[Analysis] GST Implications for Mandatory ISD Registration as Proposed in Interim Budget 2024
- Blog|GST & Customs|
- 9 Min Read
- By Taxmann
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- Last Updated on 28 February, 2024
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By CA Parag Mehta – Partner and CA Rahul Gupta – Assistant Manager | N.A. Shah Associates LLP
Table of Contents
- Existing Legal Provisions for ISD
- Legal Provisions for Cross Charge
- Comparative Summary
- Advance Rulings, FAQ prior to Amendment Proposed in Interim Budget 2024
- Circular No. 199/11/2023-GST dt. 17.07.23
- Proposed Amendments for ISD in Interim Union Budget 2024
- Key Challenges
- Way Forward
1. Existing Legal Provisions for ISD
1.1 Definition u/s 2(61) of CGST Act: (Before Amendment)
‘Input Service Distributor’ means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office;
- Office of supplier of goods/services
- Receives invoice for input services only and not for input goods or capital goods
- Issues prescribed document for distributing ITC – ISD invoice prescribed u/r 54(1)
- ITC is distributed only to units having same PAN
1.2 Manner of distribution of credit by Input Service Distributor u/s 20 of CGST Act (before Amendment)
(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:-
(a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for distribution;
(c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient;
(d) the credit of tax paid on input services attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, 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;
(e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.
2. Legal Provisions for Cross Charge
Cross Charge is not defined under GST law. Following are the relevant provisions which invoke the concept of Cross Charge
- Section 9: Levy of GST on value of supply made by a taxable person for a consideration and in the course of or furtherance of business.
- Section 7(1)(c): Activities listed in Schedule I to CGST Act to be supply even if made without consideration
- Entry 2: Supply of goods or services made between distinct persons.
- Section 25(4) & 25(5): Further distinct person is two or more units of same legal entity (whether or not in same State or Union Territory) when registered separately.
3. Comparative Summary
| ISD | Cross charge |
| Mandatory separate registration | No separate registration |
| Distribution of only Input services | Cross charge of Common inputs, input services and Capital goods |
| Distribution of ITC as per prescribed formula – sec. 20 read with Rule 39 | Valuation mechanism prescribed – Sec.15 read with Rules 28, 30 and 31 |
| Separate return compliances in GSTR-6 and GSTR-6A | No separate returns |
4. Advance Rulings, FAQ prior to Amendment Proposed in Interim Budget 2024
4.1 Analysis of Specific Advance Rulings
Columbia Asia Hospitals (P.) Ltd., In re [2018] 100 taxmann.com 501/[2019] 71 GST 444/20 GSTL 763 (AAAR-KARNATAKA)
- Services of employee at the HO (like IT services, Payroll Services, HR Services) to the distinct person shall be treated as supply and the same is liable to tax
- Further AAAR also observed that there is a fundamental difference between the concept of ISD and Cross Charge
- In case of cross charge, there is an element of service rendered by person who cross charges to the other units even though they belong to same legal entity whereas in case of ISD, there is no element of service at all, but a mere distribution of ITC.
Cummins India Limited, In re [2022] 134 taxmann.com 342/58 GSTL 549/90 GST 753 (AAAR-MAHARASHTRA)
The AAAR held that the HO is not entitled to avail the ITC of such common input supplies as the said common input services are also being used or consumed by the Branch Offices/Units in the course or furtherance of their businesses, and not only by the Head Office
- HO must register itself as an ISD and distribute such common ITC availed to the company’s branch offices/units.
4.2 Frequently Asked Questions on Banking, Insurance and Stock Brokers Sector dated 27.12.2018
Question: Would Input Tax Credit (ITC) be available to a GST registrant though the services procured from third party vendor are also directly used by various ‘distinct persons’? In such cases, is distribution of ITC required to be done mandatorily through Input Service Distributor mechanism?
Answer: Yes. Input Tax Credit (ITC) can be availed by a GST registrant in respect of the services procured in a consolidated manner from third party vendor which are directly used in the course or furtherance of business in more than one State, e.g. statutory audit fees, advertisement and marketing expenses, consultancy fees etc. The same needs to be appropriately invoiced or distributed through the ISD mechanism to the “distinct persons” who have actually used such services.
