not provide output supplies unlike the recipient unit(s). The supplier receives services at different location and may take a common invoice at the centralised location. The ISD having thus attained the common invoice, simply passes on the credit on input services to the respective locations.

ISD mechanism is only to facilitate distribution of credit of taxes paid. The ISD itself does not provide any output supply on its own and thus does not discharge any output tax liability. Similarly, the ISD does not receive input services for itself.

Manner of distribution of credits by ISD to recipient unit(s)

The manner of distribution of ITC depends primarily on following two factors:

A Location of the ISD vis a vis the location of the recipient unit

B Nature of Tax (CGST & SGST/UTGST or IGST)

The manner of distribution can be better understood by the following scenarios:

Conditions of distribution of ITC

1. The ISD shall distribute, the available ITC on input services in the same month, amongst the recipient unit(s) to whom the ITC is to be distributed including any supplier unit(s) which are engaged in making exempted sale or any unregistered unit(s), by issuing an invoice prescribed in sub – rule (1) of Rule 54 of CGST rules, 2017 to the supplier unit and disclose the information in return Form GSTR-6.
2. The distribution of ineligible ITC [Section 17 (5)] must be done separately than that of eligible ITC.
3. The invoice must contain the information of distribution of CGST & SGST/UTGST or IGST separately.
4. The distribution of ITC must not be more than the ITC available for distribution.
5. Where the available ITC for distribution is attributable to a specific recipient unit, it shall be distributed only to that recipient unit.
6. Where the available ITC for distribution is attributable to more than one recipient unit or all the recipient units, it shall be distributed on pro rata, on basis of their turnover in the state or union territory to the total turnover of all units of previous financial year amongst the supplier unit(s) which are operational in the month of distribution of ITC.
7. Any ITC received by ISD through a debit note issued by a vendor which increases the ITC available for distribution, it shall be distributed in the same manner satisfying the conditions mentioned in points numbering 1 to 6 above.
8. An ISD invoice shall clearly indicate that such invoice is issued only for distribution of ITC.

Recovery of excess distribution of ITC by Credit Notes or otherwise

Section 21 of CGST Act stipulates the manner of recovery. The extract of section 21 is mentioned below for reference:

‘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’

Rule 39 (h) prescribes that in case the ITC already distributed gets reduced for any reason, the ISD may issue a credit note to the recipient unit(s).

Rule 39 (j) prescribes that in case of any credit note issued by the vendor to the ISD, ITC pertaining to such credit notes may be apportioned amongst all the recipient units(s), in the same ratio of their earlier distribution of ITC belonging to the original invoice. The amount so apportioned on account of ITC reversal on credit note shall either be:

-  Reduced from the amount to be distributed in Form GSTR - 6 in the month, such credit note has been issued to the  ISD.

Currently the position on GST portal is such that amount of credit notes are to be provided in Table 6B and the information of invoices received at ISD are provided in Table 3, both table amount is net off in Table 4. So, the compliance of the rule ibid is invoked on portal itself. However, the ratio of apportionment is to be taken care while distribution of available ITC in Table 5.

- Added to the output tax liability of the recipient unit(s) where the amount to be distributed after the adjustment of the amount of credit note is in negative.

Currently on GST portal, if there is any negative amount available in Table 4a. then such amount may not be distributed to the supplier unit(s). It can only be added to the output tax liability of the recipient unit(s).

Moreover, Circular No. 71/45/2018-GST, dated 26-10-2018 prescribes that where the recipient unit(s) who have received excess credit from the ISD, may deposit the excess credit as output tax to government along with interest, if any, in Form DRC – 03.

In case of non - payment of excess credit availment by unit(s) through Form DRC – 03, necessary proceedings may be initiated under provisions of Section 73 or 74 of CGST Act. A penalty may also be imposed on such unit(s) under clause (ix) of sub-section (1) of Section 122 of CGST Act.

On conjoint reading of Section 21, Rule 39 (h), 39 (j) and Circular No. 71 ibid, we get that to rectify the position of excess distribution of ITC by ISD, recourse to Rule 39 or circular ibid can be taken. Where Rule 39 talks about correction of the position from the ISD side and Circular 71 talks about correction from the recipient unit(s) side. Either way the compliance to Section 21 may be enforced. Recipient unit(s) must ensure that they are aware of authenticity of the amount received from the ISD. In case of any excess distribution done inadvertently or otherwise, the interest if any or proceedings under Section 72 or 73 may be initiated against the recipient unit(s).

Registration of ISD

There is no threshold prescribed for registration of an ISD. An ISD must compulsorily be registered in GST law, irrespective of itself being separately registered in GST law. The ISD must take a separate registration for receiving inward supply invoices whose payment is to be made under reverse charge mechanism.

