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Manner of distribution & recovery of ITC by Input Service Distributor in GST [section 20 & 21 of CGST Act] - GST Ready Reckoner - GSTExtract Manner of distribution recovery of ITC by Input Service Distributor in GST [ Section 20 21 of CGST Act ] Purpose concept of ISD Mechanism in GST The concept of ISD under GST is a legacy carried over from the Service Tax Regime. It is important to note that the Input Service Distributor (ISD) mechanism is meant only for distributing the credit on common invoices pertaining to input services only and not goods (inputs or capital goods). Companies may have their head office at one place and units at other places which may be registered separately. The Head Office would be procuring certain services which would be for common utilization of all units across the country. The bills for such expenses would be raised on the Head Office. But the Head Office itself would not be providing any output supply so as to utilize the credit which gets accumulated on account of such input services. Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units. ISD mechanism enables such proportionate distribution of credit of input services amongst all the consuming units. Legal Provision relating to Input Service Distributor Compulsorily Registration:- An ISD will have to compulsorily take a separate registration as such ISD and apply for the same in form GST REG-1 . There is no threshold limit for registration for an ISD. The other locations may be registered separately. Since the services relate to other locations the corresponding credit should be transferred to such locations (having separate registrations) as the output services are being provided there. [ section 24 of CGST Act ] Manner of distribution of credit by Input Service Distributor [ Section 20 of CGST Act ] 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 under rule 39 of CGST Rules . Distribution in same month :- The input tax credit available for distribution in a month shall be distributed in the same month. An ISD will have to file monthly returns in GSTR-6 within thirteen days after the end of the month. Ineligible or eligible ITC to be distributed separately:- An ISD shall separately distribute the amount of eligible input tax credit and the amount of ineligible input tax credit (under the provisions of section 17(5) or otherwise). the input tax credit on account of central tax, State tax, Union territory tax and integrated tax shall be distributed separately in accordance with the provisions of clause (d); Distribution of credit on the basis of turnover[ Rule 39 clause (d) of CGST Rules] :- the input tax credit that is required to be distributed in accordance with the provisions of clause (d) and (e) of section 20(2) to one of the recipients R1 , whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, C1 , to be calculated by applying the following formula - C1 = (t1 T) C where, C is the amount of credit to be distributed, t1 is the turnover , as referred to in section 20, of person R1 during the relevant period, and T is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of section 20; The input tax credit on account of central tax and State tax or Union territory tax in respect of recipient located in the same state shall be distributed as central tax and State tax or Union territory tax respectively. The input tax credit on account of central tax and State tax or Union territory tax shall, in respect of a recipient located in a State or Union territory other than that of the ISD, be distributed as integrated tax and the amount to be so distributed shall be equal to the aggregate of the amount of input tax credit of central tax and State tax or Union territory tax that qualifies for distribution to such recipient. The input tax credit on account of integrated tax shall be distributed as integrated tax. The Input Service Distributor may distribute the credit subject to the following conditions, namely:- An ISD has to issue an ISD invoice, as prescribed in rule 54 of the CGST Rules, 2017 , clearly indicating in such invoice that it is issued only for distribution of input tax credit. the amount of the credit distributed shall not exceed the amount of credit available for distribution; the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient; 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; 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. Other Legal provisions The details in the returns will be made available to the respective recipients in their GSTR 2A. The recipients may include these in its GSTR-2 and take credit. An ISD shall not be required to file Annual return. An ISD cannot accept any invoices on which tax is to be discharged under reverse charge mechanism. If ISD wants to take reverse charge supplies, then in that case ISD has to separately register as Normal taxpayer. This is because the ISD mechanism is only to facilitate distribution of credit of taxes paid. The ISD itself cannot discharge any tax liability (as person liable to pay tax) and remit tax to government account. Turnover , shall bein relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entries 84 and 92A of List I of the Seventh Schedule to the Constitution and under entries 51 and 54 of List II of the Seventh Schedule to the Constitution. Note :- Entry 84: - Duties of excise on all excisable goods manufactured or product in India Entry 92A: - Tax on inter-state sale (CST) Entry 51: - State Excise duty on liquor, opium etc. Entry 54: - Taxes on the sale