Input Service Distributor (ISD) 

Concept of ISD is relevant only for organizations having GST Registration in more than one state and commonly used input services are ordered and invoiced at one particular location. Though ISD concept was very much in vogue in Service Tax, concept of ISD in GST is little bit different from that of service tax and hence it will be appropriate to first understand meaning of the term of ISD in GST context.

Meaning

As per section 2(61) of the CGST Act, "Input Service Distributor" should fulfil the following cumulative conditions:

  ♦  It is an office of the supplier of goods or services or both. Such office should also be separately registered in GST in addition to normal GST Registration.

  ♦  It receives tax invoices issued under section 31 towards the receipt of input services. Credits involved in invoices for Inputs and Capital Goods cannot be distributed through ISD Mechanism.

  ♦  It issues a prescribed document (ISD Invoice/ISD Debit Note/ISD Credit Note) for the purposes of distributing/reducing the credit of GST paid on Input services.

  ♦  It transfers credits only to other units/establishment having the same Permanent Account Number as that of ISD Office by fulfilling all laid down conditions.

In simple terms, ISD can be viewed as accumulator and transferring mechanism of ITC on input Services.

Example of ISD

PQR Ltd is located in Mumbai (HO) in addition to its presence in 10 different states of India. Statutory Auditor of PQR Ltd is also located in Mumbai and as per terms of engagement, will raise one single invoice for statutory audit fees (commonly used input services) only on Mumbai HO of PQR Ltd. In this case ideally PQR Ltd should obtain separate ISD registration and insist on raising auditing services invoice only on ISD registration.

Precautions to be taken by ISD while distributing ITC credit on Input Services

  ♦  ISD shall issue a document (ISD Invoice) in accordance with Rule 54 of CGST Rules to the recipient branch indicating that it is issued only for distribution of ITC.

  ♦  The amount of the credit distributed shall not exceed the amount of credit available for distribution.

  ♦  If the credit is attributable to only a particular recipient, then the same shall be distributed only to that recipient. E.g. if Chartered Accountant services availed for filing GST return of particular branch, credit should be transferred to that specific recipient and no one else.

  ♦  If the credit is attributable to more than one recipient, then the same shall be distributed on pro rata basis on the turnover in the relevant period in a state or union territory to the aggregate of the total turnover of all recipient to whom the ITC is attributable. E.g. Stock audit of 8 states out of 10 states is carried out by one common auditor and one single invoice is raised on ISD for stock audit services, credit involved to be transferred on the basis of ratio of total turnover of each recipient to total turnover of all 8 recipients.

  ♦  If the credit is attributable to all recipients then same shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients which are operational in the current year, during the said relevant period. E.g. Company has spent huge amount on general advertisement, ITC involved on such advertisement shall be distributed amongst all the recipient in the ratio of their turnover to total turnover of organization.

Relevant period

As the ISD is mandated to distribute the credit available for distribution to eligible recipients in the same month, concept of "Relevant period" and "Turnover" is very much important.

As per Explanation provided in Sec. 20 of the CGST Act, Relevant period means:

  (i) If the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or

 (ii) If some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, 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.

Example of Relevant period

  (i) Assume a case, credit of May 2019 is to be distributed amongst 8 branches and if all these branches were having turnover in FY 18-19 then FY 18-19 will be relevant period. To put it differently turnover of FY 18-19 will be considered as base for working out ratio for distribution of credit.

 (ii) Assume a case, Credit of Aug 2018 is to be distributed amongst 8 branches and some of these branches were not having turnover in FY 17-18 (may be because few branches were not in existence in FY 17-18 or for some other reason) but during Quarter ended June 2018 all branches were having turnover, then turnover of April 2018 to June 2018 will be considered as base for working out ratio for distribution of credit. Law maker's intention seems to have more equitable distribution of credit so as to avoid any loss to any particular state/union territory, however this had led to challenges in working out ratios.

Meaning of Turnover

Taxable as well as exempted supply turnover of all the units whether registered or unregistered excluding taxes will form part of turnover.

Manner of Distribution of Credit

As CGST/SGST credit of a state is not fungible with CGST/SGST credit of another state, special manner is prescribed for distribution of credit, which can be explained as under:

Type of credit available with ISD	If ISD and Recipient are located in same state, credit to be distributed as	If ISD and Recipient are located in different state, credit to be distributed as
Central Tax	Central Tax	Integrated Tax
State/UT Tax	State/UT Tax	Integrated Tax
Integrated Tax	Integrated Tax	Integrated Tax

It is also important to note that ISD has to distribute both eligible and ineligible credit [as per Section 17(5)] to recipients in the same tax period in which the inward supplies have been received.

Distribution Formula

ITC is required to be distributed to one of the recipients 'R1', whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, "C1", to be calculated by applying the following formula:

C1 = (t1/T) × C

Where,

"C" is the amount of credit to be distributed,

"t1" is the turnover of R1 during the relevant period, and

"T" is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable.

