In this Article, an attempt has been made to draw the concept of
- Input service distributor (ISD);
- Cross Charge and
- An explanation to ‘what is the best method to adopt in various situations’.
Goods and Services Tax is a levy on supply of goods or services. For the purpose of applicability of GST, the transactions are divided into two;
- Intra state transactions: Intrastate transactions are those where the location of supplier and place of supply are in same state and there will be a levy of Central Goods and Services Tax (CGST) and the State goods and services Tax Act (SGST) of the state in which the supplier is located.
- Inter state transactions: Interstate transactions are those where the location of supplier and place of supply are in different states or transactions of a cross border (supplier is located in India and recipient located outside India or vice versa). In case of inter-state transactions, Integrated Goods and Services Tax (IGST) will be levied and place of Supply shall be determined in accordance with sections 10, 11, 12 and 13 of the Integrated Goods and Services Tax Act, 2017.
Input Tax Credit:
The term Input Tax has been defined under section 2(62) of Central Goods and Services Tax Act, 2017. Accordingly, the term input tax in relation to a registered person means central tax, state tax, integrated tax or union territory tax charged on any supply of goods or services or both made to him and includes
- Integrated goods and services tax paid on import of goods;
- Central tax, state tax and integrated tax payable under reverse charge but does not include the tax paid under the composition levy.
Input Tax Credit as per section 2(63) of the Central Goods and Services Tax, 2017 means the credit of input tax.
Legal Glitch on the utilization of one state`s SGST with the other:
Input tax is defined to include the state tax, central tax, or integrated tax charged on all supplies received by a registered taxable person in the course or furtherance of business or commerce.
The term ‘State Tax’ is defined under Section 2(104) of Central Goods and Services Tax Act, 2017 as the tax levied under any State Goods and Services Tax Act, 2017.
Though it is mentioned under the input tax definition that the state tax is eligible for credit, but on perusal of the respective State goods and Services Tax Act the definition of state tax shall be reproduced as under
"State tax" means the tax levied under this Act- this means that a state input tax credit can be adjusted against that respective state output tax liability only but not with any other state output tax liability. This legal glitch is a hurdle for the concept of free flow of input tax credit and thus, this interpretational issue is referred to Delhi Court for examination in the case of D Pauls Travels and Tours Ltd vs. UOI & Others and the matter is pending for final disposal. As of now, there is a glitch that one state SGST may not be adjusted against another state SGST and vice versa.
A registered person located in Telangana State visits Andhra Pradesh (AP) for official purpose and have incurred the accommodation expenses in a hotel located in AP. As the supply being intrastate because the person supplying the service and place of supply are in AP the hotel will charge the CGST and APSGST. The registered person located in Telangana may not be in a position to avail input tax credit by complying the Telangana State Goods and Services Tax Act,2017.
INPUT SERVICE DISTRIBUTOR:
The term ‘Input Service Distributor’ has been defined under sec2(61) of the Central Goods and Services Tax Act, 2017 which is reproduced as under;
“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.
In view of the above definition of input service distributor, an office of a company can act as input service distributor by way of accumulating the input tax credit on various services received by the company and transferring the credit to other registered units under the same PAN. This is similar to the concept of input service distributor under service tax regime. Though GST laws propose to levy the tax on the supply of goods or services without any distinction, input tax credit relating to goods cannot be distributed under the concept of input service distributor.
Conditions to be satisfied for distribution of input tax credit (Sec-20):
Input service distributor may distribute the credit subject to the following conditions:
- While distributing the credit, input service distributor shall issue a document to the recipient branch indicating that it is issued only for distribution of input tax credit;
- The amount of the credit distributed shall not exceed the amount of credit available for distribution;
- If the credit is attributable to only a particular branch, then the same shall be distributed only to that branch.
- If the credit is attributable to more than one branch, then the same shall be distributed on pro rata based on the turnover in the relevant period in a state or union territory to the aggregate of the total turnover of all branches to whom the input tax is attributable.
Relevant Period: The term relevant period means,
- If the recipient branches of the credit have any turnover during the preceding financial year then the turnover of the preceding financial year is to be considered, or
- if any of the recipient branches don’t have any turnover in the previous financial year then the turnover of the preceding quarter in which details of all the recipient branches are available is to be considered.
Manner of Distribution of Credit under ISD (Rule 39):
Rule 39 of Central Goods and Services Tax Rules, 2017 lays down the procedure for distribution of input tax credit by input service distributor. On perusal of this rule, it provides the manner in which the input tax relating to central tax, state tax, and integrated tax shall be distributed. Two important conditions to be satisfied are reproduced as under;
- Input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient.
- Input tax credit on account of central tax and state tax shall be distributed in the following manner;
- In respect of a recipient located in the same State in which the Input Service Distributor is located, be distributed as input tax credit of central tax and State tax or Union territory tax respectively;
- In respect of a recipient located in a State other than that of the Input Service Distributor, be distributed as integrated tax.
In view of the above-referred manner in which credit is distributed, let us consider the following examples to understand the implications.