or purchase of goods other than state supply Relevant period shall be if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; if some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed. Manner of recovery of credit distributed in excess [ Section 21 of CGST Act ] Where the Input Service Distributor distributes the credit in contravention of the provisions contained in section 20 of CGST Act resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest, and the provisions of section 73 or section 74 , of CGST Act as the case may be, shall, mutatis mutandis , apply for determination of amount to be recovered. Clarifications of issues under GST related to recovery of excess Input Tax Credit distributed by an Input Service distributor Circular No. 71/45/2018-GST 26th October, 2018 Qus. Representations have been received regarding the manner of recovery of excess credit distributed by an Input Service Distributor (ISD) in contravention of the provisions contained in section 20 of the CGST Act. Ans. 1. According to Section 21 of the CGST Act where the ISD distributes the credit in contravention of the provisions contained in section 20 of the CGST Act resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from such recipients along with interest and penalty if any. 2. The recipient unit(s) who have received excess credit from ISD may deposit the said excess amount voluntarily along with interest if any by using FORM GST DRC-03 . 3. If the said recipient unit(s) does not come forward voluntarily, necessary proceedings may be initiated against the said unit(s) under the provisions of section 73 or section 74 , of the CGST Act as the case may be. FORM GST DRC-07 can be used by the tax authorities in such cases. 4. It is further clarified that the ISD would also be liable to a general penalty under the provisions contained in section 122(1)(ix) of the CGST Act. Examples Example 1:- The Corporate office of ABC Ltd., is at Bangalore, with its business locations of selling and servicing of goods at Bangalore, Chennai, Mumbai and Kolkata. Software license and maintenance is used at all the locations, but invoice for these services (indicating CGST and SGST) are received at Corporate Office. Since the software is used at all the four locations, the input tax credit of entire services cannot be claimed at Bangalore. The same has to be distributed to all the four locations. For that reason, the Bangalore Corporate office has to act as ISD to distribute the credit. If the corporate office of ABC Ltd, an ISD situated in Bangalore receives invoices indicating ₹ 4 lakh of Central tax, ₹ 4 lakhs of State tax and ₹ 7 lakh of integrated tax, it can distribute central tax, State tax as well as integrated tax of ₹ 15 lakh as credit of integrated tax amongst its locations at Bangalore, Chennai, Mumbai and Kolkata through an ISD invoice containing the amount of credit distributed. So in what ratio will the credit be distributed by the ISD? In that case :- The credit has to be distributed only to the unit to which the supply is directly attributable to. If input services are attributable to more than one recipient of credit, the distribution shall be in the pro-rata basis of turnover in the State/Union Territory. For example, if an ISD has 4 units across the country. However, if a particular input service pertains exclusively to only one unit and the bill is raised in the name of ISD, the ISD can distribute the credit only to that unit and not to other units. If the input services are common for all units, then it will be distributed according to the ratio of turnover of all the units. The following illustration will clarify the issue Example 2:- M/s XYZ Ltd, having its head Office at Mumbai, is registered as ISD. It has three units in different states namely Mumbai , Jabalpur and Delhi which are operational in the current year. M/s XYZ Ltd furnishes the following information for the month of July, 2017 asks for permission to distribute the below input tax credit to various units. i. CGST paid on services used only for Mumbai Unit: Rs.3,00,000/- ii. IGST, CGST SGST paid on services used for all units: Rs.12,00,000/- Total Turnover of the units for the Financial Year 2015-16 are as follows: - Unit Turnover (Rs.) Total Turnover of three units = ₹ 10,00,00,000 Turnover of Mumbai unit =Rs. 5,00,00,000 (50%) Turnover of Jabalpur unit = ₹ 3,00,00,000 (30%) Turnover of Delhi unit = ₹ 2,00,00,000 (20%) Computation of Input Tax Credit Distributed to various units is as follows: Particulars Credit distributed to all units Total credit available Mumbai Jabalpur Delhi CGST paid on services used only for Mumbai Unit. 3,00,000 3,00,000 0 0 IGST, CGST SGST paid on services used in all units-Distribution on pro rata basis to all the units which are operational in the current year 12,00,000 6,00,000 3,60,000 2,40,000 Total 15,00,000 9,00,000 3,60,000 2,40,000 Note 1: Credit distributed pro rata basis on the basis of the turnover of all the units is as under: - a) Unit Mumbai: (5,00,00,000/10,00,00,000) *12,00,000 = ₹ 6,00,000 b) Unit Jabalpur: (3,00,00,000/10,00,00,000) *12,00,000 = ₹ 3,60,000 c) Unit Delhi: (2,00,00,000/10,00,00,000) *12,00,000 = ₹ 2,40,000 Conclusion: Thus the concept of ISD is a facility made available to business having a large share of common expenditure and billing/payment is done from a centralized location. The mechanism is meant to simplify the credit taking process for entities and the facility is meant to strengthen the seamless flow of credit under GST.
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