Rule 39 of CGST/SGST rules lay down the procedure for the Input Service Distributors for distributing Input Tax Credit. All the registered individuals should be aware of rule 39 of CGST/SGST. It is commonly seen that every business owner is aware of the Goods and Services Tax or GST. However, they may not be aware of GST rule 39, which we will discuss below.
Rule 39 of CGST/SGST rules
Before understanding rule 39, let's know about Input Tax Credit (ITC) and Input Service Distributor (ISD). Knowing these two concepts can aid in understanding Rule 39 of GST Act easily.
Meaning of Input Tax Credit
Input Tax Credit stands for the credit of tax paid at the purchase of inputs which can be taken against the tax to be paid for paying tax on the outputs.
Example – Mr X supplied goods costing Rs 100 + GST 18 = Rs 118. He had taken services of Truck for Rs 20 + GST 2 = Rs 22. What is the liability of GST for Mr X
Solution – Mr X’s GST liability is Rs 16 which is calculated as follows:
Output Liability – Rs 18
Less: Input Tax Credit – Rs 2
GST liability = Rs 18-2 = Rs 16
Who is an Input Service Distributor as per the GST Act?
ISD meaning in GST-
Input Service Distributor has the following features under GST -
- The ISD distributes ITC to different branches having the same PAN but different GST numbers.
- The ISD will be required to issue an ISD Invoice that clearly states that this invoice is purely for ITC distribution.
- The ISD receives the invoices for the services used by each branch, and ITC is distributed proportionally by the ISD to its various branches.
The input service distributor can only distribute credit on invoices for services and not for capital goods.
ISD Under GST Regime:
Service tax also contained the rules relating to an Input Service Distributor. There are provisions for separate registration of an ISD under the GST rules. A separate registration is required to be obtained by the ISD apart from its normal registration. All the other branches should have a separate registration. The input tax credit would be distributed to those branches that supply output services.
- An ISD Invoice will be required to be issued by the Input Service Distributor, in which it will be specified that this invoice is solely for the reason of distribution of ITC.
- The input tax credit can be divided into two by the ISD, i.e. the eligible credit and the ineligible credit.
- If the recipient unit is located in the same state as the ISD, then the credit of Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) will be distributed as CGST or SGST or Union Territory Goods and Services Tax (UTGST).
- If the recipient unit is located in a different state from the ISD, then the credit of CGST or SGST or UTGST will be distributed as Integrated Goods and Services Tax (IGST).
Please note that the total amount of Input Tax Credit to be distributed cannot be exceeded.
The mechanism mentioned above of common credit distribution must be used separately for CGST, SGST, and IGST credit. The following table summarises the credit to be distributed by ISD:
Credit to be distributed
ISD and the recipient have the unit located in the same state
Recipient unit located in a Different state as that of ISD
IGST or CGST or SGST
ISD Under Both the Regimes- GST and Service Tax Regime
Who all can be an ISD?
Under the previous regime, i.e. the service tax, one ISD could have been either a manufacturer or a producer of final products or a person who provides service. But under GST, ISD can be anyone who is a supplier of goods or services or both.
Thus it can be noted that the definition of ISD under GST is more widespread as it covers all entities/persons who make any supply (which includes any sale, barter, exchange, transfer, lease, rental disposal, etc.
What is the basis on which credit can be distributed?
Under the Service tax regime, an Input Service Distributor receives an invoice towards the purchase of service. The services might have been received by one or more units or branches. After that ISD issues invoices or bills or challan for the purpose of distributing the credit among various branches/offices.
In contrast, under the GST regime, an Input Service Distributor receives tax invoices for services used by branches. Then such ISD issues an ISD Invoice prescribed under GST rules for the purpose of distribution of credit on a proportional basis among the various branches.
How is the credit being distributed?
Credit is provided under the service tax regime by issuing invoices, bills, or challans to distribute to these makers, producers, or providers. However, in the GST system, it is dispersed by issuing an ISD invoice to distribute to a supplier of taxable goods and/or services with the same PAN as the office mentioned above.
What is the type of tax credit that can be distributed in the old and new regimes?
Under the service tax regime, the credit of service tax is paid on the said services, and the credit of CGST (or SGST) and IGST is paid on the said services under the GST regime.
To whom can it be distributed?
Under the service tax regime, credit can be transferred to outsourced manufacturers and suppliers with the same PAN; however, under the GST regime, credit cannot be distributed to outsourced manufacturers or service providers.
As a result of the preceding comparison between the two regimes, credit distribution is limited to offices with the same PAN. This may be related to a change in taxable events from manufacturing to supply. The tax burden would emerge at the moment of supply, and it would be paid by ISD using the available input tax credit.
Conditions to be fulfilled by ISD as per Rule 39
Registration Related: Input Service Distributor has to compulsorily register as “ISD” apart from registration under GST as a normal taxpayer. The same has to be mentioned in form no. REG-01 as an ISD under serial no. 14. Distribution of credit to the recipient units will be allowed only after making a declaration in the form mentioned above.
