[Opinion] Distribution of Common Credits and Internally Generated Services – The Enigma Continues?

Hardik Gandhi, Darshan Savla & Siddhesh Tated – [2023] 152 taxmann.com 677 (Article)

Background

The GST law marked its 6th anniversary on 1st July 2023. It is motivating to see how the GST law has evolved over these years and appreciate the government’s constant efforts to settle various issues under this law by providing suitable periodic clarifications.

Pursuant to the 50th GST Council meeting held on 11 July 2023, the Central Board of Indirect Taxes and Customs (‘CBIC’) has issued much awaited clarifications with respect to distribution of credits for common input services as well as internally generated services, by way of Input Service Distributor (‘ISD’) or invoice u/s 31 of Central Goods and Services Tax, Act, 2017 (‘CGST Act’) vide Circular No. 199/11/2023-GST dated 17 July 2023.

We intend to discuss the clarifications issued and highlight areas that need further clarification.

1. ISD is not mandatory for distribution of credits related to third-party expenses (‘common ITC’)

Clarification issued:

• The CBIC has clarified that in respect of common input services procured by the head office (‘HO’) from a third party, but attributable to both HO and branch offices (‘BOs’) or exclusively to one or more BOs, the HO has an option to distribute ITC through the ISD mechanism or by issuing tax invoice u/s 31 of CGST Act. Therefore, it has been clarified that ISD mechanism is currently not mandatory for distribution of common ITC received at HO.

Provisions under GST law:

• Section 20 of the CGST Act provides for manner of distribution of common credits by an ISD, which is based on the turnover in the state of the recipient BOs.
• Section 21 of the CGST Act provides that in case of excess distribution of credits to one or more recipients in contravention of provisions of Section 20, the said excess credits should be recovered from recipients along with interest.
• Section 31 of the CGST Act provides for issuance of tax invoice in case of taxable supply of goods or services or both.

Advance Ruling:

• Tax authorities relying upon the ruling pronounced by Maharashtra Appellate Authority for Advance ruling (‘AAAR’), in the case of Cummins India Ltd., In re [2022] 134 taxmann.com 342/2022 (58) G.S.T.L. 549/[2022] 90 GST 753 are of the view that the ISD route is mandatory for distribution of common ITC and that distribution of common ITC through any other manner is inappropriate.
• Accordingly, tax authorities have been disallowing the ITC availed by recipient locations through invoice issued u/s 31 instead of ISD invoices, leading to a double tax impact. The above clarification will help in clearing the ambiguity and bring much-needed relief to taxpayers through clarity and consistency.

Considerations:

• The Circular provides that common ITC can be distributed from HO to BO either by following the procedure prescribed under Section 20 for ISD route or by issuing a tax invoice u/s 31 of CGST Act.
• Given that tax invoice u/s 31 can be issued only in a case where there is an underlying taxable supply, it is unclear from the circular whether the government’s intention is to consider those distribution of common third-party expenses from HO to BO as ‘supply of taxable services’; particularly when Hon’ble Orissa High Court in case of JSW Steel Ltd. v. Union of India 2022 (63) G.S.T.L. 167 (Ori.), had observed that issuance of tax invoice by BO to HO in the garb of support services, without there being any clarity as to what is the support service that has been provided by BO to HO, would not be considered as ‘supply’ and accordingly, ITC availed by HO shall not be eligible for distribution to other BOs.
• Further, the circular provides that similar to ISD mechanism, the issuance of tax invoice u/s 31 of CGST Act is permissible. Accordingly, it is unclear whether the manner prescribed for distribution of common ITC u/s 20 for ISD, is also required to be followed while distributing common expenses from HO to BO by issuance of tax invoice u/s 31 or whether the valuation in such a case, is required to be done as per Rule 28 of CGST Rules and whether benefit of 2nd proviso to Rule 28 of CGST Rules can be availed?
• The circular provides clarification for distribution of common ITC from HO to BO. However, there may be cases where BO incurs such common third-party expenses which could be attributable to HO or other BOs. In such cases, it appears that similar logic may be applied for distribution of common ITC from BO to HO or other BOs. However, it is not clear in the circular.
• Further, it is important to note that the Council has recommended that amendment may be made in GST law to make ISD registration mandatory prospectively.

Currently, there are many taxpayers who have not registered ISD and accordingly, the government should provide suitable time for updating of their systems/processes before making the ISD mechanism mandatory through amendment in GST law.

On the other hand, taxpayers may have to re-visit the internal processes in place to ensure future ready for implementing the ISD mechanism.

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