E.g. Total CGST Credit to be distributed by ISD during March 2019 (C) = INR 10 Lakh

Turnover of Maharashtra branch during 17-18 (t1) = 5 crore

Total Turnover of all the branches during 17-18 (T) = 50 crore

CGST to be distributed by way of ISD mechanism to Maharashtra branch (C1) = 1 Lakh

Separate working on above line is to be made for each type of tax viz. CGST, SGST, UTGST and IGST and again for each eligible recipient.

ISD Debit/Credit Note

Let's take an example, common advertisement expenses were incurred by organization and invoice was raised by supplier on ISD. This credit was already distributed amongst eligible recipients in the manner prescribed and corresponding credit was also availed by them. Due to negotiation subsequently vendor has issued credit note on ISD for 10% rate difference on Invoice amount along with GST. Since credit is already transferred to eligible recipients, now question arises, how the ISD can show such adjustment in its return and how respective recipients will reverse their credits in compliance with Section 15(3) of CGST Act.

To take care of such situation, GST Law provides that in case an additional credit is available to ISD by the supplier by issuance of Debit Note or any credit is reduced by supplier to ISD by issuance of credit note, the additional credit shall be apportioned to each recipient in the same ratio in which the ITC contained in the original invoice was distributed. However, in case where due to reduction of credit, credit with the respective unit become negative, the amount shall be added to the output liability of recipient.

Summary of other relevant points

  ♦  CGST, SGST, IGST, UTGST credit shall be distributed separately by ISD units.

  ♦  Tax credit of particular month to be distributed in same month only.

  ♦  The details of the ISD invoices/debit note/credit note raised should be furnished in GSTR-6

  ♦  Invoices disclosed in GSTR-6 will be reflected in GSTR-2A of respective recipients.

  ♦  ISD is required to file monthly return on 13th of following month.

  ♦  Credit can be distributed to operational units only having Same PAN. Term operational unit is not defined.

  ♦  Organization can have more than one Input Service Distributor.

  ♦  As per instructions appended below GSTR-6, ISD will not have any reverse charge supplies. If ISD wants to take reverse charge supplies, then in that case ISD has to separately register as Normal taxpayer. Therefore for services subject to reverse charge, such credit should be routed only through normal registration.

  ♦  ISD is not required to file Annual Return/Audit Report.

  ♦  If Credit is distributed in contravention of provisions of Act resulting in excess distribution of credit, it will be recovered from the recipients with interest and penalty.

  ♦  Generally ISD will not be required to pay any tax and only cash payment could be in the form of interest and late fees payment.

Cross-charge in GST

The term 'cross charge' has not been defined under the GST Law. Under the erstwhile VAT/CST/Excise laws there was a concept of Branch Transfer (Stock Transfer) of goods from one branch/depot/warehouse to another, either in the same state or in different state. Through this mechanism the tax/duty charged on the goods transferred from one location to another location was getting transferred as per the provisions applicable in the respective laws.

There was no concept of provision of services or charging tax on the services provided by one branch/HO to another. The service tax law had the concept of Centralised Registration, with option of separate registration qua each place of business alongwith the concept of ISD. Hence no need for cross charge had arosen on the services provided or deemed to be provided between the Branches/HO per se.

The Advance Ruling of Columbia Asia Hospitals Private Limited has sensitized tax payer and professional community about the importance and evils of cross charge. Even Schedule I to CGST Act deems "Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business" as supply.

To take an example, Company is having common HR unit in Mumbai for all its Head Office as well as inter- State branches. This HR unit is functioning from rented premises. Various credits involved on renting and all other expenses incurred in running and maintaining HR department (e.g. Printing and stationery cost etc) will be first accumulated and availed by Mumbai unit and subsequently cross charged to all other inter-State branches so as to ensure fair equitable distribution of credit amongst all inter-state branches and also comply with schedule I of CGST Act. Presently whether or not salary cost forms part of cross charge is biggest controversy and practical call to be taken in this matter based on facts and circumstances of each case. Readers may please note credit of inputs can't be routed through ISD and therefore credit involved in such commonly used inputs e.g., printing and stationery can be routed only through cross charge mechanism.

Basis/Ratio for Cross Charge

Rule 28 of CGST Rules lays down the valuation mechanism for cross charge. Further second proviso to Rule 28 prescribes that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value of the goods or services.

Comparison between Cross-Charge and ISD

It should be noted that Cross-Charge and ISD are two different concepts having different purpose and utility. The following table lists down major differences between these two commonly misunderstood terms.

Points for comparison	ISD	Cross-charge
Purpose	To transfer credits involved in respect of commonly used input services e.g. audit fees and consultancy fees etc	To account for and charge GST on supply made between 2 distinct persons. E.g., Activities performed by Corporate office say in respect of IT system maintenance
Separate Registration	Mandatory	No separate registration is required
Element of services	Service is provided by third party to ISD. There is no direct element of service from ISD to eligible recipients	There is a visible element of service rendered by person who cross charge to other units being cross-charged
Separate Invoice	Separate ISD Invoice/debit note/credit note is required for transfer or credit	Separate invoice/debit note/credit note as "Business Support Service" to be raised by the person who cross charge
Input Service/Output Service	Mechanism to transfer credit only for Input Services. Not permitted to transfer credit involved in Inputs or output services	Suitable when one distinct person is providing output service to another distinct person

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