An Input Service Distributor (ISD) is a mechanism under GST that allows a business to distribute input tax credit (ITC) of services received at a central location (like a head office) to its branches or units that are registered under the same PAN but in different states. The ISD essentially collects the ITC for services used centrally and distributes it to the relevant units based on a specific mechanism prescribed by GST regulations.  Only input services (not goods) can be distributed through an ISD.ITC related to capital goods and outward supplies cannot be distributed through ISD. Section 20 of the CGST Act governs the manner of distribution of credit by an ISD, while Rule 39 lays down the procedural aspects. Let’s explore these provisions in detail.

Who is an Input Service Distributor (ISD)?

An Input Service Distributor refers to an office of a supplier that receives tax invoices related to input services and distributes the available ITC to its different business units (distinct persons under Section 25 of the CGST Act). Such an office is required to be registered as an ISD under clause (viii) of Section 24 of the CGST Act.

Distribution of Credit by an ISD (Section 20)

(i) Receipt of Invoices

• The ISD receives invoices related to input services, including those where tax is paid under reverse charge under sub-section (3) or sub-section (4) of Section 9.
• These invoices may be received on behalf of multiple business locations (distinct persons/ Branches).

(ii) Distribution of ITC

• The ISD must distribute central tax (CGST) & state tax (SGST) or integrated tax (IGST) charged on the invoices received.
• This includes credit in respect of services liable to tax under reverse charge basis under Section 9(3) and 9(4), where tax is paid by a distinct person in the same state as the ISD.
• The distribution must be done in the prescribed manner, within the prescribed time, and subject to restrictions and conditions.

(iii) Mode of Distribution

• The credit of central tax (CGST) shall be distributed as CGST or IGST and state tax (SGST) shall be distributed as SGST or IGST, and the credit of integrated tax (IGST) shall be distributed as IGST.
• Distribution is done by issuing a document that contains details of the allocated ITC.

Procedure for Distribution of ITC by ISD (Rule 39)

(i) Monthly Distribution & Reporting

• ITC must be distributed in the same month and reported in FORM GSTR-6.
• The amount distributed cannot exceed the available credit.

(ii) Attribution of Credit

• Credit of tax paid on input services attributable to a recipient shall be distributed only to that recipient.
• If the credit is attributable to multiple recipients, it must be distributed pro rata based on turnover of the recipients in their respective states/UTs during the relevant period.

(iii) Distribution of Different Types of Tax

• CGST and SGST/UTGST must be distributed separately.
• IGST must be distributed as IGST.
• If the recipient is in the same state as the ISD, CGST and SGST/UTGST are distributed as CGST and SGST/UTGST.
• If the recipient is in a different state, CGST and SGST/UTGST are combined and distributed as IGST.

(iv) Documentation & Adjustments

• ISD must issue an ISD invoice when distributing ITC.
• If ITC is reduced (due to a credit note, wrong distribution, etc.), an ISD credit note must be issued.
• Any additional credit due to a debit note must be distributed in the same manner as the original credit.

Illustration

Let us understand the same with an example.

Case 1:

ABC Ltd is a company having a Head Office at New Delhi and Branch office in Ahmedabad. ABC Ltd is providing exempted supplies. The HO provides HR, IT and legal support to branch located at Ahmedabad.

The common ITC at head office should be transferred to Ahmedabad by ISD mechanism.

Now there may be 4 scenarios at Ahmedabad location:

The stepwise compliance is as follows:

1. Ahmedabad location is providing support services to HO therefore it should cross charge such support services to HO.
2. The HO will cross charge the HR, IT and legal support services to Ahmedabad Location. The valuation of such services should be made at an open market value or where open market value is not available, the value of similar services or where the value of similar services is not available, then 110% of the cost incurred should be considered. In case the Ahmedabad branch is eligible for full input tax credit of such supplies the transaction value as mentioned in the invoice shall be open market value.
3. After the above cross charging, the total turnover shall be determined by adding the cross-charge value in total turnover.
4. The common ITC at Delhi location should be distributed by following the ISD mechanism, on the basis of the above turnover which includes cross charge value.
5. The Ahmedabad branch receives the ITC from Delhi ISD and treats the same in accordance with the law i.e., either to utilize in full or reverse the proportionate ITC under rule 42, whichever is applicable as mentioned in the above table.

Case 2:

ABC Ltd is a company having a Head Office at New Delhi and Branch office in Ahmedabad. ABC Ltd provides taxable supplies. The HO provides HR, IT and legal support to branch located at Ahmedabad.

The common ITC at head office should be transferred to Ahmedabad by ISD mechanism.

Now there may be 4 scenarios at Ahmedabad location:

The stepwise compliance is as follows:

1. Ahmedabad location is providing support services to HO therefore it should cross charge such support services to HO. Since the HO is eligible for full input tax credit the valuation of such services should be any value charged in the invoice.
2. The HO will cross charge the HR, IT and legal support services to Ahmedabad Location. The valuation of such services should be made at an open market value or where open market value is not available, the value of similar services or where the value of similar services is not available, then 110% of the cost incurred should be considered. In case the Ahmedabad branch is eligible for full input tax credit of such supplies the transaction value as mentioned in the invoice shall be open market value.
3. After the above cross charging, the total turnover shall be determined by adding the cross-charge value in the total turnover.
4. The common ITC at Delhi location should be distributed by following the ISD mechanism, on the basis of the above turnover which includes cross charge value.
5. The Ahmedabad branch receives the ITC from Delhi ISD and treats the same in accordance with the law i.e., either to utilize in full or reverse the proportionate ITC under rule 42, whichever is applicable as mentioned in the above table.

Conclusion

Understanding Section 20 and Rule 39 is crucial for businesses operating in multiple locations. Proper adherence to ISD provisions helps in maximizing ITC benefits while maintaining compliance with GST regulations. Businesses should ensure accurate documentation and timely distribution to optimize tax benefits and avoid penalties under the GST regime.

The Input Service Distributor (ISD) mechanism under GST allows businesses to centrally receive and efficiently distribute input tax credit (ITC) on services to their branches based on their respective turnover. This ensures that the ITC is appropriately allocated and utilized, helping businesses streamline tax compliance and maximize tax benefits. Proper documentation, accurate turnover-based distribution, and timely reporting through GSTR-6 are essential for smooth functioning of the ISD system.