GST return for Input Service Distributor

Every Input Service Distributor shall have to file a monthly return in Form GSTR-6 by 13th day from the end of the month. An ISD shall have to furnish the details of the invoices of input services received, the amount of eligible and ineligible ITC available for distribution and distributed thereon etc. 

On filling of FORM GSTR-1 by the supplier by 11th day from the end of the return month the ISD receives the information of the invoices of inward services in Form GSTR-6A, such details can be accepted as it is or if need be added, corrected, deleted be furnished in Form GSTR – 6. Moreover, there is no requirement of filing of Annual return by an ISD.

Particulars of documents to be issued by or to ISD

Just like the ISD issues an invoice or a credit note upon the recipient unit(s) the recipient unit(s) having a same Permanent Account Number and state code may also issue invoice of common input service credit upon ISD.

Common Errors

Following errors are to be avoided:

1.  Goods purchased at ISD GSTIN – The ISD cannot make purchases of goods and distribute the ITC on such purchases to another recipient unit(s). In such scenario, section 21 may be invoked and recovery proceedings may be initiated under Section 73 or 74 of CGST Act.
2. Ineligible ITC not distributed – Rule 39 (1) (b) clearly enforces that distribution of eligible and ineligible credits shall be done. The intent can be understood by the fact that GST being a destination base taxation. The destination State is considered to share the revenue with the Centre. Where the services were attributable to different states the revenue share may only be reached to them only in case where the ISD discloses such ineligible ITC properly in its return.
3. Interest liability not paid on Excess distribution – Cases where it can be identified that there were excess distribution by ISD to recipient unit(s) such discrepancy might have been rectified by correcting the tax position by the ISD or recipient in later months, but the interest levy may still be applicable under Section 50.
4. ITC distribution not made in same month – Very often the ISD does their compliance half-way through by filing of Nil return in Form GSTR – 06 even where the amount was available for distribution. Rule 39 (1) (a) mentions that the input tax credit available for distribution in a month shall be distributed in the same month. Such situations may tantamount to non-compliance and penalty provisions under chapter XIX may be invoked.
5. RCM compliances not properly followed – Non- compliance is more often observed where the business unit has both normal and ISD registration and the invoice or any other document, raised by the vendor was on ISD GSTIN. The ISD can not discharge tax liability on its own under RCM, hence the discharge of liability of common expenses is to be made from normal GSTIN in the same state.

             The procedure goes as follows: {Rule 54 (1A)}

            - an invoice is received at another GSTIN, in the same state of ISD. The liability may be discharged, and  corresponding ITC may be availed in returns.

             - An invoice may be issued by normal registration to ISD for transfer of credit. Return Form GSTR – 1 and GSTR – 3B may be furnished with details of supply and tax liability be paid.

              - ISD may avail ITC and distribute such ITC through ISD invoice to all other respective recipient unit(s). The ISD may get the ITC reflected in its Form GSTR – 6A and in turn the recipient unit(s) may get it in their GSTR – 2A. 

6. ISD invoice not obtained in physical copy – Most assesses accounting software are not designed to issue ISD invoice. On the other hand, some assume that since their business, in different states, is still a single legal entity, irrespective of the deeming fiction imposed under GST law. In case of any proceedings from department, they would generate invoices anytime. Section 16 (2), however, does not entitle, vested rights to avail ITC to the recipient units(s) without valid ISD invoice.

7. Incorrect turnover considered for ITC distribution – It is necessary that the turnover taken for distribution of ISD ITC should be strictly in accordance with the provision. There is no liberty to the assessee to choose different base of turnover viz a viz the turnover mechanism provided in the Act.

8. ITC distributed to all units instead of corelating with the concerned units – There could be instances where ITC is not linked to the specific unit/s even though the services have been consumed at such specific locations. This could lead to the incorrect distribution of ITC among various units.

9. Non consideration of Rule 36 (4) for ISD: Reconciliation of ITC with GSTR-2A is normally followed in case of normal registration. However, it has been seen that it is ignored at the time of filing ISD return. The impact of the same could be on the recipient unit if ITC is distributed in violation of Rule 36 (4).

Burning issues

1. Rate of Tax, description of service with HSN classification in case of Rule 54 (1A) (a) invoice where multiple RCM invoices are received at otherwise than ISD location.
2. Rule 37 reversals, if any, in case Rule 54 (1A) (a) invoice to ISD.
3. Cross charge, inter alia, where the invoice received wrongly by the supplier unit in different state for common services and the invoice can not be rectified, modified or cancelled due to any reason.

Closing Remark

Though the concept of ISD is being dabbled by the participants in Industry and Revenue from a long time, yet different treatments are often seen. In GST, the ISD concept has gained popularity and will continue to gain in future. It is prudent that all the participants involved come on same page on grey areas, guided by CBIC, so to avoid any possible litigations in future.

The Author can be reached at [email protected] or [email protected] for any clarifications or any suggestion.