5. Circular No. 199/11/2023-GST dt. 17.07.23
CBIC has issued Circular No. 199/11/2023-GST dated 17.07.2023. wherein clarifications have been provided in pursuance to taxability of activities performed by an office of an organization in one State to the office of that organization in another State, which are regarded as distinct persons.
Major Clarifications
- Distribution of ITC Via ISD or Cross Charge
- Valuation of Services in case of Cross Charge
5.1 Whether ISD or Cross Charge?
Flexibility to choose
(1) For Third party services
ISD: The HO can either distribute the Credit through ISD by registering itself as ISD under section 24 of CGST Act.
OR
Cross Charge: The HO can claim the ITC which is pertaining to the BO’s and issue invoice of the same to distribute the credit.
(2) For Internally Generated Service
Cross Charge: Between distinct persons cross charge will be applicable. (i.e. HO carrying out common functions which benefits other operational units).
6. Proposed Amendments for ISD in Interim Union Budget 2024
6.1 Proposed Legal Provisions for Input Service Distributors (ISD)
Amendment in Definition u/s 2(61) of CGST Act:
In section 2, for clause (61), the following clause shall be substituted, namely:–
(61) “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 subsection (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.
6.2 Comparative Summary of ISD Old vs New
| Existing | Proposed |
| ‘Input Service Distributor’ means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office; | “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. |
6.3 Legal Provisions for Input Service Distributors (ISD)
Manner of distribution of credit by Input Service Distributor u/s 20 of CGST Act (After Amendment)
- Any 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, shall be required to be registered as Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices.
- The Input Service Distributor shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under sub-section (3) or sub-section (4) of section 9 paid by a distinct person registered in the same State as the said Input Service Distributor, in such manner, within such time and subject to such restrictions and conditions as may be prescribed.
- The credit of central tax shall be distributed as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit, in such manner as may be prescribed.
6.4 Comparative Summary of ISD (Existing vs Proposed)
| ISD | Cross charge |
| (1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:- (a) the credit can be distributed to the recipients of credit against a document containing such details (b) the amount of the credit distributed shall not exceed the amount of credit available for (c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient; (d) the credit of tax paid on input services attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, 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; (e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period |
For section 20 of the Central Goods and Services Tax Act, the following section shall be substituted, namely:
“20. (1) Any 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, shall be required to be registered as Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices. 2) The Input Service Distributor shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under sub-section (3) or subsection (4) of section 9 paid by a distinct person registered in the same State as the said Input Service Distributor, in such manner, within such time and subject to such restrictions and conditions as may be prescribed (3) The credit of central tax shall be distributed as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit, in such manner as may be prescribed. |
7. Key Challenges
- Mid-year implementation of ISD mechanism will result in confusion between bifurcation of input services for Cross charge and ISD
- Identifying the need for a single ISD registration or multiple ISD registrations
- Identifying common input services for distribution through ISD mechanism.
- Formulating a comprehensive strategy where ISD mechanism is intertwined with Cross charge mechanism
- Effective and concurrent communication with the vendors for updation of ISD GSTN in their masters
- Appropriate distribution of RCM ITC between ISD and Non- ISD unit
- Basis of distribution of ISD credit –ITC denial on the grounds that services are not attributable to the distinct person
- ITC reconciliation in respect of inward supplies to be completed on or before 13th of the respective month
- Change in working capital requirements resulting from possible credit accumulation at the recipient location
- Accumulation of ITC in SEZ unit due to credit distribution resulting in blockage of working capital
- ISD required to distribute the ITC in the same month as per existing provisions
8. Way Forward
- Initiating implementation of ISD mechanism with the help of Tax and software experts
- Comprehensive training to the GST Tax team to ensure seamless adoption of ISD mechanism
- Evaluate applying for ISD registration at the earliest
- Imperative to ensure clear communication with the vendors for quoting ISD GSTN
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