Indirect Tax Flash Alert

01 February 2024

Proposal to follow Input Service Distributor (ISD) process mandatorily

• In the 50th GST Council meeting, the Council had recommended to amend the ISD provisions for the
distribution of credit on common input services procured from third parties, so as to make it mandatory.

• In this regard, the Finance Bill, 2024 (“the Bill”) has proposed the following amendments [to be effective
from a date to be notified post the Bill obtains Presidential assent] -

- Change in the definition of Input Service Distributor [Section 2(61)] –

The existing definition1 of ISD covers an office of a supplier of goods and services who receives tax
invoices issued under section 31 towards the receipt of input services and issues a prescribed document
for distributing such credit to a distinct person.

Under the proposed definition, an Input Service Distributor means “an office of the supplier of goods or
services or both which receives tax invoices towards the receipt of input services, including invoices in
respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of
distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such
invoices in the manner provided in section 20”.

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“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.

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- Substitution of provisions for manner of distribution of credit by ISD [Section 20] –

The existing section 20 of the CGST Act, 2017 is proposed to be substituted to provide that any person
covered under the definition of ISD shall mandatorily be required to obtain a registration as an ISD under
section 24(viii) and shall be required to distribute credit in such manner, within such time, and subject
to such restrictions and conditions as may be the prescribed manner.

The proposed provisions regarding the computation and manner of ITC to be distributed, and the
restrictions and conditions subject to which distribution is be made shall be prescribed under the CGST
Rules, 2017 to be amended.

Aurtus comments:

➢ Circular No. 199/11/2023-GST dated 17.07.2023 had subsequently clarified that the existing
provisions of ISD are not mandatory and brought relief to many taxpayers who faced demands, in a
situation which is largely revenue neutral, on account of disallowed ITC on cross charge invoices (as
a recipient branch). The clarification had invalidated the rulings such as the one in M/s Cummins
India Limited [2022 (1) TMI 660 - Appellate Authority for Advance Ruling, Maharashtra], which had
held that the HO could not have availed the ITC of tax paid on such common input services, thereby
necessitating the implementation of the ISD process.

➢ While the aforesaid amendments will come into effect prospectively from a date to be notified,
taxpayers who have not obtained ISD registration and have been following the cross-charge
mechanism will need to make process and system changes to transition to credit allocation through
the ISD mechanism before the amended provisions become effective.

➢ The implementation of ISD is likely to result into certain tax and procedural issues during the
transitional period and with respect to tax positions adopted previously:

- Obtain an ISD registration at the Head office. This could also involve obtaining multiple ISD
registrations where common services are obtained at more than one location.

- A transaction level review of whether a particular input service is consumed within a location
to provide for any internally generated services that need to be cross-charged or whether it
can be said to be common services to be invoiced to ISD. Further, where full credit is not
available to the distinct recipient, the question of valuation of internally generated services
gains significance.

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 - It also needs to be ascertained whether services availed from a third-party vendor are
attributable to all distinct persons (registration units) or few distinct persons to which the
services pertain.

- The Company needs to timely intimate third-party vendors to obtain invoices on the ISD
registration for common services to distribute such ITC to recipient units through the ISD
mechanism.

- Addressing transitional issues with respect to vendor invoices issued prior to the proposed ISD
provisions coming into effect but accounted / booked into system after the provisions
becoming mandatory.

➢ Further, the revised provisions regarding turnover based computational mechanism for distribution
of ITC, and the restrictions and conditions subject to which distribution as currently contained in
section 20 may be modified and form part of the CGST Rules, 2017 which are yet to be prescribed.
This will require analysing the formula for distribution of credit and evaluate the impact of the new
distribution mechanism on GST cash outflow / accumulation of credit in each State.

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