Input Service Distributor (ISD) under Goods and Services Tax (GST) Regime

Even under the Goods and Services Tax (GST) regime, the concept of Input Service Distributor (ISD) is similar to that under the existing laws. In this article, we will see through the provisions related to distribution of credit by Input Service Distributor as provided in Section 21 of the Revised Model GST Law. Even with the Goods and Service Tax (GST), the promised One Nation One Tax regime seems far from truth. This harsh reality is reflected in the provisions relating to set-off of Input Tax Credit of Central GST (CGST) and/or State GST (SGST) and/or Integrated GST (IGST) amongst each other as well as the manner in which each of them are allowed to be distributed as under the provisions of ISD. Certain restrictions have been imposed on utilization of one credit against the liability of another (For example: CGST input with SGST output) and/or distribution of one credit as another credit. For an instance distribution of SGST credit as IGST credit is not allowed when distributor and recipient are in same state. Anyway, lets head on ahead and try to understand these complex provisions in a simple and easy manner.

Input Service Distributor (ISD) is defined in Section 2(54) of the Model GST Law and it means  an office of the supplier which receives tax invoices towards receipt of input services and issues a prescribed document to its other offices/units who are in the business of providing taxable goods and/or services and having the same PAN for the purpose of utilization of the credit by the later unit. It is to be noted that under GST Regime as well, a separate registration is to be taken as Input Service Distributor (ISD) even though the office may be registered as taxable person. The definition of ISD given under Section 2(54) is reproduced below:
Section 2(54) “Input Service Distributor" means an office of the supplier of goods and/ or services which receives tax invoices issued under section 28 towards receipt of input services and issues a prescribed document for the purposes of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above;”

It can be observed that there must be inward supply of services along with tax invoices issued under section 28 to the Input Service Distributor and he in turn can distribute the credit to his other units who must be a supplier of taxable goods and/or services having the same Permanent Account Number (PAN) so that they can avail/utilize the credit against their output tax liability. These following points are of utmost importance:
  • The tax invoice should be received by ISD toward inward supply of services. Goods have not been covered under the provisions of ISD.
  • Prescribed document is to be issued. 
  • The unit/branch receiving the credit must be a supplier of taxable goods and/or services. If he is supplying exempted goods alone he is not eligible to receive the credit from ISD.
  • The unit/branch should be registered under the same PAN as that of ISD.

Section 21 of the Model GST Law prescribes the manner in which credits of CGST (SGST in State Acts) and/or IGST can be distributed to other units/branches. In this regard distinction is made on the manner of distribution of credit when the Distributor and Recipient are in Different States and when they are in same states. The relevant manner of distributing the credit subject to certain general conditions is laid down below:

Where the Distributor and Recipient are in DIFFIRENT States
  • The ISD may distribute credit of CGST as CGST or IGST
  • The ISD may distribute credit of IGST as IGST or CGST
  • The ISD may distribute credit of SGST as SGST or IGST
Where the Distributor and Recipient are in SAME States
  • The ISD may distribute credit of CGST as CGST alone
  • The ISD may distribute credit of IGST as CGST or SGST
  • The ISD may distribute credit of SGST as SGST alone


The above provisions can be summarized with the help of following table:


Location of ISD and Recipient Unit(s)


Credits As

Credits of
IGST
CGST
SGST
Remarks
In the Same State
IGST
NO
YES
YES
IGST as CGST or SGST
CGST
YES
NO
NO
CGST as CGST alone
SGST
NO
NO
YES
SGST as SGST alone
In Different States
IGST
YES
YES
NO
IGST as IGST or CGST
CGST
YES
YES
NO
CGST as IGST or CGST
SGST
YES
NO
YES
SGST as IGST or SGST

It may be noted that where credit can be transferred as either of the two alternatives, the one which is most beneficial should be opted for. For example, assuming distributor and the recipient are in same state, where one unit/business vertical  has a huge CGST liability, the IGST credit should be distributed by the ISD as CGST (and not SGST) to that particular unit/vertical, so that it will be able to set off its liability with the credit to the maximum extent possible and less amount may be paid via cash. Accordingly, if there is another unit/vertical with more SGST liability and SGST input credit of that unit is insufficient to cover the same, the IGST may be distributed, to that particular unit, as SGST.

The Law has provided certain overall conditions subject to which the distribution as referred above can be effected. These provisions are highlighted below:

  • The credit of tax paid on input services attributable to a recipient of service (i.e. one particular unit among many) shall be distributed only to that recipient (unit). In other words, we are allocating the credit and not distributing the same. Wherever a direct nexus is established between the value of input services and the unit utilizing those services, the input credit on such services is to be distribution/allocated to that particular unit.
  • the credit of tax paid on input services attributable to more than one recipient of credit shall be distributed only amongst such recipient(s) to whom the input service is attributable and such distribution shall be pro rata on the basis of turnover in a State of such recipient, 
    • during the preceding financial year if the recipients have turnover during that year or,
    • if some or all recipients do not have turnover during the preceding financial year, during the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed
    • to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period. 
    • The word turnover means aggregate value of turnover defined under sub-section (6) of Section 2.
  • The credit attributable to all recipients shall be distributed amongst such recipients on pro rata basis of turnover in State.
  • The amount of credit distributed shall not exceed amount of credit available for distribution.
  • The prescribed document shall be issued to each recipient of credit and shall contain such details as may be prescribed.


Further, section 22 provides that where ISD distributes credit in excess of what is allowed and provided under section 21, the excess may be recovered from the recipient(s) along with interest and the provisions of section 66 and 67, as the case may be, shall apply mutatis mutandis for effecting such recovery.

Unlike the previous laws, the GST Model Law differs in the view when it comes to the recipient to whom the input credit can be distributed by the ISD. Under the existing laws, the credit was not restricted to any particular unit or manufacturer or service provider and the credit of services utilized by one unit was allowed to be distributed to another unit. The CESTAT, Bangalore in the case of Ecof Industries Pvt. Ltd. v. CCE, Bangalore 2009 (10) TMI 171 adopted a holistic view and held that the availability of credit is related to manufacturer of goods or provider of output services as a whole and is not restricted to any particular unit or manufacturer or service provider. On a further appeal by the revenue, the Karnataka High Court later in 2011 concurred with the view of CESTAT, Bangalore.

Not upholding the similar position under the GST Regime, will definitely cause undue hardship to taxpayers. The relief might be available in the due course in the form of similar judicial pronouncement(s) but of that we are unsure as of yet.

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