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The mechanism to distribute ISD credit read with clause 2 to Schedule I of CGST Act (i.e., inter-branch services) allows the organisation to avoid the ISD and optimize the utilisation of input tax credit (ITC). Let us analyse how.

Let us first understand who is an input service distributor?

As per Section 2(61) of CGST Act, Input Service Distributor is an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services and issue a prescribed document for the purpose of distributing the credit of tax paid on the such services to a supplier having the same Permanent Account Number as that of the said office (i.e., to its own recipient office);

By applying the above definition to an Organisation, its offices such as Head office, Branch Office, Central Office, Support Offices - Marketing Offices, Backend offices, Shared Service offices etc., may come under the purview of Input Service Distributor. An Organisation may have their customers spread across different States and may have a number of such offices which may be treated as ISD and consequentially requiring every such Office to raise ISD invoices.

Manner of distribution prescribed under the CGST Act/Draft Rules

Rule 4 of Draft Input Tax Credit Rules read along with Section 20, states the manner in which ITC shall be distributed-.

The credit of tax paid on input services attributable to a recipient shall be distributed only to that recipient;

The credit of tax paid on input services attributable to more than one recipient shall be distributed amongst such recipients to whom the input service is attributable on the basis of the turnover in a State or UT, during the relevant period, to the aggregate of the turnover of all such recipients.

ITC available for distribution in a month shall be distributed in the same month. (There is no clarity in the Draft Rules as to the consequences of non-distribution in the same month).

Input Service Distributor shall segregate and distribute eligible ITC and ineligible ITC separately.

ITC on account of CGST, SGST, UTGST and IGST shall be distributed separately.

The input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient;

The input tax credit on account of central tax and State tax shall,

  1. In respect of a recipient located in the same State, amount shall be distributed as input tax credit of central tax and State tax respectively;
  2. In respect of a recipient located in a State other than that of ISD shall be distributed as integrated tax.

The Input Service Distributor shall issue ISD Credit note, for reduction of credit, in case the credit is already distributed.

(Any denial of credit due to mismatch may lead to raising of ISD credit note- which adds complexities and compliance burden)

Question- Is there any sustainable way to avoid ISD mechanism?

Maybe Yes!!

What if the ISD use the credit rather than distributing it?

For analysing this option, the concept of inter-branch service need to be understood and it would be appropriate to take a note of following provisions of law.

Schedule I of CGST Act-

Clause 2 states that the supply of goods or services or both between related persons or between the distinct persons, as specified in Section 25 when made in the course or furtherance of business to be treated as supply even if made without consideration.

Who can be treated as distinct persons?

Section 25(5) states that a person who has obtained or is required to obtain registration in a State or UT in respect of an establishment, has an establishment in another State or UT, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.

From the above, it can be inferred that different registrations of an establishment are considered as distinct persons in GST. Hence, Input service distribution office and locations to which ITC is supposed to be distributed are distinct persons. These Input Service Distributor Offices supplies services to other locations by way of management advisory and business support


  1. Head office provides business support services to all other locations by way of providing top management advise in the day to day affairs.
  2. Sales office or Marketing office provides sales support services to the supplying locations.
  3. Shared Service office provides business support services by undertaking some of the core business activities on behalf of other locations.

Accordingly, the Head Office/Sales Office/Shared Service Office etc. should raise an invoice for the services supplied to the other locations as per clause 2 to schedule I of CGST act and discharge their tax liability, since they fall under the ambit of distinct persons.

A question may arise what could be the input services for the provision of the above services. The services which are considered to be distributable as ISD, will now be treated as input services for the business support/ management service provided by ISD office (business support/Management advisory Office).

Since the credit is attributable to output service provided by said offices, the question of distribution to their other registrants does not arise.

Next question could be on the determination of value?

As per Rule 2 (a) of Draft Valuation Rules, when supply is made between distinct persons, the value of supply shall be Open Market Value and Proviso to Rule 2 states that if the recipient is eligible for full ITC, then the value declared in the invoice shall be deemed to be Open Market Value.

This would mean that so long as the recipient is eligible for full ITC, the value declared in the invoice is not subjected to scrutiny by the Department.

Raise Invoice to avoid credit blockages:-

As invoice value will not be subject to scrutiny, the value can be fixed in such a way that credit never gets blocked in the State/UT in which such offices are located. In case the credit gets accumulated due to, say, zero-rated supplies (i.e., exports), the invoice value can be fixed at a higher, which allows to utilise the accumulated credit. Since the recipient unit would be eligible for full credit (based upon invoice raised by such support office), the credit gets transferred to other locations. It also eliminates the requirement of applying for refund of accumulated ITC.


Raising of inter-branch service invoice by a centralized office or a shared service office or sales office to other registration, would address the below three key issues.

  • Firstly, it satisfies the requirement under Clause 2 of Schedule I of CGST Act i.e., inter-branch service.
  • Secondly, it allows indirect transfer of ITC without raising an ISD invoice.
  • Lastly, the value can be fixed suitably (can also be ad-hoc) in such a way that credit never gets blocked in any of the State / UT, where such offices are located. 

Disclaimer: The views expressed are strictly of the author and the author is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission in the article.

The author can be reached at ajaykottakota@gmail.com


Published by

ajay kottakota
Category GST   Report

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