Role of Input Service Distributor After Change In Law
What is an ISD (Input service distributor)?
An Input Service Distributor (ISD) is a taxpayer that receives invoices for services used by its branches. It distributes the tax paid known as the Input Tax Credit (ITC), to such branches on a proportional basis by issuing ISD invoices. The branches can have different GSTINs but must have the same PAN as that of ISD.
Let’s understand with an example:
The head office of M/s XYZ Limited is located in Rajasthan having branches in Gujarat, Maharashtra and Kolkata. The head office incurred annual software maintenance expense (service received) on behalf of all its branches and received the invoice for the same.
Since the software is used by all its branches, the input tax credit of entire services cannot be claimed in Bangalore. The same has to be distributed to all three locations. Here, the head office at Rajasthan is the Input Service Distributor.
Compliances for ISD
-
Filing of Return— As per Rule 65 of CGST Rules, ISD to file monthly returns in form GSTR 6 by 13th of the subsequent month.
-
Issuance of Invoice— As per Rule 54 of CGST Rules, ISD issue ISD invoice as per Rule 54(1)
-
Manner of distributing credit— As per Rule 39(1)(b) of CGST Rules, the amount of credit distributed shall not exceed the amount of credit available for distribution.
Key Amendments Effective 1st April 2025
1. Mandatory ISD Mechanism for Common Input Services— The concept of Input Service Distributor (ISD) under the Goods and Services Tax framework has undergone significant transformation with the recent amendments notified by the Government of India, which come into effect from 1st April 2025. These changes aim to streamline credit distribution mechanisms and plug misuse or misallocation of input tax credit.
GST Council in its 50th meeting had recommended that ISD (Input service distributor) procedure as laid down in Section 20 of the CGST Act, 2017 may be made mandatory prospectively for distribution of ITC in respect of input services procured by Head Office (HO) from a third party but attributable to both HO and Branch Office (BO) or exclusively to one or more BOs.
Starting from 1st April 2025, a new GST rule has been applied, GST-registered businesses with multiple GSTINs under the same PAN must register as an Input Service Distributor (ISD). This amendment has been introduced to simplify Input Tax Credit (ITC) distribution and enhance compliance. This reverses the previous practice where entities were distributing credit using cross-charging mechanisms.
Amendments related to such recommendation has been done as follows—
As per section 2(61) of CGST Act, "Input service distributor" means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in Section 20; (This definition has been amended by Finance Act, 2024 dated 15.02.2024 w.e.f. 01.04.2025 by Noti. No. 16/2024-Central Tax)
Prior to this amendment, businesses had the flexibility to choose between the ISD mechanism and cross-charging for distributing ITC on common services. However, from April 1, 2025, the ISD mechanism becomes mandatory for distributing ITC related to common input services procured from third parties. The cross-charge mechanism (i.e., raising an invoice from one GSTIN to another under the same PAN) will still be allowed but will be applicable only for internally generated services.
After that, Finance Bill 2025 also proposed following amendment-
In clause (61), after the word and figure "section 9", the words, brackets and figures "of this Act or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017 shall be inserted.
section 2(61) of the CGST Act, 2017 which seeks to define an ‘Input service distributor’ is being amended to explicitly provide for applicability of mechanism of the Input service distributor in respect of inter-state procurements of services attracting reverse charge, by adding reference to Sections 5(3) and 5(4) of the IGST Act, 2017.
2. Ban on Cross-Charge for Input Services
Cross-charging cannot be used for input services received at one location and used by multiple units. Only the ISD route can be used for such distribution. This move is expected to ensure uniformity and prevent disputes.
3. Revised Distribution Rules
Credit distribution will need to adhere to a revised formula ensuring that input services are allocated proportionally based on actual or estimated usage. The distribution must be done through prescribed documentation (i.e., ISD invoice).
4. Separate Registration for ISD
Even if the head office is registered under GST for regular business operations, it must obtain a separate ISD registration to distribute input service credit.
GSTIN and ISD registrations are mutually exclusive in a given state. ISD registration is required separately as GSTIN registration does not permit distribution of credit. The distribution of the credit is permitted only through ISD mechanism.
Implications for Businesses
Conclusion The revised ISD framework effective from 1st April 2025 signals a clear intent by the government to create a transparent and standardized approach for credit distribution. Businesses should promptly assess their internal processes and align with the new compliance landscape to avoid disruptions and ensure seamless credit flow. |