The introduction of Input Service Distributor (ISD) provisions under India’s Goods and Services Tax regime has brought much needed clarity on distribution of input tax credits for various centralized procurement services.
In this in-depth guide, we will demystify key concepts relating to ISD under GST to help businesses utilize it optimally for managing credit flow.
What is ISD Under GST?
Input Service Distributor (ISD) refers to an office or department that receives and distributes common input services within an organization. ISD mechanisms under GST allow large businesses with centralized procurement to efficiently allocate input tax credits.
For instance, a corporate headquarters securing audit services or a shared services center obtaining IT support services centrally for the entire company.
The ISD provisions enable them to distribute the input credits from such services to various operating units across states who actually consume them. This avoids duplication of taxes.
Need for ISD Under GST
- Large organizations have centralized departments to procure common services centrally to gain economies of scale.
- These input services like HR, IT support, legal, rent etc. are distributed across units in different locations.
- Under the earlier tax regime, cross-utilization of credits for such services attracted taxes. ISD enables seamless flow of input credits.
- It results in efficient credit utilization without tax cascading. Units can set off available credits on output GST.
Registration Requirements for ISD
- ISD departments must obtain a separate registration as ISD under the goods and services tax by filing the GST REG-1 application form.
- This registration is independent of other GST registrations obtained by operating units of the company.
- Separate registration is required since ISD acts like a distinct person for input credit distribution.
- An entity with operations across all states can still have a single centralized ISD registration.
Key Provisions for ISD Under GST
- ISD mechanisms are governed under Section 20 of the Central Goods and Services Tax Act, 2017.
- Registered ISDs can procure documents issued under Section 31(3)(f) of CGST Act for distributing input service credit.
- ISD registration is mandatory to distribute common credits, even within the same state. Voluntary registration is allowed.
- The entity who initially procures input services on which ISD redistributes credit must also be GST registered.
- ISD cannot distribute credits on behalf of exempt, composition or non-GST registered entities.
- Both Central GST (CGST) and State GST (SGST) input credits can be distributed by an ISD.
- ISD registration is pan-India. Once registered, it can distribute credit from any state to units in other states.
Conditions to Distribute Credit as ISD
- Invoice for input services must mention ISD specifically.
- Such services must be directly received by the ISD, not just accounting entries.
- All units receiving distributed credit from ISD must also be GST registered.
- ISD mechanisms cannot be used to transfer input credit to outsourced service providers, only own units.
- The credit distribution methodology must reasonable quantify service consumption across entities.
Procedures for Distributing Credit by ISD
Step 1) Receive invoices for input services used by all units
Step 2) Verify that all operational units are GST registered
Step 3) Determine allocation ratios for distributing credits
Step 4) Issue ISD invoice to transfer credits to units as per ratios
Step 5) File monthly GST returns in GSTR-6 to report redistributed credit
Step 6) Ensure recipients account for ISD credit in their GSTR-2
Advantages of ISD Under GST
- Optimizes input tax credits available across all entities in an organization
- Allows cross-utilization of credits on commonly procured input services
- Eliminates cascading taxes on centrally provided services
- Simplifies credit accounting through centralized distribution model
- Removes need for multiple lower-value vendor contracts across units
- Enables consolidated invoice reconciliation and vendor management
Key Considerations for ISD Compliance
- Distribute credit only to units engaged in provision or receipt of taxable goods/services.
- Ensure consistent methodology for allocation - acceptable ratios can be turnover, headcount etc.
- Maintain documentation on criteria used for distribution and actual ratios adopted.
- Redistributed credit cannot exceed total credit available with ISD.
- File GSTR-6 return monthly to report credit distribution details.
- Reconcile GSTR-6 filed by ISD with GSTR-2A of receiving branches.
ISD for Specific Business Models
- Bank Branches: Headquarters receive inputs services like professional consultation, software, rent etc. used by branches. ISD helps distribute credit on these.
- Regional Offices: For companies with state-level offices like for sales, logistics etc. ISD mechanisms enable input tax credit transfer between them.
- Franchises: Franchisor takes centralized services like marketing, branding, HR etc. Credit can be sent to franchisee outlets through ISD.
- Holding Companies: To pass on credit of input services to group subsidiaries or units effectively through ISD route.
The ISD provisions under GST law are specifically designed to address challenges in distributing input tax credits for centralized procurement. Understanding the registration, procedures and documentation requirements is key for effectively harnessing ISD for optimal credit utilization. With the right ISD compliance, large organizations stand to benefit tremendously from integrated credit flows.