Input Service Distribution: Make input tax credit distribution simpler

Topics:

1. What is Input Service Distributor(ISD)?
2. Conditions to be followed by Input Service Distributor.
3. Eligible documents issued by Input Service Distributor.
4. Procedure for distributing input service credit.
5. Adjustment of credit after distribution of credit
6. Formula for distribution of ISD credit.
7. Credit which cannot be transferred through ISD route.
8. What to do if excess credit is distributed?
9. Conclusion

 

1.What is an Input Service Distributor?

Input service Distributor is an entity who is engaged in accruing and distributing Goods and Service Tax credit to other branches of the same company. During the course of business it is a normal practice that the vendors raise all the bills to the head office of a company instead of the unit where the actual supply is taking place. The credit of tax paid on such bills cannot be taken directly by the manufacturing or service providing units. Instead the head office is required to take ISD (Input Service Distributor) registration and pass on the credit to the respective branches.

There may also be a situation where the head office is carrying on marketing and management activities for all the units. Here expenditure is incurred by the head office in housekeeping service, security service, software maintenance service and others. The input tax credit is available on such services. However such credit cannot be utilized by the head office directly as all the output supplies are from the units and no taxability arises here. In such a scenario the head office distributes the credit so accumulated among all the units from where the supply is taking place.

2.Conditions to be followed by Input Service Distributor

The following conditions needs to be followed by the Input Service Distributor

• The PAN (Permanent Account Number) of the Input Service Distributor shall be same as that of the units where the input tax credit is distributed.
• Input Service Distributor shall have separate registration from all other units.
• All the units where credit is distributed must be taxable suppliers.
• The ISD can distribute credit only from input services. Credit pertaining to inputs cannot be distributed by this route.
• The Input Service Distributor cannot distribute credit on account of Goods and Service Tax payment on Reverse Charge Mechanism.

 

3.Eligible documents issued by Input Service Distributor.

There are three documents that can be issued by an Input Service Distributor to distribute credit. These are as follows:

• Input Service Distributor invoice
• Credit note issued by an Input Service Distributor
• Any other documents issued by Input Service Distributor containing details as per Section 54 (1) of Central Goods and Service Tax Rules, 2017.

4.Procedure for distributing input service credit.

The following procedures shall be maintained while distributing any Input Service Credit

• Input Tax Credit available with the Input Service Distributor in a particular month shall be distributed in the same month.
• Here the Input Service Distributor furnishes the details of distributed input tax credit in FORM GSTR-6.
• The eligible credit and ineligible credit shall be distributed separately.
• The Input Service Distributor distributes the credit on account of Central Tax, State Tax, Union Territory Tax and Integrated Tax separately.
• There is a particular formula prescribed for distributing of input tax credit among the units which you will read in the next section. The credit so deduced shall be distributed to the units after issuance of the eligible documents as already discussed.

5.Adjustment of credit after distribution of credit

There may be two situations

• If additional amount of Input Tax Credit is available on account of issuance of debit note then the Input Service Distributor distributes the credit in the same month in which the debit note is issued. The same shall be included in FORM GSTR-6 for that period.
• Sometimes credit notes are issued. In such a case the Input Tax Credit distributed is reduced. Now the Input Service Distributor is required to apportion the credit so reduced among all the units in the same manner in which the credit was previously distributed. Further the credit shall be reduced in GSTR -6 for the month. If the amount could not be adjusted in GSTR-6 then the amount of credit required to be reduced shall be added to the output tax liability.

6.Formula used for distribution of ISD credit.

There are two sets of rules for this section

1. If the credit available for distribution to a particular unit (recipient) then the credit is transferred only to that unit.
2. If the credit available for distribution to more than one units or all the units then the distribution shall be made on pro rata basis based on the turnover of that unit in that state or union territory.

Let C= amount of credit to be distributed,

T1= turnover of unit 1 in its state/ union territory in the relevant period

T = Aggregate turnover of all recipient in the relevant period.

Now if, C1= credit distributable to unit 1 then,

C1= C x (T1 / T)

 

In this formula there is an important word ‘relevant period’. Let us define it for clarity. So relevant period shall be

• The preceding year to the year when the credit is distributable to the recipients if the recipients have any turnover in the previous year.
• If there is no turnover of the recipient in the preceding year, then the last quarter for which the details of turnover is available with the recipient.

 

7.What credits are not eligible for transfer through Input service distribution?

• The input tax credit pertaining to the inputs cannot be transferred through Input Service Distribution.
• The credit pertaining to payment under reverse charge mechanism cannot be transferred through this mode.

8.What to do if excess credit is distributed?

If the Input Service Distributor distributes excess credit in contravention of the available provisions then the excess credit shall be reversed along with applicable interest.

7.Conclusion

The importance of Input Service Distribution is important as it help to greatly set off your tax expenses. There are many businesses that have input tax credit lying in input services but they are unaware of this avenue. By understanding this concept they can utilize the money already present with them in the form of credit and get the maximum out of it.