The Central Board of Indirect Taxes and Customs (CBIC) has clarified that recipients of input tax credit distributed through an Input Service Distributor (ISD) are responsible for meeting the eligibility conditions under Sections 16 and 17 of the Central Goods and Services Tax Act, 2017, and making applicable credit reversals.
The Board has addressed seven issues concerning ISD registration, the timing of credit distribution, liability for irregular distribution, and the treatment of credit transferred to an ISD for turnover and refund calculations.
The circular also clarifies that documents issued by a regular GST registrant to transfer credit to an ISD under Rule 54(1A) represent a credit transfer mechanism. The amounts reflected in those documents do not constitute the issuing registrant’s outward turnover, while the credit transferred cannot be included in that registrant’s “Net ITC” for specified refund calculations.
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Issued under Section 168(1) of the CGST Act, the clarification follows representations from trade and industry and seeks to ensure uniform implementation across field formations.
ISD registration depends on receipt of invoices on behalf of distinct persons
The Board has clarified that there is no bar on obtaining more than one ISD registration within the same State or Union Territory for separate business verticals or places of business.
Where separate GST registrations have been obtained, the registrants are treated as distinct persons under the CGST Act. Each such registrant receiving input service invoices for or on behalf of distinct persons, where the corresponding credit is required to be distributed under Section 20, must obtain ISD registration.
The clarification therefore links the registration requirement to the receipt of relevant input service invoices and the obligation to distribute credit. The existence of separate business locations alone is not stated as the trigger.
The Board has also emphasised that an ISD must distribute credit only to the distinct persons to whom it is attributable, in accordance with Rule 39(1).
Recipients must establish ITC eligibility
Addressing whether the ISD or the recipient must comply with the conditions for availing credit, CBIC has drawn a distinction between distributing credit and establishing entitlement to it.
The ISD is required to distribute credit in the manner prescribed under Section 20. The recipients must comply with the eligibility conditions under Sections 16 and 17 and the relevant rules.
Accordingly, the distribution of credit through an ISD does not, by itself, establish the recipient’s entitlement to avail it. The recipient remains responsible for examining whether the statutory conditions are satisfied.
Irregular distribution can attract penalty on ISD and recovery from recipients
The circular separately explains the consequences of distributing credit in contravention of Section 20.
An ISD making an irregular distribution is liable to penalty under Section 122(1)(ix). The provision prescribes a penalty of ₹10,000 or an amount equivalent to the tax evaded or input tax credit distributed irregularly, whichever is higher.
Where the contravention results in excess distribution to one or more recipients, the excess credit is recoverable from those recipients, along with interest, under Section 21.
The applicable provisions of Section 73, Section 74 or Section 74A, as the case may be, govern determination of the recoverable amount.
The clarification thus identifies separate consequences for the distributor’s failure to follow the distribution rules and the recipient’s receipt of excess credit.
When does credit become available for monthly distribution?
CBIC has also addressed the requirement under Rule 39(1)(a) that credit available for distribution in a month must be distributed in that month.
According to the circular, once input service invoice details are received in the ISD’s FORM GSTR-6A, the credit becomes available for distribution when the ISD ascertains that it is prima facie eligible for availment.
The ISD must distribute the credit in the month in which it makes that ascertainment and report the details in FORM GSTR-6.
The Board explains that, although an ISD does not itself avail the credit, it receives the invoices for centrally procured services and is therefore best placed to undertake this initial assessment.
At the same time, Rule 39(1)(g) requires eligible and ineligible credit, including credit ineligible under Section 17(5) or otherwise, to be distributed separately. The circular reiterates that this segregation must be maintained.
This preliminary assessment by the ISD operates alongside the recipient’s responsibility to satisfy the statutory eligibility conditions.
Credit reversals must be made by recipients
The Board has clarified that the ISD should distribute the entire credit available for distribution to the recipients to whom it is attributable.
The recipients must then make any applicable reversals under:
- Section 17(1) or Section 17(2), read with Rules 42 and 43; or
- Section 17(4), read with Rule 38.
The clarification places the responsibility for these reversals at the recipient level, where the applicable restrictions on credit must be assessed.
Credit transfer documents do not form part of outward turnover
A substantial part of the circular concerns Rule 54(1A), which permits a regular registrant having the same PAN and registered in the same State as the ISD to issue an invoice, credit note or debit note for transferring relevant input service credit to the ISD.
The Board explains that this mechanism facilitates payment of reverse charge tax by the regular registration before the resulting credit is transferred to the ISD for further distribution.
Although the taxable value shown in the transfer invoice must correspond to the value of the services whose credit is being transferred, the document does not represent an outward supply by the issuing registrant.
Consequently, the amount reflected in such an invoice, debit note or credit note does not qualify as “turnover in State” or “turnover in Union territory” under Section 2(112).
This remains the position even where the document is required to be declared in FORM GSTR-1 to transmit the details to the ISD.
Exclusion applies to ISD allocation and refund turnover calculations
CBIC has clarified that these credit transfer amounts must be excluded when computing turnover for determining the credit distributable to a recipient under Section 20 read with Rule 39.
The amounts must also be excluded from “adjusted total turnover” for determining the maximum permissible refund under Section 54(3) read with Rule 89.
The clarification prevents a credit transfer entry from being treated as the issuing registrant’s outward turnover for these calculations.
Transferred credit cannot be included in the transferor’s Net ITC
The circular further states that input service credit attributable to distinct persons and transferred under Rule 54(1A) does not constitute credit relating to the inward supplies of the regular registrant transferring it.
The registrant is required to pass that credit to the ISD as such.
Accordingly, the transferred credit does not qualify as “Net ITC” in the hands of that registrant for calculating refunds under Rule 89(4) or Rule 89(5).
This clarification concerns the registrant transferring credit to the ISD; it does not dispense with the eligibility requirements applicable to the eventual recipients.
Regular registrant must transfer entire reverse charge credit
The Board has also clarified that the regular registrant transferring the relevant credit under Rule 54(1A) is not required to make reversals under Sections 17(1), 17(2) or 17(4) before transferring it.
Instead, the registrant must transfer the entire credit available on account of its payment of reverse charge tax to the ISD for distribution.
The eventual recipients must undertake the applicable reversals.
CBIC expressly notes that the recipients may include the same regular registrant that initially transferred the credit to the ISD. If credit is subsequently distributed back to it, its obligations as a recipient will apply.
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