Input Service Distributor (ISD) under GST: Brief Guide

We all think that taxes are an incredibly complicated ordeal. But not to those…

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We all think that taxes are an incredibly complicated ordeal. But not to those who have knowledge about it. Wouldn’t all of us like to be one of those people? So, head on to S20’s website and check out our taxation course in Ahmedabad and become an expert in taxes. Read on to know one of the most important concepts under taxation, ISD.

A provider of goods or services may have several locations, including their head office, registered office, regional office, marketing office, branch, godown, and sales depot. Each of these locations uses a variety of input services, including security, communication, courier, and housekeeping costs, to name a few, and is responsible for paying service tax. To overcome the difficulty of effectively utilising accumulated credit, such units and premises may register as an Input Service Distributor to get credit on such input services and to distribute credit to other units.

A taxpayer who receives invoices for the services used by its branches is known as an Input Service Distributor (ISD). By generating ISD invoices, it distributes the tax paid, known as the Input Tax Credit (ITC), to such branches in a proportionate manner. The branches must share the same PAN as the ISD but may have different GSTINs.

Let’s use an illustration to clarify. Company ABC Limited’s head office is in Mumbai, and company also has offices in Chennai, Delhi, and Kolkata. On behalf of all of its branches, the head office incurred a yearly software maintenance charge (service received) and was billed for it. Since the software is utilised by every branch, Mumbai is not a valid location to claim input tax credits for the full scope of services. To all three sites, the same must be given. The Input Service Distributor in this case is the headquarters in Mumbai.

Definition of ISD

  • According to Section 2(61) of the CGST Act of 2017, a “Input Service Distributor” is a location of the supplier of goods or services or both that accepts tax invoices issued under Section 31 for the receipt of input services and issues a prescribed document in order to distribute the credit of central tax, State tax, integrated tax, or Union territory tax paid on the aforementioned services to a supplier of taxable goods or services or both having the same Permanent Account Number.
  • According to the definition, an office of a firm that distributes input services is known as an input service distributor (ISD) under the GST. This office receives tax bills for input services and distributes the applicable input tax credit to other branch offices of the same company.

Registration Under GST

A distinct registration must be obtained by an ISD. There is no minimum need for ISD registration, and registration is required. Businesses that are currently ISDs under the current system (service tax, for example) will need to apply for a new ISD registration under the GST. This is due to the fact that the current ISD registration won’t be transferred to the GST system.

Relevance of ISD

For companies operating in India with several branches, ISD under GST is relevant. Each branch from which a taxable supply is made, as required by these businesses, must have a GSTIN. The business would receive ITC (Input Tax Credit) in the form of SGST, CGST, or IGST based on the purchases made by the head office or branch. Here, the government has created the ISD idea as mentioned below to make sure that the ITC is fairly allocated among the various business branches.

  • If the recipients of the credit experienced turnover in their State or Union territory in the fiscal year prior to the fiscal year during which the credit is to be distributed, the fiscal year in question;
  • If some or all of the recipients of the credit experienced no turnover in their State or Union territory in the fiscal year prior to the fiscal year during which the credit is to be distributed, the last quarter for which information regarding the recipients’ collective turnover is available.

Purpose of Registering As An ISD

The idea of an ISD is a facility made available to businesses with a high percentage of shared expenses, where invoicing and payment are handled from a single site. The facility is intended to strengthen the seamless flow of credit under GST, and the mechanism is intended to make the input tax credit application process for firms simpler.

Where Is ISD Not Applicable?

In the following circumstances, ISD cannot disburse the input tax credit:

  • where input and capital products are eligible for ITC. procurement of equipment and raw supplies, for instance.
  • ITC can’t be given to contractors who make goods or offer services.

Ratio of Distribution Of Credit By ISD

Only the unit to which the supply is directly due must receive the credit. If input services may be attributed to more than one credit recipient, the distribution will be based on the State/Union Territory’s turnover, pro rata. Assume an ISD has 4 locations around the nation. The ISD, however, may only transfer the credit to that unit and not to other units if a certain input service only relates to one unit and the bill is raised in the name of the ISD. If the input services are shared by all units, then the distribution will be based on the overall turnover ratio of all the units.

How Input Tax Distributor can distribute the credit under GST:

  • In cases where ISD and the distributor are located in the same state:

In cases where ISD and the distributor are located in different states:

It should be noted that if the ISD and recipient are in different States, the credit for CGST and SGST can also be issued as IGST. Large organisations with presence in multiple States have added this for easy credit. A situation where an ISD receives invoices for input tax credit after paying CGST and SGST (on intra-State supply) yet the destination unit is some other states may occur in practise. The ISD cannot use the aforementioned input to make any credit claims if it transfers the SGST of its state to the destination state.

