Understanding ISD Registration and ITC Distribution under GST Regulations

Understanding the New Input Service Distributor (ISD) Provisions under GST

From April 1, 2025, registration for Input Service Distributor (ISD) becomes mandatory under the Goods and Services Tax (GST) framework. This provision is applicable exclusively to input service invoices received on behalf of distinct persons. The distribution of Input Tax Credit (ITC) must occur on a monthly basis, driven by the turnover of recipient branches. For branches operating within the same state, ITC is allocated as CGST plus SGST, while inter-state branches receive ITC converted to IGST. If a specific input service pertains solely to one branch, the ITC will be allocated exclusively to that branch. Additionally, both debit and credit notes will impact the ITC distribution in a proportional manner. It is essential to note that ineligible ITC cannot be distributed and must be monitored separately. ISD invoices must reflect ITC distribution as outlined in Rule 54(1). In cases of erroneous ITC distribution, a reversal accompanied by interest is warranted. Notably, even unregistered or exempt branches are subject to turnover-based ITC allocation.

Frequently Asked Questions on ISD Provisions

1. When does ISD registration take effect?

   • Answer: ISD registration becomes mandatory from April 1, 2025.

2. Does ISD apply to goods or services?

   • Answer: ISD applies only to input service invoices received by the distributor for or on behalf of distinct persons.
     • Examples:
       • Statutory audit invoices received by the Head Office (HO), which relate to its branches.
       • Accounting software invoices received by the HO for use by branches.

3. What are the core principles of ITC distribution by ISD?

   • Answer: ITC must be distributed within the same month it is received and should not exceed the available credit. Distribution is based on the turnover of each recipient branch, where:
     • For same-state branches, ITC is distributed as CGST plus SGST.
     • For different-state branches, it is converted to IGST.

4. How is ITC allocated for services relevant to multiple branches?

   • Answer: ITC is allocated proportionally according to the turnover of each branch. The distribution formula is as follows:
     • C1 = (t1 / T) × C
       • Where:
         C1 = ITC for a specific recipient
         t1 = turnover of that recipient
         T = total turnover of all recipients
         C = total ITC to be distributed.

5. What occurs when an input service pertains solely to one branch?

   • Answer: The ITC is allocated exclusively to that branch.

6. How is ITC distributed between branches in the same state and those in different states?

   • Answer: For branches within the same state, ITC is apportioned as CGST plus SGST; however, for branches located in different states, it is allocated as IGST.

7. What is the procedure if a supplier issues a debit or credit note?

   • Answer: For a debit note, the additional ITC is distributed in the same manner as the original ITC. In the case of a credit note, ITC must be proportionally adjusted for all recipients.

8. How should ineligible ITC be managed?

   • Answer: Ineligible ITC must be separately tracked and cannot be distributed.

9. What documentation is mandated for ITC distribution?

   • Answer: ISD must issue an "ISD Invoice" as required under Rule 54(1) to document ITC distribution.

10. What are the consequences of distributing ineligible ITC?

    • Answer: Should an ISD incorrectly distribute ineligible ITC, the recipient unit is obliged to reverse the ineligible credit along with applicable interest under Section 50 of the CGST Act.

11. How is ITC allocation handled for unregistered or exempt branches?

    • Answer: ITC allocation must consider turnover for all branches, regardless of registration status.

12. What are the essential takeaways regarding ITC distribution by ISD?

    • Answer: Key points include that ITC must be allocated monthly without exceeding available credit. Exclusive services' ITC goes solely to that branch, while common services’ ITC is distributed according to turnover. ITC for same-state branches is allocated as CGST plus SGST, and for different-state branches as IGST, with proportional adjustments made for any credit or debit notes.