In this article, we will discuss in detail the meaning of an input service distributor (ISD). An input service distributor is an authoritative officer who is in charge of the distribution of the GST input tax credits. An ISD under GST is responsible for maintaining the tax credits to any firm's GSTIN or the firms' branches with a different GSTIN but registered within the same PAN number.
Did you know?
The registration for an ISD is compulsory under section 24 of the GST Law, 2017. You are required to make an application for registration in Form GST REG-01.
Who Is an Input Service Distributor in GST?
An Input Service Distributor is a kind of taxpayer who is the first in charge of receiving all the invoices for the services used by a firm's branches. The role of the ISD is to distribute the tax to be paid, known as Input Tax Credit (ITC). The firm that requires its ta to be paid should have different GSTINs, but it is mandatory for the branches to have the same PAN as the ISD.
As stated in Section 2(61) of the CGST Act, 2017, an ISD under GST means:
- It is an authoritative officer of supplier of goods and services.
- This officer gets tax invoices in return for input services.
- He is responsible for distributing GST/CGST/UTGST credit to a goods supplier who has the same PAN.
- He also issues invoices in order to distribute credit.
An ISD under GST can have several offices like a head office, registered office, branch office, etc. He can avail of a number of input services, courier costs, housekeeping expenditures, security charges and pay the tax for all these services. Such a person can obtain the status of an Input Service Distributor in GST.
Also Read: GSTR-3B: Return Filing, Format, Eligibility & Rules
Situations Where ISD under GST Is Not Applicable?
There are a few conditions where the ISD under GST is not allowed to distribute the input tax credit:
- A scenario where the Input Tax Credit is paid for input and capital goods.
- The ISD in the GST mechanism is designed for only the distribution of the credit on common invoices. These invoices should be in accordance with the input services.
- ISD under GST is not applicable when capital goods are involved.
Pertaining to all these conditions, the input service distribution is not applicable.
The Purpose of Registering as an ISD under GST
Companies with multiple branches or multinational operations usually focus on purchasing goods or services from a single industry. In such cases, in order to effectively remove the GST tax, the GST input tax credit accumulated by the purchasing agency must be distributed to the branch according to the consumption of services.
In this scenario, the taxpayer may register with the centralised purchasing office as an Input Service Distributor. Once the purchases are made, the ISD under GST can transfer the IGST, CGST and SGST tax credits to branches by issuing an invoice. A key element for ISD registration under GST is that it applies only to the tax related to the input services. According to ISD, only the tax under input services can be distributed. The Input Service Distributor cannot distribute the input tax credit for input goods and fixed assets.
The mechanism of the ISD in GST is a provision designed for businesses that share various common expenditures. These companies have a centralised system of clearing bills and payments from a specific location. The process of input service distribution is meant to facilitate the process of taking credits. This entire concept is said to help enhance the smooth flow of credit under the regulations of GST.
Insight on Input Service Distribution in GST under Earlier Regime and GST Regime
|
Differentiation |
Earlier Regime |
GST Regime |
|
Any branch of the manufacturer of the end product or a business that provides output service. |
Any branch or office of the goods’ supplier or services. |
|
When an office receives any invoice issued in accordance with the rule 4A of the Service Tax, 1994. This should be issued in the direction of the buying of input services. |
When a branch office receives an invoice issued by the goods’ supplier in the direction of receipt of input services. |
|
Offices can issue invoices, bills for distribution to manufacturers or service and good providers. |
When you issue an ISD invoice for distribution to a taxable goods supplier with an identical PAN as the office mentioned above. |
|
The service tax credit is paid on the mentioned services. |
The credit of CGST/ IGST is paid on the mentioned services. |
|
To the branches and outsourced manufacturers of the mentioned office. |
The supplier possessing the same PAN is eligible for the distribution of the credit. |
These are the primary and most important differentiation points between the two regimes. As mentioned, the distribution of credit is limited to the offices or branches with the same PAN. The explanation behind this concept is the shift of taxable credit from manufacturing to supply. The old regime was responsible for the rise of tax liability at the time of supply. This would finally result in the payment of taxes by ISD under GST using the available input tax credit.
The Conditions to be fulfiled by an Input Service Distributor
Following are the important conditions to be fulfilled by an ISD:
Registration
It is mandatory for an input service distributor to register as ISD under GST. This registration is an additional process after an input service distributor in the GST register as a regular taxpayer. This kind of taxpayer is obliged to register under serial number 14 of the REG-01 form as an ISD under GST. Only after the registration process mentioned the Input Service Distributor is eligible to distribute the credits to the receivers.
Also Read: How to Get a PAN Card for Your Business?
Invoicing
The process of distribution of credits can only be done by issuing the tax credits as an ISD invoice.
Returns
The ISD under GST has to ensure that the amount of credit does not surpass the amount of tax credit accessible with the input service distributor at the end of the month. This amount of credit distributed should be filed in GSTR-6 by the 13th day of the coming month.
The tax credit recipient can see the tax credit that ISD has distributed in GSTR-6A, which is auto-populated from the supplier's return. The recipient branch, in turn, can claim it by stating it in GSTR-3B. An ISD is not required to file Form GSTR-9 annually.
Distribution of ITC
As per the reverse charge mechanism, the tax credit is not eligible for distribution to the receivers. In this case, the input service distributor is required to use this credit as a regular taxpayer.
Conclusion
In the case of reducing the ITC distributed by an input service distributor in GST, the process of lowering the credit will remain the same. The concept of ISD under GST was introduced to make the distribution of credits easier for businesses that focus on centralised payments from any one of their branch offices. The responsibility of the input service distributor is to distribute the Input Tax Credit by issuing an agreement that consists of the exact amount of the ITC distributed.
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