Unlocking The Role Of Input Service Distributor Under GST

An input service distributor under GST is a tax payer who needs to distribute input tax credit that pertains to GSTIN. They pertain it to its various units and branches that comprises of different GSTINs but are registered under similar PAN. 

An input service distributor under GST is a very confusing concept and you need to get through the details of it. Without knowing the facts things can become more complex and complicated for you. 

In the 50th GST council meeting the circular can be issued where it is clearly stated that ISD mechanism is not mandatory in all the cases. Additionally, this can boost the scope of your brand value to a greater level. 

Who Is An Input Service Distributor Under GST? 

An Input Service Distributor  under GST (Goods and Services Tax) is a business entity that helps you to receive invoices for input services and distributes the input tax credit (ITC) to its branches or units having the same PAN (Permanent Account Number) but different GST registrations.

Key Features of an Input Service Distributor (ISD):

• Acts as a Middle Entity: The ISD does not provide outward supplies but only distributes ITC on input services to its branches.
• Only Input Services Allowed: ISD can distribute ITC only on input services, not on goods.
• Same PAN, Different GSTINs: ITC can be distributed only to units registered under the same PAN but having different GSTINs.
• Separate Registration Required: An ISD must obtain a separate GST registration, distinct from its regular business registration.
• Proportional ITC Distribution: ITC is distributed based on the turnover of each unit.

Situations Where ISD Is Not Applicable 

There are certain situations where the input service distributor is not applicable. In most of the cases, the tax payers do not know that. So, let’s get through the details to have a clear insight to it. 

1. ITC On The Goods Cannot Be Distributed 

ISD can only distribute ITC on input services, not on inputs (raw materials) or capital goods.

Example: If a head office purchases machinery, it cannot distribute ITC related to this purchase to its branches.

2. Single GST Registration No Need For ISD 

If a business operates under a single GSTIN (same state, same registration), there is no need for an ISD mechanism. Example: A company with multiple departments but a single GST registration can directly claim ITC without using ISD.

3. Outward Supply Of Goods And Services By ISD 

An ISD cannot engage in outward supply of goods or services. Example: If the head office also makes sales or provides services, it must obtain a regular GST registration, not an ISD registration.

4. Distribution Of ITC To Entities With Different PAN  

ISD can distribute ITC only among branches having the same PAN but different GST registrations. Example: If a parent company wants to distribute ITC to its subsidiary (with a different PAN), ISD is not applicable.

5. Distribution Of ITC For Non Taxable Or Exempt Supplies 

ITC related to exempt, non-taxable, or non-business activities cannot be distributed through ISD. Example: If a head office incurs expenses related to exempt supplies, such ITC cannot be passed to branches.

6. ISD Registration Is Not Mandatory For All Business 

A business receiving input services can choose not to register as an ISD and instead claim ITC directly if eligible under regular GST rules. Additionally, this can boost the scope of your brand value to a greater level. 

Purpose Of Registering Under GST 

There are several purposes for registering under GST. Some of the key factors that you must know from your end are as follows:- 

1. Getting Legal Recognition As The Supplier Of Goods & Services 

Businesses registered under GST get legal recognition and can operate as compliant tax-paying entities. Unregistered businesses cannot collect GST or claim input tax credit. Input service distributor under GST can make things work perfectly well in your favour. 

2. Collection & Payment Of GST 

Only a registered business can collect GST from customers and pass on the credit to buyers. Ensures proper tax compliance and helps businesses avoid penalties.Input Service distributor under GST. 

3. Availiment Of Input Tax Credit 

Registered businesses can claim ITC on taxes paid on purchases, reducing the overall tax burden. ITC helps in avoiding tax cascading (tax on tax) and lowers costs. Additionally, this can boost the scope of your business development to a greater level. 

4. Interstate Sales Without Restrictions 

GST registration allows businesses to sell goods or services across states without restrictions. Without GST registration, businesses can only operate within the state under composition schemes.

5. Eligibility For E-commerce Sales 

Businesses selling on e-commerce platforms (Amazon, Flipkart, etc.) must have GST registration. Without GST registration, selling through online platforms is not allowed (except for exempted categories).

6. Compliance With Government Rules 

Registration ensures that businesses are tax compliant and avoid legal actions, fines, and penalties. A GSTIN (GST Identification Number) is mandatory for filing returns, issuing invoices, and claiming ITC.