Invoice Related: ISD can distribute the amount of tax credit to recipients as earlier stated by issuing an ISD invoice.
Returns Filing Related- Rule 39 of CGST / SGST Rules:
- An Input Service Distributor is also required to comply with the requirements relating to return filing every month.
- Every month GSTR6 is filed by ISD. Generally, it is to be submitted by the 13th of the next month. Only the government can extend the date.
- Apart from this, credit for the purchase invoices can be taken in GSTR 3B to be filed each month. These purchases can be verified from Form No. GSTR2A.
- There is no need for an ISD to file GSTR 9 and GSTR 9C. This means that there is no need for an ISD to file the Annual Return.
An ISD cannot accept any bills of reverse charge. But why? The reason behind this is that the ISD facility is only for the purpose of credit distribution.
Rule 39 of CGST / SGST Rules - How to Distribute ITC by an ISD?
The distribution of ITC by ISD will be done as per rule 39 of CGST Rules. The distribution will be made as per the following-
(a) First and foremost, note that credit of a particular month must be distributed in that particular month only, and the information must be provided on the GST portal with the help of FORM GSTR 6.
(b) The Input Tax Credit of Ineligible Service and Eligible Service should be indicated separately as credit is taken for eligible services only.
(c) Specific Formula / Mannerism of Credit Distribution -
Credit for input services is attributable to more than one receiver or all recipients. The credit shall be distributed pro-rata among such recipients based on the recipient's turnover in a state or union territory during the previous financial year.
Suppose one or more of the units among which credit is to be distributed did not have turnover in the previous Financial Year. In that case, the turnover of the last quarter for which details of all recipients' turnover are available before the month in which credit is to be distributed is used to calculate turnover.
It shall be the amount, “C1”, which is to be computed by using the below-mentioned formula-
C1 = (t1÷T) × C
“C” is the total amount of credit that needs to be distributed
“t1” is the turnover of a specific recipient during the relevant period, and
“T” is the total turnover of all recipients
(e) ITC on account of IGST shall be distributed as an ITC of IGST to every receiver;
(g) An ISD Invoice is issued by the Input Service Distributor in which it is clearly specified that this invoice is solely for the reason of distribution of ITC
(h) If any ISD receives any debit note from the supplier, it must raise the debit note in the same month.
(i) If an ISD receives a credit note that reduces the amount of ITC available, the ISD must issue an ISD credit note to the recipients to whom the credit was awarded based on the original invoice. The credit note should be issued in the same proportion as the initial credit was dispersed. The ISD credit will not be issued in the same month that the credit notation appears in the ISD's GSTR6A.
(j) When credit for input services is attributed to a single recipient, that recipient will receive the credit. For example, if an ISD in Maharashtra receives an invoice for IT maintenance services delivered in a branch in Kolkata, that credit will be distributed only to the Kolkata branch.
Under Section 16 of the CGST Act, one significant criterion for credit availed in GST is that a service supplier must have been received. As a result, credit should only be available to the actual recipient of the service.
Input Service Distributor in GST with an example:
Imagine that ABC Ltd. has different units, as mentioned below.
1. Industrial unit in Munnar, Kerala; closed from 2020-21 onwards, no turnover.
2. Unit in Ooty, Karnataka; turnover of Rs. 120 crores in 2020-21;
3. Service centre in Adilabad, Telangana; turnover of Rs. 12 crores in 2020-21;
4. Service centre in Kanchipuram Chennai, Tamil Nadu; turnover of 18 crores in 2020-21;
The corporate office of ABC Ltd.’s functions as ISD. It has to distribute ITC of Rs. 18 lakh for December 2021. An invoice that includes a tax of Rs. 6 lakh pertains to technical consultancy for the Ooty unit. What should be the distribution of the credit?
According to Rule 39 of CGST rules, Rs. 6 lakh credit is attributable to the Ooty unit, and it will be transferred to the Ooty unit only as per Sec. 20(2) (c). From the remaining Rs. 12 lakh, the Munnar unit will not be authorised to any credit as ITC is dispersed to only those recipients who supply goods and services. Rs. 12 lakh have to be distributed between the Ooty unit and the service centres in Adilabad and Kanchipuram. This should be based on their gross revenue in the previous financial year- in 2020-21.
- Ooty unit will get (120 crore / 150 crore) x 12 lakh = Rs. 9.6 lakh;
- Adilabad service centre will receive (12 crore /150 crore) x 12 lakh = Rs. 96,000; and
- Kanchipuram service centre will get (18 crore /150 crore) x 12 Lakh = Rs. 1,44,000.
Therefore, ISD is a service made available to businesses with many shared expenses that allow invoicing and payment to be done in one place. The main purpose of this system is to make the credit-taking process easier for businesses and ensure that credit flows smoothly under the GST regime. As a result, Rule 39 of CGST/SGST rules explains how an Input Service Distributor distributes input tax credits.
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