[Analysis] Input Service Distribution (ISD) Registration – Background | Proposed Amendments | Challenges

Authored by CA Parag Mehta & CA Ankit Joshi – N.A.Shah Associates LLP

Table of Contents

1. Background
2. Proposed Amendments
3. Analysis of Proposed Amendments
4. Will Cross Charge Billing go away?
5. Challenges
6. Steps to be taken
7. Issues to be addressed
8. Conclusion

1. Background

The 50th GST council meet had recommended making ISD mandatory for distribution of common Input Tax Credit which are procured from a third party. Subsequently the 52nd GST council meet had recommended to make necessary amendments to definition of ISD u/s 2 (61) as well as to the manner of distribution of ISD credit u/s 20 of the CGST Act,2017 to make the ISD registration mandatory.

2. Proposed Amendments

In line with the recommendations of the council meet the Finance Bill 2024 have proposed the following amendments to the CSGT Act, 2017:

Proposed amendment to Section 2 (61) of the CSGT Act, 2017:

“ 2(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 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;”

Proposed amendment to Section 20 of the CSGT Act, 2017:

“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 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.

(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.”.

3. Analysis of Proposed Amendments

Currently Circular 199/11/2023-GST dated 17th July 2023 have clarified that it is not mandatory to distribute the common ITC among the branches via the ISD mechanism and the assessee can opt for cross charge billing for such distribution.

However, with the proposed amendment to section 20 of the CGST Act,2017, all assessee having multi state GST registration will have get themselves mandatorily registered as ISD to distribute the common ITC credit among its branches located in different state in the manner that will be prescribed separately.

Also, now with proposed new definition the person obtaining the ISD registration will have to now distribute the ITC in relation to reverse charge payment which is missing in the current definition.

4. Will Cross Charge Billing go away?

Circular 199/11/2023-GST dated 17th July 2023 have given option to the assessee for distribution of common ITC either through cross charge or ISD mechanism. In the said circular the two new terms were introduced namely “third Party” services and “ Internally generated” services . Third Party services relates to services availed from someone outside the company like auditor, security etc whereas internally generated services mean services provided by one branch to another. For third party services the circular has given the option either to follow the cross-charge method or the ISD method. However, in case of internally generated services the same will be distributed through cross charge.

As per the new proposed amendments where the assessee receives the input services including the RCM invoices on behalf of distinct person i.e. branches will have to get themselves registered as ISD and distribute the same in the manner prescribed. Hence whenever the company receives the third-party invoices which is used for HO as well as branches as well then, the same will be required to be distributed through ISD registration only and not cross charge.

However, in case of Internally generated services the cross-billing mechanism will still apply.

Moreover, even in case of third-party invoice which are in relation to goods, and which is for both HO as well as branches, the ITC in relation to the same will be distributed through cross charges only as ISD mechanism only talks about services and not goods. Hence distribution of ITC in relation to goods will still be through cross charge.

5. Challenges

Now with ISD set to become a mandatory thing, all the assesses will have to get on the table and start strategize on how to implement the same. It will be like updating and upgrading the entire internal GST system but on a smaller scale as compared to what one did during the inception of GST.

With ISD registration the assesses having multi state presence/vertical wise registrations will now have face quite a few challenges especially in area of compliances which will significantly increase. Also, assesses currently distributing common ITC through cross charge will now have to modify their systems and distribute the common ITC through ISD mechanism only. Moreover, they will have to undergo a major modification in its accounting systems to comply with the provisions of ISD distribution.

Further the companies also need to consider whether they can follow single ISD registration or have multiple registrations. This would be specifically applicable in case of Banking & Insurance wherein there are concepts of regional and zonal offices.

The main challenge would be capturing invoices for common expenses where GST is payable under Reverse Charge Mechanism under ISD registration, discharging the same and distributing the said ITC. One needs to wait for mechanism to be prescribed for such payment and distribution.

6. Steps to be taken

For implementing the new ISD mechanism the assesses will be required to take following steps

1. Laying down a proper strategy to implement the ISD system and change the accounting software’s accordingly.
2. Identifying as to which state needs to take the ISD registration as common expenses can be incurred even in more than one state which needs to be distributed to all branches.
3. List down all the expensed and lay down a specific mechanism to identify expenses as to which expense transaction to be considered as common for ISD.
4. Based on the above mechanism identify the vendors and communicate them for updating the ISD registration number.
5. Appropriate training to the ground level staff regarding identification of common ITC, manner of distribution and appropriating the common ITC, invoicing, Filing of ISD returns etc.

7. Issues to be addressed

The procedure and manner of distributing the ISD is still yet to amended and prescribed. However, the department should lay down the distribution procedure in a simplified manner which align with other applicable Acts & rules and address varying of issue which might come up later like:

1. Time Limit of issuance of ISD invoices.
2. Treatment of excess/wrongly distributed credit.
3. Clarification on the concept of third-party services and internally generated service.
4. More clarity as to what qualifies as ISD and what qualifies as cross charge etc.
5. Whether the distribution mechanism (prescribed earlier) i.e. turnover wise will prevail as
   there are various expenses i.e. Software license etc. for which turnover criterial would not
   be a valid mechanism.

8. Conclusion

The above proposed amendments will come into force when the Finance Act is assented, and relevant notifications are issued for the same. Being said that the assesses need to start strategizing right now as ISD registration will be a major change especially in case of assesses having multi state presence.

One needs to accept the fact the there will always be a difference between theory and practical applications. Also, the procedure and manner of distributing the ISD is still yet to amended and prescribed. Hence one to wait and see as to how the rules are prescribed the same and what practical challenges one face during the implementation.