Insight On ISD Under Earlier Regime & GST Regime 

Conditions To Be Fulfilled By Input Service Distributor Under GST 

There are certain conditions that you need to fulfill being an input service distributor under GST. Some of the key factors that you should be well aware off are as follows:- 

1. Separate Registration ISD 

The ISD must obtain a separate GST registration apart from its regular GST registration (if applicable). It cannot use the same GSTIN as its main business operations. Input Service distributor under GST can make things work perfectly well in your favour. 

2. Distribution Of ITC Only On Input Service 

ISD can only distribute ITC on input services, not on goods or capital goods. Example: ITC on legal, advertising, or software services can be distributed, but ITC on machinery cannot. However, this can boost the scope of your brand value to a greater level. 

3. ITC Can Be Distributed To Units With Same PAN 

The ITC can be distributed only among branches/entities having the same PAN but different GSTINs. It cannot be distributed to a different legal entity.

4. Proportional Distribution Of ITC 

ITC must be distributed in proportion to the turnover of the recipient units in a state/union territory. Example: If Branch A has ₹10 lakh turnover and Branch B has ₹20 lakh turnover, Branch B will receive twice the ITC as Branch A.

5. Only Taxable Units Can Receive ITC 

The recipient unit must be engaged in taxable or zero-rated supplies to be eligible for ITC.

If a unit is engaged in exempt supplies, it cannot claim ITC through ISD. This is one of the crucial aspect of Input Service Distributor under GST. 

6. No Cross Utilization Of ITC For Different Tax Components 

ITC of CGST, SGST, IGST, and UTGST must be distributed separately: IGST ITC can be distributed to any branch. CGST & SGST ITC can only be distributed within the same state. Additionally, this can make the GST process work in the correct order. 

7. Mandatory Issuance Of ISD Invoices 

The ISD must issue a tax invoice when distributing ITC to its units. These invoices must have a unique serial number and mention the GSTIN of both ISD and recipient branches.

Recovery Procedure For Wrongful Distribution Of Credit By ISD 

If an Input Service Distributor (ISD) wrongfully distributes Input Tax Credit (ITC), the GST law has a specific recovery mechanism to correct the error and recover the excess or wrongly distributed credit. The process is as follows:

1. Identification Of Wrongful Distribution 

Wrongful distribution of ITC can occur due to excess credit distributed to a branch. ITC distributed to an ineligible unit (e.g., engaged in exempt supplies).Wrong allocation of IGST, CGST, or SGST (e.g., distributing CGST to a branch in another state).

2. Issuance Of Demand Notice 

If tax authorities detect wrongful ITC distribution during an audit, assessment, or scrutiny, they issue a Show Cause Notice (SCN) to the ISD under Section 73 or 74 of the CGST Act, 2017. Section 73: If the wrongful credit was distributed without fraud or willful misstatement.

Section 74: If the wrongful credit was distributed fraudulently, with intent to evade tax (higher penalties apply).

3. Payment Of Excess ITC Distributed By ISD 

The excess or ineligible ITC wrongly distributed must be reversed by the recipient unit in GSTR-3B. If the ITC has already been utilized, the recipient must pay back the ITC along with interest (18% p.a.).

4. Penalty For Wrongful Distribution 

If wrongful ITC was distributed unintentionally, only interest is payable. If wrongful ITC was distributed fraudulently, a penalty up to 100% of the excess ITC may be levied. Additionally, you must be well aware of the scenarios that can impact the input service distributor under GST. 

5.  Correction In ISD Returns 

If the error is identified by the ISD before tax authorities intervene, it can be corrected in the subsequent GSTR-6 return. However, if ITC has already been utilized by the branch, reversal through GSTR-3B is required.

6.  GST Recovery Proceedings 

If the wrongful ITC is not reversed or paid voluntarily. The department may issue a demand order under Section 79 of CGST Act. The recovery may be done by: Deducting the amount from future ITC claims. Direct bank account attachment. Seizure of assets or property of the ISD.

Final Take Away 

Hence, these are some of the crucial facts about input service distributor under GST that you must be well aware off. If you have any queries left in your mind then you can feel free to get connected with us in this matter. 

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