Consider this situation, Upon payment of CGST and SGST (West Bengal), an ISD located in Kolkata may get an invoice for intrastate supply of input services. This service may be shared by its units located in the State of Jharkhand as well as other states. The CGST credit can be given to all of the ISD’s units, and those units can spend the credit without any issues. However, if the SGST (West Bengal) credit is given to units in other states, those states are not permitted to use it for any other reason. Therefore, if the ISD and Unit are located in separate States, a careful provision has been provided in the statute that allows for the distribution of such SGST Credit as IGST. Once the SGT (West Bengal) credit has been allocated as IGST to the units in other states, those units may use the IGST credit to pay their respective state’s CGST or SGST.

Filing of Returns by ISD

Every ISD must submit monthly returns in GSTR-6 within thirteen days of the end of the month in accordance with Rule 65 of the CGST Rules 2017 and must provide details regarding all ISD invoices issued. The relevant recipients will receive the details from the returns in their GSTR 2A. The beneficiaries are free to credit them and include them in their GSTR-2. An ISD is exempt from filing an annual return. Any invoices for which the tax is to be discharged via the reverse charge procedure are not acceptable to an ISD. This is so that tax credit distribution can be made easier thanks to the ISD mechanism. As a person obliged to pay taxes, the ISD cannot release itself from any tax obligations or pay taxes to the government. ISD must register individually as a Normal taxpayer if it intends to accept products with reverse charges.

Taxation can become very complicated to understand. That is why we are here to make it easy for you! Head over to S20’s website and check out our taxation course in Ahmedabad and we are sure you’ll come out an expert.

GST Compliances for Composition Scheme Dealers

GST Composition Scheme provides relief to small businesses in the form of lower rates…

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GST Composition Scheme provides relief to small businesses in the form of lower rates and lesser compliances. By opting for this scheme, a business can pay GST at a fixed rate, without claiming input tax credit. You can learn more nitty-gritties regarding applicability/eligibility and benefits of this scheme by taking GST classes in Ahmedabad at Super 20 Training Institute (s20.in). Meanwhile, the article here lists down the compliances to be undertaken, should you or your client opt for this composition scheme.

Typical compliances for an indirect tax scheme involve:

In the context of GST composition scheme, these compliances are explained as under:

A. Opt for the scheme
For traders and manufacturer : If turnover is upto Rs. 1.50 Crores p.a.
For Service sector : If turnover is upto Rs. 50 Lacs p.a.
then only a person can opt for composition scheme as the scheme is to benefit small businessmen.

Where a registered dealer desires to opt for composition scheme, typically he is required to do so before or at the beginning of the year, by filing Form GST CMP-02. Where the scheme is opted for in the middle of the year, it becomes applicable from the month following the month in which the form is filed.

Persons applying for fresh registration under GST and opting for composition scheme, may do so by filing Form GST REG-01.

Once a dealer has opted for the scheme, there are two more statements to be filed:

  • Form GST CMP-03 – This statement provides information regarding stock and inward supplies held on the day of opting for the scheme. 
  • Form GST ITC-03 – This statement is required to be filed in order to reverse any input tax credit already claimed on stock of inputs / capital goods before opting for this scheme.

If all these forms and compliances seem daunting, attend GST classes in Ahmedabad to get complete clarity and sort out any queries you may have. 

B. maintaining detailed records
The main purpose of the scheme is to provide relief to taxpayers from comprehensive maintaining of records and compliances. Therefore, unlike regular dealers, dealers registered under the composition scheme are NOT required to maintain detailed records. Further, they are NOT required to collect taxes either, as the taxes are paid at a fixed rate out of own pocket. However, the following to-do’s should be borne in mind:

  • The dealer must issue a Bill of Supply, and NOT a tax invoice.
  • All bills of supplies must state ‘composition taxable person, not eligible to collect tax on supplies’.
  • All hoardings outside the office / at other prominent places must clearly state ‘Composition taxable person’. 
  • Composition delaer can not make any interstate sales.

C. Calculating and payment of taxes
A dealer under the composition scheme should collectcollate the following details of:

  • outward supplies on which tax is payable
  • inward supplies on which tax is payable on reverse charge

Thereafter, compute tax liability by using fixed (reduced) rates as applicable, and split tax liability equally among the CGST and SGST components. Further, credit of input tax cannot be claimed by a GST composite dealer. Add interest payable (if any).The afore-said details would need to be filled in Form GST CMP-08. Form CMP-08 is a statement-cum-challan required to be filed on a quarterly basis. It summarizes the tax liability of the dealer alongwith other relevant details sought by the government. Due date for payment of taxes as well as filing of this statement is 18th of the month following the quarter for which taxes are being paid.

D. Filing of returns – Quarterly and annual
The quarterly statement in Form CMP-08 mentioned above serves as quarterly return as well (it replaces erstwhile quarterly Form GSTR 4).

An annual return also needs to be filed by a GST composite dealer by 30th April following the relevant financial year.

Law prescribes penalties where there is delay in filing of the returns mentioned above. Super 20 Training Institute offers excellent GST return training in Ahmedabad so that you can ensure that the return filing process for you and/or your clients is smooth and hassle-free.