Introduction
Input Service Distributor (ISD) is a concept existing from the Service tax era. In GST regime, by way of Circular 199/2023 and specific interpretation of ISD provisions it was understood to be an optional compliance till 31.03.2024. However, from 1st April 2025 it is mandatory with necessary changes in the ISD definition w.r.t third party invoices which is attributable to another GSTIN or is attributable to two or more GSTINs with same PAN.
Key Features of GST-ISD are:
- Ability to transfer eligible and ineligible credit
- Requirement to transfer RCM-ITC
- Turnover based ITC distribution (reasonable/logical basis – NA)
- Mandatory registration (irrespective of T/o)
- E-invoice is not applicable for ISD invoice/CN
- Monthly – GSTR 6 filing by 13th of subsequent month
To get an in-depth understanding of ISD provisions, its procedural requirements, benefits and drawbacks this article may prove useful: https://hnallp.com/assets/articles/bdd90-gst-isd-article_mar25.pdf
In this article, we delve into the more advanced and practical issues w.r.t ISD and their possible solution.
Contents
1) Identification of ISD expenses. 2
2) ITC eligibility conditions on ISD Invoice. 2
3) Time limit to claim ITC w.r.t ISD invoice. 3
4) Issues surrounding Rule 54(1A). 3
5) ISD-ITC to be distributed in the same month.. 4
6) Common Credit Distribution.. 4
8) ISD registration in another State. 4
9) Distribution of IGST as IGST or either as IGST or CGST.. 5
10) Limited GSTINs Distributions. 5
12) Goods & Services in a single invoice. 5
The bifurcation of expenses must be performed with key elements in mind:
- Is it ‘for’ another GSTIN under the same PAN?
- Is it ‘on behalf of’ another GSTIN under the same PAN?
- Is it expected that the branch GSTIN(s) incurs a part of the expense?
- What is the utility/benefit earned for the branch GSTIN(s)?
- Whether the HO is merely acting as an agent/representative?
- Is it attributable to some or all GSTIN under the same PAN?
The terms, ‘on behalf of’ and ‘attributable to’ indicate a broader coverage rather than a narrow reading of the ISD ITC identification.
Balakrishna Industries Ltd. Vs Commissioner of C.ex Jaipur [2015 (39) S.T.R. 861 (Tri. – Del.)], the CESTAT had allowed distribution of CENVAT credit in relation to the head office rent, to its factory location.
Therefore, it may be prudent in certain scenario to consider all indirect expenses incurred at the HO/corporate office to ascertain if distribution under ISD is needed. An entity must bifurcate the expenses on a case-to-case basis with careful examination of each expense. Reasonable grounds must be exhibited to prove why any expense has been / has not been considered for distribution under ISD.
ITC eligibility must be verified on the invoice received by the ISD-GSTIN, and not the ISD invoice received at the recipient GSTIN. Although, once assessed, the eligibility of the ISD invoice (for the recipient GSTINs having the same PAN), can be disputed as not being subject to some of the eligibility conditions, as follows:
- Receipt of Services – ISD GSTIN is available only to distribute credit. ISD will not be able to prove the receipt of services which would be possible by other regular GSTINs. Although, the entity must be able to prove receipt of services.
- GSTR-1 by vendor – Where invoice is uploaded in GSTR-1 but the statement/ return is not yet filed, the invoice would still reflect in GSTR-6A and be available for ITC distribution. Ideally, similar to GSTR-2B, GSTR 6B is expected to be implemented to bridge the portal gap with the GST law [section 16(2)(aa)].
- Temporary ITC reversal – ITC claimed by the ISD, still requires to follow the provisions of eligibility of ITC. Two situations which may warrant ITC reversal post claim are – non-payment to vendor within 180 days and vendor GSTR 3B filing compliance (Rule 37 & 37A). Similar to table 4.B.2 and table 4.D.1 there is no option of temporary ITC reversal and re-claim in Form GSTR-6.
- Recipient to file return under section 39 – ISD return is mentioned under section 39(4) and section 16 does not specifically mentioned GSTR 3B return.