- Say, a company is having office in Telangana, Karnataka, Uttar Pradesh. The office in Telangana has obtained registration under input service distributor. The office in Uttar Pradesh has incurred a location or performance specific expenditure viz. hotel expenditure in Hyderabad. In such case, the hotel charges Central Tax and State Tax of Telangana. The Hyderabad office (input service distributor) can take credit of the said expenditure and transfer the same as Integrated Tax to Uttar Pradesh.
- In the above example, if the said expenditure is incurred in Mumbai. The hotel will charge Central Tax and State Tax of Maharashtra. In such case, neither the office in Uttar Pradesh nor the Hyderabad office (input service distributor) can take input tax credit of the same.
- In the above example, if the Company has office even in Mumbai also. Then the hotel expenditure incurred in Mumbai is not for the purpose of Mumbai office business and in the absence of input service distributor registration for Mumbai office, the said expenditure cannot be claimed as input tax credit.
Limitations under Input Service Distributor:
From the above-discussed examples, it can be concluded that there are two limitations under the concept of Input service Distributor:
- Credit relating to goods cannot be distributed under this concept.
- There is a legal glitch that prevents the input service distributor to distribute the credit relating to state tax charged on intra-state supplies that are supplied in a State other than that in which the input service distributor is located.
As discussed in the introduction, GST is a levy on supply of goods and services or both. The word ‘Supply’ is defined under Section 7 of Central Goods and Services Tax Act, 2017 which is reproduced as under,
For the purposes of this Act, the expression “supply” includes -
- All forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of the business;
- Import of services for a consideration of whether or not in the course or furtherance of business;
- The activities specified in Schedule I, made or agreed to be made without a consideration; and
- The activities to be treated as supply of goods or supply of services as referred to in Schedule II.
If we observe the above definition of Supply, it is defined in an inclusive manner which includes all kinds of supply of goods or services undertaken for a consideration by a person in the course or furtherance of business. However, it also includes activities listed in schedule I even in the absence of consideration. On perusal of the activities listed in schedule I, the one relevant in the present context is reproduced as under;
‘Supply of goods or services or both between related persons or between distinct persons as specified in section 25, when made in the course or furtherance of business
It means that any supply of goods or services or both between branches of different states/Union territories in the course or furtherance of business is treated as supply and the transaction shall be valued as per the valuation rules 28, 30 and 31.
The above entry has been inserted in order to satisfy the Consumption-based tax system i.e., the tax shall flow to the state in which the goods or services are consumed. If the same is not treated as supply, then the state in which the supplier is located will be suffering from the revenue loss because when the sale ultimately happens with a third party, the revenue will flow to the state in which the recipient branch is located but the supplier branch shall avail the input tax credit which shall be borne by the state in which the Supplier branch is located.
Treatment of Cross Charge:
In general, the effective tax treatment shall be, the supplier branch shall supply the goods or services by charging the recipient branch and accordingly pay the GST amount to the government, the recipient branch shall avail the input tax credit of the same.
Elimination of legal glitch of utilizing input tax credit of one state SGST with the other under Cross Charge:
Under this concept, there is a scope for the elimination of legal glitch of utilizing input tax credit of one state SGST with the other state. If one state`s branch of an entity has incurred immovable related expenses in other states then it would have paid CGST and SGST of the other state, which it cannot utilize as such as input tax credit, hence the branch in other states shall utilize this input tax credit by giving its GSTIN in the invoice, and which in turn invoice the 1st branch under the head of ‘Business support services’ by charging IGST.
However, where the services are pertaining to two or more branches then the same shall be invoiced in accordance with the provisions of Sec 20 of the Central Goods and Services Tax Act, 2017 because the legislative intent is clear that it is to be distributed based on the turnover only.
A company having branches at Andhra Pradesh, Mumbai, Kerala and Telangana being the head office. Branch at Telangana have incurred accommodation expenses in Mumbai and have paid CGST and Maharashtra SGST. The credit relating to the transaction may not be available due to the technical glitch as explained above, this amounts to a block of credits. Hence, under this option the Mumbai branch shall invoice the Telangana branch under ‘Business support services’ head and transfer the equal credit to the Telangana branch, Mumbai branch shall utilize the credit charged by the hotel resulting into no blockage of credits.
The whole essence of the transaction shall turn out to be like- Mumbai branch shall book the accommodation in a hotel by giving it`s GSTIN and shall claim the credit of the same and shall invoice to Telangana by charging IGST under business support services hence, there will be no blockage of credits.
However, if the same Telangana office incurs the similar expenditure in Tamil Nadu then the credit may not be available under Cross charge and Input Service Distributor as well.
Based on the facts, the relevant method can be applied by considering the following;
- When a company having multiple registrations in various states but procures various input services in a single state then ISD is beneficial.
- When a company having multiple registrations in various states and procures various input services across various states then Cross Valuation is beneficial because, in case of ISD, SGST of the state in which ISD is registered is only eligible for the credit.
- Company desirous of distributing the credit relating to goods (e.g. Stationery), as ISD is restricted to services only, the credit relating to goods commonly used can be distributed under Cross charge only.