In a large business entity, there are many expenditures which are incurred by a Central office for better administrative/Internal control or to take advantage of scale etc. Sometimes, it is due to shear convenience that expenses are incurred by one branch for another branch. But, section 16 (1) of the CGST Act (for ready reference text of provision is reproduced as Appendix A) authorises a registered person to avail input credit on any supply of goods or services or both only in case where the Goods or Service or both are either used or are intended to be used in the course or furtherance of his business. In this provision the words used "registered person" and "his business" are very important. A person as defined u/s. 2(84) is required to register himself in each of the State of India if he has business in more than one State and may also voluntarily obtain more than one registration in the same State for his different branches. In such a case every branch having distinct registration number becomes a "registered person" known as "distinct person" as per Schedule I of CGST Act. In view of the above "his business" shall mean the business of such "distinct person" and not the business of the person or business entity as a whole. It can be appreciated that in view of the above, to allow the trade a facility of seamless ITC, it was necessary to provide for a mechanism for distribution of ITC belonging to different branches of the person.
As per the FAQ on the subject issued by CBIC, the concept of ISD is a facility made available to business having a large share of common expenditure and billing/payment is done from a centralized location. The mechanism is meant to simplify the credit taking process for entities and the facility is meant to strengthen the seamless flow of credit under GST. The meaning of Input Service Distribution or ISD in short As defined u/s. 2 (61) of CGST Act (for ready reference text of provision is reproduced as Appendix B) an ISD means an office of the Supplier which receives tax invoice for input service and issues a document for the purpose of distributing ITC. Some experts have the opinion that to obtain ISD registration, the person must have an office that is not a registered location from where taxable supplies are effected and further cautions not to have overlapping registration as both taxable person and ISD. In their opinion deliberate use of words 'office of supplier' indicates that there is no 'taxable supply' from that office. This opinion does not seem to be correct as there is no bar to have dual registration from the same location the person can have a registration as supplier and also as ISD for the same location. The person can have Corporate Office and the sales and distribution office at the same location, and this is very common.
It is also far from practical, e.g. the Corporate office receives the tax invoice and distribute the ITC, at the same time such Corporate office also provides services of policy making, SOPs, direction, finance, accounting etc. to its branches which are commonly known as Cross services and are required to be billed and GST is required to be paid by such Corporate office in view of Schedule I of CGST ACT. This requires it to register as a supplier. It is obvious that there can not be any supply of Goods or Services under the registration as ISD. It is also relevant to note that it is not necessary for an ISD to be a Head Office, the requirement is of an office which receives invoice for input service (not even necessarily to be for common services) and issues documents for the distribution of ITC. The definition of ISD does not anywhere use the words "common service/s".
Which Tax can be distributed by ISD?
As per Section 20 (1) of CGST Act (for ready reference text of provision is reproduced as Appendix C) and as per the similar provision in respective SGST/UTGST Acts, the ISD can distribute SGST, CGST and IGST. As per FAQs issued by the CBIC CGST can be distributed as IGST for the recipient located in different State and the FAQ further answers that SGST/UGST can also be distributed as IGST for the recipient located in different State. To clarify, the FAQ also mentions the following illustration: The Corporate office of ABC Ltd. is at Bangalore, with its business locations of selling and servicing of goods at Bangalore, Chennai, Mumbai and Kolkata. Software license and maintenance is used at all the locations, but invoice for these services (indicating CGST and SGST) are received at Corporate Office. Since the software is used at all the four locations, the input tax credit of entire services cannot be claimed at Bangalore. The same has to be distributed to all the four locations. For that reason, the Bangalore Corporate office has to act as ISD to distribute the credit. If the corporate office of ABC Ltd, an ISD situated in Bangalore receives invoices indicating Rs. 4 lakh of Central tax, Rs.4 lakhs of State tax and Rs. 7 lakh of integrated tax, it can distribute central tax, State tax as well as integrated tax of Rs. 15 lakh as credit of integrated tax amongst its locations at Bangalore, Chennai, Mumbai and Kolkata through an ISD invoice containing the amount of credit distributed. Conditions specified for distribution of ITC by ISD As provided by section 20 (2) of CGST Act a. the credit can be distributed to the recipients of credit against a document containing such details as prescribed under rule 36 of CGST Rules (the rule is not reiterated for paucity of space)
b. the amount of the credit distributed should not exceed the amount of credit available for distribution
The proportion in which ITC can be distributed of ITC by ISD As per provision of section 20 (2) of the CGST Act a. the credit of tax paid on input services is attributable to a single branch, the credit shall be distributed only to that branch.
b. If the credit of tax paid on input service is attributable to more than one branch whether registered or not or even engaged in supply only of exempted goods/services but not the all branches, the credit shall be distributed pro rata on the basis of their turnover in the relevant period.
c. If the credit of the tax paid on input service is attributable to all the branch whether registered or not or even engaged in supply only of exempted goods/services, the credit shall be distributed pro rata on the basis of the turnover of the all such branches for the relevant period The relevant period as per explanation to the section 20 of CGST shall be:
a. the financial year preceding the year during which credit is to be distributed in case all the recipients of credit have turnover during the preceding Financial year, or
b. last quarter preceding to the month for which credit is to be distributed in case turnover of one or more recipient of credit for the preceding financial year is not available Interestingly, suppose Company XYZ having branches at Chennai, Jaipur, Ahmedabad and Bangalore and HO as Bangalore incorporated in month of April 2020 registers all the branches as distinct persons in May 2020 and HO also as ISD in month of May 2020. What shall be the relevant period for distribution of input credit received in the month of May 2020?
For detailed Procedure for distribution of Input Credit by ISD please refer to rule 39 of the CGST Rules. I shall only mention that the provision of rule 39 (a) directs the ISD to distribute ITC in the same month. This clause is a restrictive clause and in my opinion in excess of power to make rules a granted by section 20 read with section 164 of the CGST Act. Caution The Services which are attributable to respective branches should not be misunderstood with the Service which are required to be billed to various branches for services rendered to them e.g. accounting and administrative service.
Some example of attributable services:
1. AMC of ERP software,
2. Insurance Expenses for stock insurance, health insurance of employees, transit insurance etc.
3. Statutory Audit Expenses
4. ISO audit fee
Some examples of services which are not attributable:
1. Insurance of HO Building
2. Bank Charges for Corporate credit limits
3. Security Agency expenses for Corporate office Security I shall be obliged for your comments and suggestions.
Appendix A 16.
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Appendix B (61) "Input Service Distributor" means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office; Appendix C 20.
(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely: - -
(a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for distribution;
(c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient;
(d) the credit of tax paid on input services attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period;
(e) the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.
Explanation. - - For the purposes of this section, - -
(a) the "relevant period" shall be- -
(i) if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or
(ii) if some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed;
(b) the expression "recipient of credit" means the supplier of goods or services or both having the same Permanent Account Number as that of the Input Service Distributor;
(c) the term ''turnover'', in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entry 84, entries 84 and 92A of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule.