INPUT SERVICE DISTRIBUTOR IN GST & CHANGES BY FINANCE ACT, 2024

[Dr. Sanjiv Agarwal]

The concept and provision in relation to input service distributor or distribution (ISD) are stipulated in CGST Act, 2017. The following provisions exist:

Section	Provides for
2(61)*	Definition of Input Service Distributor (ISD)
20*	Manner of Distribution of Credit by Input Service Distributor
21*	Manner of Recovery of Credit Distributed in Excess

*Substituted by Finance Act, 2024 (Act No. 8 of 2024) to be effective from a notified date.

These changes are:

• Amendment in the definition of Input Service Distributor (ISD) [Section 2(61) of the CGST Act] - ISD to include distribution of ITC in respect of services, tax on which is liable to be paid under reverse charge mechanism.
• Amendment in the manner of distribution of ITC by the ISD (Section 20 of the CGST Act)- Any office of the Registered Person which receives common ITC will be mandatorily required to be registered as ISD and than distribute the ITC to distinct persons; Freedom will be provided for distribution of ITC of CGST as CGST or IGST and the ITC of IGST as IGST or CGST - at the option of ISD person transferring the ITC to distinct person; Time limit and conditions for distribution of ITC by ISD to be prescribed in Rules.

Meaning of Input Service Distributor [Section 2(61)]

As per section 2(61), “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.

The term ‘Input Service distributor’ has been defined in section 2(61) of the GST Act to mean:

1. An office of the supplier of goods and/or services or both,
2. Which receives tax invoices issued under Section 31,
3. Towards receipt of input services ,
4. Who issues tax invoices or such other documents for distributing the credit of CGST, SGST, IGST paid on such services,
5. To supplier of taxable goods and services having same PAN as that of such office.

For the purpose of distribution of such credit, such ISD shall be treated as supplier of services.

Thus, an ISD could be understood as a corporate or any such office of a multi unit registered dealer where the corporate of any such office known as ISD is providing service to other units having the same PAN, which are involved in supply of taxable goods and/or services. The ISD is entitled to take credit of services used by it and further, ISD has been made eligible for distributing the credit of ITC so accumulated to various other units proportionately.

Amendment made by Finance Act, 2024

Definition of “Input Service Distributor under Section 2(61) has been substituted by Finance Act, 2024. Accordingly,

“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.

The definition has been substituted keeping in mind the amendment in manner of distribution of credit by the ISD in section 20 of the Act.

The definition of ISD brings in the following changes:

1. Reference to tax invoice under section 31 has been omitted.
2. Issuance of prescribed document for the purpose of distribution of credit of various taxes has been omitted.
3. Invoices to include invoices in respect of services liable to tax under section 9(3) or 9 (4) i.e., on reverse charge basis, for or on behalf of district persons.
4. ISD shall be liable to distribute input tax credit as per section 20 of the Act.

Manner of Distribution of ISD (Section 20)  

Section 20 provides for an “Input Service Distributor” who shall distribute the credit of input tax in prescribed manner and subject to specified conditions.

In case various units of the ISD are located in the same State where such ISD is located, it will distribute the input tax credits of CSGST and SGST in the following manner:

1. As per rule 39 of the CGST Rules, in case recipient units are located in the same State as that of ISD, then the CGST and SGST credits will be distributed as CGST and SGST credits to different recipient units.
2. As per rule 39 of the CGST Rules, in case recipient units are located in different states than the location of ISD, than the credits of CGST and SGST will be distributed as IGST among various recipient units.
3. The input tax credit of integrated tax (IGST) shall be distributed as input tax credit of IGST to every recipient.

The Input Service Distributor (ISD) has to comply with the following conditions as laid in section 20(2) of the CGST Act:

1. The credit can be distributed by issue of invoice or any other prescribed document, such document will contain details as may be prescribed.
2. The amount of credit distributed shall not exceed the amount of credit available with ISD.
3. The credit of tax on some services attributable to a recipient will be distributed to that recipient only.

The input tax credit has to be distributed by ISD in reference to turnover of the recipient units in the relevant period. The relevant period has been defined in explanation to section 20(2) of the GST Act as to mean:

1. All recipient having turnover in the preceding financial year – Financial year preceding the current period for which input tax credit is required to be distributed.
2. All recipients not having turnover in the preceding financial year – the last quarter preceding the period for which input tax credit is required to be distributed.

Amendment made by Finance Act, 2024

The manner of distribution of credit by an ISD under Section 20 has been substituted to be  as follows:

(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.

As a consequence, following shall follow:

1. 1. Distribution of common credit shall become mandatory
   2. Recipient of common input tax credit shall have to be mandatorily registered as ISD
   3. Common credit shall be distributed to distinct persons as per section 25 of Act
   4. ISD shall also be applicable to services covered under reverse charge mechanism
   5. Will require changes in record keeping & accounting and require new compliance obligations.
   6. Cross charge option will become a matter of past.

End Note

The amendment seeks to make distribution of input credit on common inputs or based on cross charge mandatory by a ISD. This will bring in uniformity across the taxpayers rather than having an option to distribute or not. However, such mandatory ISD will apply prospectively only and not affect the pre-amendment periods.

Once the new provisions are notified for implementation, necessary changes in GST rules will also be notified to facilitate ISD registration and filing of returns by ISD. This change may also bring clarity between ISD and cross charge.