- ISD required to prove eligibility to credit as details on nature of service absent at receiving branch or factory - Rule 2(m) of Cenvat Credit Rules, 2004 [Comm. Of Service Tax Vs Godfrey Philips India Ltd. 2009 (239) E.L.T. 323 (Tri. - Ahmd.)].
The expiry of ITC u/s 16(4) (by 30th November or due date of annual return) applies to ‘invoice and debit note’. Although ISD invoice flows from section 31 and Rule 54 is for invoice under special cases, Rule 36(1)(e) differentiates between ‘invoice’ and ‘ISD invoice’. Additionally, once the eligibility and timeline check has been performed on the vendor invoice, the credit accrues (assuming conditions satisfied). ISD is only meant to distribute such accrued credit, imposing a time limit again on the same ISD invoice would be improper. For example, claiming ITC by the recipient GSTINs post 30th November based on ISD invoice but ISD has done distribution within time limit as per Section 16(4).
We would have to wait and watch how litigation plays out in this regard. Additionally, ISD invoice does not contain HSN, and similar to the past regime is only a tool to transfer credit but is not a ‘supply’ under GST.
A clarity that a fresh time limit is applicable based on the ISD invoice date would be necessary.
- Special invoicing procedure introduced in Jan 2018 to issue invoice by regular GSTIN to ISD within same State for further distribution of ITC.
- Rule introduced before RCM was brought into ISD definition and related provisions. Amended definition from April 2025 covers RCM expenses.
- 25th GST Council agenda 7 (i) indicates Rule 54(1A) invoice to be used for RCM expense invoices.
- HSN not mentioned in contents of invoice provided as per Rule - Cannot apply same principal as applied in JSW Steel Orissa HC (cross charge concept).
- Rule 39(1A) introduced from 1st of April is informing to use 54(1A) as there is no other mechanism for RCM to distribute to ISD and must go through regular GSTIN. However, it is not a restrictive provision to disallow usage for non-RCM credits from regular to ISD. Clarity needed as to usage of rule for non-RCM expenses as well.
- Entities which take all ITC invoices to regular GSTIN instead of ISD and then identifies common services to invoice to ISD using Rule 54(1A) must be allowed to do so - Right to equality and right do business as per Article 14 & 19(1)(g) of the Indian Constitution.
- Another issue is disclosure of these invoices in returns + need of issue of e-invoice. A view is there that the details of invoice shouldn’t be disclosed in GSTR-1 or 3B as it is not outward supply. Instead, should be added manually in GSTR-6A and ITC claimed directly in ISD GSTIN instead of regular GSTIN. However, this procedure would complicate the documentation of the process.
- E-invoice applicability is another grey area. Ideally, should not be applicable since it is not for any taxable supply but only distribution of credit. Suitable clarification in this regard needed though.
- IGST RCM liability must be shifted as CGST + SGST or as IGST, procedural difficulty present in the GST portal. Various trains of thoughts present in the professional community although, if done in normal route, it is moved as C+S to ISD and therefrom as CGST+SGST/IGST to applicable recipients’.
- Same State - POS indifferent, Reg. / ISD GSTIN cannot invalidate the ITC if all other conditions satisfied.
In terms of Rule 39(1)(a), ITC available in the month must be distributed in the same month. Additionally, rule 39 (1)(b) states that ITC distributed cannot exceed the ITC available. This rule cannot overcome the time limit to claim ITC under Section 16(4). Also, inference of the term ‘ITC available’ need not necessarily mean ‘ITC eligible’. GSTR 6 is used to distribute credit, although, only a GSTR-3B can claim ITC.
It is important to note, GSTR-6A works similarly to GSTR-2A, being a dynamic statement. Frequent changes in ITC available for distribution without a fixed cut- off date creates difficulty for taxpayers. Tax department has already started litigating credit distribution based on invoice date in different months. Necessary amendment or clarification needed to overcome this challenge as well.
