CBIC Clarifies Seven Key Issues on the Input Service Distributor (ISD) Mechanism under GST

b) As per provisions of section 25(2) and section 25(4) of CGST Act, 2017, if separate registrations have been obtained for separate business verticals or places of business within a State or UT, before or after 01.02.2019 respectively, then each such registrant is to be treated as a distinct person under the Act.

c) A plain reading of the above-mentioned provisions indicates that there is no bar on obtaining more than one ISD registration for each business vertical or each place of business, as the case may be, within a State or UT.

d) Accordingly, it is clarified that:

i. Each such registrant who receives input services invoices for or on behalf of distinct persons, which is liable to be distributed in the manner provided in section 20 of CGST Act, 2017, is required to obtain an ISD registration.

ii. However, it is to note that in terms of provisions of rule 39(1) of CGST Rules, 2017, the ISD shall distribute the credit only to the distinct person to whom the credit is attributable to.

b) As per provisions under section 21 of CGST Act, 2017, where an ISD distributes credit in contravention of the provisions of section 20, resulting in excess distribution of credit to one or more recipients of credit, the excess credit so distributed shall be recovered from the recipients of credit along with interest, and the provisions of section 73 or section 74 or section 74A, as the case may be, shall apply for determining the amount to be recovered.

c) Further, as per clause (ix) of section 122(1) of CGST Act, 2017, in case a taxable person takes or distributes input tax credit in contravention of section 20 of CGST Act, 2017, or the rules made thereunder, he shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or input tax credit distributed irregularly, whichever is higher.

d) Based on the above it is clarified that:

i. The ISD is required to distribute the credit to its distinct persons (recipients of credit), for or on whose behalf, it receives input service invoices, in the manner provided for in section 20 of CGST Act, 2017.

ii. It is the recipients of credit, who are liable to comply with the conditions for being eligible to the input tax credit, including the conditions stipulated in section 16 or section 17 of CGST Act, 2017 and rules made thereunder.

iii. In case credit is distributed by the ISD, in contravention of provisions of section 20 of CGST Act, 2017, the ISD is liable to penalty under clause (ix) of section 122(1) of CGST Act, 2017, and if such contravention results in excess distribution of credit to one or more recipients of credit, the excess credit so distributed is liable to be recovered from such recipients of credit, in terms of the provisions under section 21 of CGST Act, 2017.

b) As per rule 65 of CGST Rules, 2017, ISD is required to furnish FORM GSTR-6, on the basis of details contained in FORM GSTR-6A and where required, after adding, correcting or deleting the details, furnish FORM GSTR-6 containing the details of tax invoices on which credit has been received and the invoices issued under section 20 of CGST Act, 2017.

c) Further, section 16(2) of CGST Act, 2017 enlists the conditions for eligibility which are required to be fulfilled for availment of input tax credit.

d) As clarified in Sr. No. 2 above, it is the recipients of credit, who are liable to comply with the conditions for being eligible to the input tax credit, including the conditions stipulated in section 16 or section 17 of CGST Act, 2017 and rules made thereunder.

e) Further, as per rule 39(1)(g) of CGST Rules, 2017, the ISD is required to separately distribute input tax credit which is eligible and which is ineligible in terms of section 17(5) of CGST Act or otherwise.

f) Therefore, even though ISD is not required to avail input tax credit itself, but in case of distribution of credit through ISD mechanism, as the procurement of services is being made centrally, only ISD, which receives the input services invoices, is in the best position to determine whether input tax credit in respect of such invoices is eligible to be availed.

g) Accordingly, it is clarified that once the details of the input services invoices are received by the ISD on behalf of its distinct persons in its FORM GSTR-6A, the input tax credit in respect of the said invoices can be said to be available to the ISD for distribution only when it is ascertained by the ISD to be prima facie eligible for availment. Therefore, in terms of rule 39(1)(a) of CGST Rules, 2017, the ISD is required to distribute the said input tax credit in the month in which he makes such ascertainment, and distribute it separately as eligible and ineligible credit in accordance with the provisions of rule 39(1)(g) of CGST Rules, 2017. The details thereof are to be included in FORM GSTR-6.

b) Accordingly, it is clarified that ISD should distribute the entire input tax credit available to it for distribution to the recipients of credit to whom it is attributable to, and it is such recipients of credit who are required to make reversals of input tax credit under section 17(1) or section 17(2) of CGST Act, 2017 read with rule 42 and rule 43 of CGST Rules, 2017 or under section 17(4) of CGST Act, 2017 read with rule 38 of CGST Rules, 2017, as the case may be.

b) Further, clause (b) of rule 54(1A) of CGST Rules, 2017 provides that the taxable value in the invoice issued under clause (a) shall be the same as the value of the services whose credit is sought to be transferred to the Input Service Distributor.

c) The said provisions were brought prima facie to allow for payment of tax on reverse charge transactions by the regular registration having same PAN and State code as the ISD, to ensure that tax in respect of such transactions is discharged before the credit is transferred to the ISD, for further distribution to the other distinct person, who will then avail the credit.

d) Therefore, rule 54(1A) of CGST Rules, 2017 is merely a credit transferring mechanism.

e) Based on the above, it is hereby clarified that:

i. The invoice, credit note, debit note issued by a registered person, having same PAN and registered in the same state as the ISD under rule 54(1A) of CGST Rules, 2017 is not in respect of the outward supply of the said person and therefore the amount reflected on such invoice or debit note or credit note does not qualify as “turnover in State “or “turnover in Union territory” under section 2(112) of CGST Act, 2017, of the said person, even though the same may be required to be declared in his FORM GSTR-1, to transmit the same to the ISD for further distribution.

ii. Accordingly, the amount reflected on such invoice or debit note or credit note should not be included for the computation of “turnover in a State” or “turnover of Union territory” of the said person, issuing the said invoice, credit or debit note, to ascertain the amount of input tax credit required to be distributed to a ‘recipient of credit’ under section 20 of CGST Act, 2017 read with rule 39 of CGST Rules, 2017 and “Adjusted total turnover” under section 54(3) read with rule 89 of CGST Rules, 2017, for ascertaining the maximum refund amount permissible to the registered person.

b) Accordingly, in respect of the credit pertaining to input services attributable to one or more distinct persons, which is transferred by the registered person having same PAN and State code as the ISD, in terms of rule 54(1A), it is clarified that:

i. The said person having same PAN and same State code as ISD, is not required to make reversals of input tax credit under section 17(1) or section 17(2) or section 17(4) of CGST Act, 2017 and the said person is required to transfer the entire input tax credit available on account of payment of tax by it under reverse charge to the ISD for its further distribution to the recipients of credit.

ii. It is such recipients of credit who are required to make reversals of input tax credit under section 17(1) or section 17(2) or section 17(4) of CGST Act, 2017, as the case may be, as already clarified in Sr. No. 4 above. Further, such recipients of credit may also include the said registered person having the same PAN and same state Code as the ISD, who had transferred the input tax credit to the ISD in the first place.