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All about Input Service Distributors

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ALL ABOUT INPUT SERVICE DISTRIBUTORS

Introduction

The concept of Input service distributors have been introduced for the Organizations having multiple offices across the across the​​ country and using the common services for the business. For them, Input Service Distributor is an office where all the tax invoices related to input services are received and distributed amongst the recipients of the said services amongst themselves in the​​ prescribed manner as given in the Rule 39(1)(d) of the CGST Rules 2017. It is pertinent to note that this mechanism is used only for the distribution of ITC on account of Input services and not on account of Goods (Inputs or Capital goods) and the PAN should be the same used by the ISD as well as the recipient branches of the Entity.

Registration

For registration under the Input Service Distributors Mechanism, the Head Office or the ISD shall have to take the separate registration for the said unit. Also,​​ there may be a question in the mind of the readers whether multiple ISDs can be made, so in that case, a company can register any number of ISDs in order to distribute ITC in respect of the input services. For the registration, the ISD unit shall have to file the Registration application in serial number 14 of the GST REG 01 as an Input Service Distributor apart from the Normal registration under the Act.

Manner of distribution of ITC

The manner of the distribution has been specified in the Section 20 read​​ with Rule 39. In this, it has been specified that the ISD shall ensure the arithmetical accuracy of the ITC availed and shall have to distribute the ITC in the same proportion in which the common service has been used by the said recipients. It is pertinent to note that the ITC to be distributed only to the recipients of the services and not the other units which have not used the services.

For the manner of distribution of the ITC, in case of the proportion of the ITC to be distributed, the ratio shall be​​ decided on the basis of the aggregate turnover for the previous year preceding the year in which the ITC has been availed or the preceding quarter for the year preceding the month in which the ITC has been availed.

To understand the manner of distribution​​ of ITC, let’s understand the concept of turnover and relevant period:-

  • In case of the recipients having turnover in the preceding financial year from the year in which the ITC has been availed and the unit is operational, the said aggregate turnover of the​​ preceding financial year; or

  • In case of the recipient not having turnover in the preceding financial year from the year in which the ITC has been availed, the aggregate turnover of the last quarter preceding the month in which the ITC has been availed.

For the purpose of Turnover, it is equal to Turnover minus excise duty, state excise duty, central sales tax and VAT i.e. tax levied under entries 84 and 92A of List I of Seventh Schedule and entries 51 and 54 of List II of the Seventh Schedule.

For the method of distribution, the following shall be the manner:-

  • ITC of CGST, SGST/UTGST in respect of recipients located in the same state / Union territory is distributed as CGST and SGST/UTGST.

  • ITC of CGST, SGST/UTGST in respect of recipients located in the different state / UT is distributed as IGST which shall be equal to the CGST and SGST of the credit availed.

  • ITC of IGST shall be distributed as IGST.

 

 

Now we discuss about the manner of the distribution of the ITC.

C1 =​​ (T1 /T) X C

C1​​ = ITC attributable to the respective unit

T = Aggregate of the turnover of all the units, to​​ whom the ITC is attributable

T1​​ = Turnover of the recipient during the relevant period

C = ITC to be distributed

Now lets understand the concept with the help of an example:-

M/s. XYZ Ltd. Is having its head office in Gurgaon and is registered as ISD also​​ for the purpose of distribution the ITC as all the billing has been done from the head office. They have taken the marketing services from an advertising agency worth Rs. 50 Lakhs plus GST @ 18%. Now M/s. XYZ Ltd. has 3 units in Gurgaon, Delhi and Mumbai.

Total turnover for the previous financial year

Unit

Turnover (Rs.)

Gurgaon

1,50,00,000

Delhi

2,50,00,000

Mumbai

4,50,00,000

Solution – Total credit to be distributed = Rs. 9,00,000/-

Total turnover = Rs. 8,50,00,000/-

Ratio

Gurgaon = 1,50,00,000 ÷​​ 8,50,00,000 X 100 = 17.64%

Delhi = 2,50,00,000 ÷ 8,50,00,000 X 100 = 29.41%

Mumbai = 4,50,00,000 ÷ 8,50,00,000 X 100 = 52.95%

Credit to be distributed

Gurgaon = Rs. 9,00,000 X 17.64% = Rs. 1,58,760/-

Delhi = Rs. 9,00,000 X 29.41% = Rs. 2,64,690/-

Mumbai =​​ Rs. 9,00,000 X 52.95% = Rs. 4,76,550/-

Hence, in this manner, the ITC shall be distributed amongst the 3 Units.

Now, in the case of the credit notes to be issued to the recipients in respect of any modification on account of ITC invoice or for any other reason, the same shall be raised by the ISD unit to the recipient in the same manner in which the ITC has been distributed.

For the purpose of filing the GST return for passing the GST credit by the Input Service Distributor, the same shall be done by filing​​ Form GSTR 6 on monthly basis within 13 days from the end of the month in which the credit has to be distributed. Also, it is pertinent to note that the ITC which has been availed shall have to be distributed to the recipient units in the same month. Any further modification in respect of the ITC to be distributed shall be in the form of debit notes and credit notes.

Authored by:-

CA Saurabh Khullar

Founder, Taxcharcha.com

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