When an expense for ISD being of a common credit for the recipient (used for both taxable and non-taxable/non-business purposes), must be transferred as eligible credit in GSTR-6 and at the recipient location Rule 42 may be followed for appropriate ITC reversal. This is also backed by Rule 39(1)(g) which specifically identifies blocked credit u/s 17(5) only for ineligible ISD-ITC distribution. This view is also supported in Hawkins Cookers Ltd. Vs Comm. Of Service Tax 2020 (43) G.S.T.L. 513 (Tri. - Mumbai).
In terms of Rule 36(1) and Rule 54, ISD Invoice and ISD Credit Note have been provided for, although, ISD Debit Note (DN) has not been mentioned. In case ISD distributes short ITC, the option to raise ISD-DN must be available. In the absence of the same, ISD Invoice can be issued as indicated in Rule 39(1)(m). Procedural lacunae in the GST law which needs to be corrected.
Another question which arises in ISD concept is if an ISD registration is allowed in another State from where no supply takes place and there is no place of business? Yes, ISD registration is allowed in another State on a standalone basis, although the presence of an ‘office’ is a must. Although ‘office’ is not defined in GST law, ‘place of business’ includes any other place where a taxable person receives services u/s 2(85)(a). Such registration helps in tax optimization and is especially useful for those entities with market expenses, on-site expenses relating to a different State.
Section 20(3) and Rule 39(1)(i) are in direct contradiction with each other as Rule 39 says IGST can only be distributed as IGST while Section 20(3) says IGST can be distributed as IGST or CGST. Interestingly, the GST portal allows distribution of IGST ITC in line with section 20(3) either as IGST or CGST.
Clarity provided by way of Rule 39(1)(d) that when ITC is attributable to few GSTINs only, the numerator and denominator for ITC distribution must consider the turnover of only such GSTINs to whom such ITC is attributable. The total PAN-turnover need not be considered here.
The ITC is to be distributed to every one of registered persons units irrespective of the fact that they are unregistered, EOU unit, SEZ unit etc. Additionally, it is important to note that refund is eligible against such ITC distributions. [Britannia Industries Limited v. Union of India 2020 (42) G.S.T.L. 3 (Guj.)].
This is a rare scenario, although, there may be an instance of works contract which has goods and services is mentioned. The procedural difficulties may conclude in difficulty in distribution of such credits. It is suggested to ensure that vendor contacts and documentation is clarified and service related invoice is separately provided for ISD-ITC distribution.
Other Judicial Precedents:
J K Cement Works (JKWCW) Vs Comm. Of C. Ex 2017 (49) S.T.R. 549 (Tri. - Del.)
To facilitate the recipient party for carrying out its manufacturing activity, JKWCW produces electricity, through a power plant installed in its unit, on job work basis and transmits a part of the electricity, which is used by the recipient in the manufacture of its final product (taxable). ISD credit distributed by JKWCW was held to be eligible.
Pricol Ltd Vs Commissioner of GST & C. Ex. 2019 (025) GSTL 0215 (Tri-Mad)
Return/reversal of excess/incorrect credit distributed back to the ISD, in turn can be facilitation only by the recipient unit reversing the unintended credit and issuing a document confirming the facts of the same.
Comm. Of C. Ex & S.T Vs Fenoplast Ltd 2017 (005) GSTL 0302 (Tri-Hyd)
The requirement of ISD registration is procedural in nature. ISD registration is only to facilitate the distribution of credit. Failure of obtain ISD registration cannot be only a procedural lapse which has been rectified by the appellant on receiving the show cause notice. Procedural lapse condoned, and such credits are admissible.
Conclusion
The concept of ISD remains similar to the pre-GST regime. Procedures, albeit different, may need to be reviewed and followed to avoid any need for legal recourse. Application of ISD principles by State authorities (probably for the first time) is something to look out for. There is a need to come out with clarifications / necessary amendments in the provisions wherein some of the issues discussed above can be addressed. If any practice is being followed which is presently not supported by the provisions, then it is suggested to keep the tax department informed about the same.
Note – All section and rule references in this document relate to CGST Act & Rules
This article was first published in KSCAA journal of May 2025.
Disclaimer - The views expressed in this article are personal. Any suggestions or feedback can be sent to [email protected] or [email protected].