Effective April 1, 2025, the Central Board of Indirect Taxes and Customs (CBIC) has mandated significant changes to the Input Service Distributor (ISD) mechanism under the Goods and Services Tax (GST) regime.
These changes, introduced through Notification No. 16/2024-Central Tax dated August 6, 2024, aim to streamline the distribution of Input Tax Credit (ITC) for businesses with multiple GST registrations under a single Permanent Account Number (PAN).
What Is an Input Service Distributor (ISD)?
An ISD is an office of a business that receives tax invoices for input services used by multiple branches or units and distributes the corresponding ITC to those branches. This mechanism ensures that ITC from shared services, such as audit fees, legal consultations, and software subscriptions, is appropriately allocated to the branches that utilize these services.
Key Changes Effective April 2025
- Mandatory ISD Registration: Businesses with multiple GST registrations under the same PAN must register as an ISD to distribute ITC on shared services across branches.
- Scope of ISD Mechanism: The ISD mechanism applies exclusively to input services and not to goods or capital goods.
- Distribution Based on Turnover: ITC must be distributed proportionally based on the turnover of each recipient branch during the relevant period. The formula for distribution is:
C₁ = (t₁/T) × C
Where:- C₁ = ITC allocated to a specific branch
- t₁ = Turnover of the specific branch
- T = Total turnover of all branches
- C = Total ITC available for distribution
- Tax Type Distribution:
- For branches in the same state as the ISD, ITC is distributed as Central GST (CGST) and State GST (SGST).
- For branches in different states, ITC is distributed as Integrated GST (IGST).
Impact of Debit and Credit Notes on ITC Distribution
The issuance of debit and credit notes by suppliers affects the ITC distribution process as follows:
- Debit Notes: If a supplier issues a debit note, indicating an increase in the value of the original invoice, the additional ITC must be distributed to the relevant branches using an ISD invoice in the month the debit note is recorded in GSTR-6.
- Credit Notes: If a supplier issues a credit note, indicating a decrease in the value of the original invoice, the corresponding reduction in ITC must be apportioned among the recipient branches in the same proportion as the original ITC distribution. This adjustment should also be reflected in GSTR-6 for the month in which the credit note is recorded.
It’s crucial to note that if the amount to be reduced exceeds the ITC available for distribution, the excess must be added to the output tax liability of the recipient branch.
Compliance Requirements
To ensure adherence to the new ISD provisions, businesses must:
- Issue ISD Invoices: For distributing ITC, ISDs must issue invoices containing details such as the name, address, and GSTIN of both the ISD and the recipient branch, a unique serial number, date of issue, amount of credit distributed, and the signature of the ISD or authorized representative.
- File GSTR-6: ISDs are required to file Form GSTR-6 by the 13th of the month following the relevant period, detailing the ITC distributed to each branch.
- Maintain Records: Accurate records of all received invoices, distributed ITC, and issued ISD invoices must be maintained for audit and verification purposes.
Handling Ineligible ITC
Ineligible ITC, such as that related to personal expenses or non-business activities, must be tracked separately and should not be distributed to branches. If ineligible ITC is mistakenly distributed, the recipient branch is obligated to reverse the credit along with applicable interest as per Section 50 of the CGST Act.
Preparing for Compliance
Businesses should take the following steps to comply with the new ISD rules:
- Assess Applicability: Determine whether your business receives input service invoices for multiple branches, necessitating ISD registration.
- Implement Systems: Establish systems and processes to accurately track and distribute ITC, including the issuance of ISD invoices and the filing of GSTR-6.
- Train Personnel: Educate finance and accounting teams on the new ISD provisions to ensure proper implementation and compliance.
- Review Contracts: Examine existing contracts with suppliers to understand the potential impact of debit and credit notes on ITC distribution.
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