Input Service Distributor (ISD)

Mandatory Registration of ISD for Multi-GSTINs having same PAN:

The CBIC issued Notification No. 16/2024-Central Tax dated 06.08.2024, to notify Mandatory registration as ISD (Section 20(1)) for Multi-GSTINs having same PAN.

Companies operating in multiple states and distributing common input tax credit (ITC) with branch offices will need to register as Input Service Distributors (ISD) with GST authorities by 1 April 2025. This requirement stems from an amendment to the Goods and Services Tax (GST) law introduced through the Finance Bill, 2024.

The Central Board of Indirect Taxes and Customs (CBIC) has now set 1 April 2025, as the deadline for all companies with multi-state branches to comply with this new registration requirement.

The amendment mandates that businesses with multi-state GST registrations must register as ISD to allocate ITC for services available across their branches. The mechanism for sharing ITC is outlined in GST rules, with common ITC apportioned based on the turnover ratio of different branches under the same PAN.

Definition of ISD in GST

An Input Service Distributor (ISD) is defined under Section 2(61) of the CGST Act, 2017, as an office of a supplier of goods or services that receives tax invoices for input services and distributes the corresponding input tax credit to its branches or units. The ISD mechanism is specifically designed for businesses that have common expenses across multiple locations, allowing them to optimize their tax liabilities.

Importance of ISD in GST

The ISD mechanism is crucial for several reasons:

• Efficient Credit Distribution: It enables businesses to distribute input tax credits for services incurred at a central level to various branches, thus optimizing tax liabilities.

• Compliance: The ISD ensures that businesses comply with GST regulations by properly documenting the distribution of credits.
• Seamless Flow of Credit: It facilitates a smooth flow of credit across different units, enhancing operational efficiency.

Further, below are the necessary steps and compliances with respect to ISD to be taken care of:

• ISD Registration
• Vendor Identification,  Communication,  ISD  Distribution  Mechanism  & Accounting of ISD.
• Monthly Compliance- Filing GSTR-6

1. ISD Registration :

The first and most crucial step is to register as an Input Service Distributor (ISD) through the GST portal. This registration will allow your business to efficiently allocate input tax credits (ITC) for centrally procured services to your various business units or branches.

Key Points:

• Eligibility: Businesses with multiple GST registrations across different states or with multiple branches that receive common input services centrally.
• Documents Required: Prepare all necessary documentation, such as GST registration details, nature of services, and a list of business units that will be receiving the ITC.
• Deadline: Apply for ISD registration well before 1st April 2025 to avoid any last-minute issues.

Once you are registered as an ISD, you will be able to distribute input tax credits for services such as legal, accounting, and IT services, to your branches or divisions.

2. Vendor Identification, Communication, ISD Distribution Mechanism & Accounting of ISD

After ISD registration, the next critical step is to identify and communicate with your vendors and understand the aspects of ISD and the distribution mechanism for ITC. These steps ensure proper ITC allocation and smooth operations across your business.

• Identifying Vendors:

• Identify Vendors Providing Centralized Services: List all vendors supplying services centrally to your business. These could include services like accounting, legal, consulting, or IT services that benefit multiple units or branches.
• Communication with Vendors: Inform your vendors about your ISD registration so they can issue proper GST-compliant invoices with clear details, including the GSTIN and tax amounts. This is crucial for accurate ITC claims.

• Aspects of ISD:

• Centralized Procurement: The main function of an ISD is to allow businesses to centrally procure services and allocate the input tax credits for these services to various branches. This avoids the need for each branch to register separately for GST and claim credit on its own.
• No Change in Tax Rates: ISD registration does not change the tax rate on services; it only helps with the distribution of ITC.
• Eligibility of ITC: Only the ITC on input services (services used to support the business operation) can be distributed through the ISD mechanism. Goods or capital goods are excluded from ISD distribution.

• Distribution Mechanism:

• How ITC is Distributed: After central procurement of services, the ITC is distributed based on the proportion of the value of services consumed by each branch. The business must ensure that the distribution is done in line with the prescribed distribution rules.
• Form GSTR-6: The business must file GSTR-6 monthly to report the distribution of credits among the various business units, ensuring that credits are correctly allocated.
• Reconciliation and Documentation: Keep track of how the ITC is distributed each month, ensuring that all branches receive the appropriate share based on their usage of the services.

Proper communication and understanding of the ISD distribution mechanism ensure that your ITC claims are accurate and compliant.

• Accounting of ISD Records:

Maintaining proper accounting records for ISD transactions is crucial for compliance and smooth auditing processes. These records should include:

• Detailed ITC Distribution Records: Keep a record of how input tax credits are distributed to each branch. This includes the amount, the GSTIN of the branch, and the nature of the service.
• Invoices and Payment Records: Ensure that invoices issued by vendors for centralized services are correctly recorded, and payments are tracked to reflect accurate ITC claims.
• Monthly Reconciliation: Regularly reconcile your ISD records with your GSTR-6 filings to ensure the amounts distributed match the entries in your accounts.

A clear and well-maintained accounting system will prevent discrepancies, aid in audits, and ensure that your ITC claims are valid and substantiated.

3. Monthly Compliance – Filing GSTR-6 :

Once ISD registration is complete and the distribution mechanism is in place, the next step is ensuring monthly compliance through GSTR-6 filing. GSTR-6 is the return form that ISDs use to report their monthly ITC distribution.

Key Points:

• Filing GSTR-6: GSTR-6 is the monthly return form where you will report the ITC received and how it has been distributed to your different branches or units.
• Accurate Data: Ensure that all data on the GSTR-6 form is accurate, including the details of the centralized services procured, the ITC claimed, and the branches receiving the credits.
• Due Date: GSTR-6 is typically due by the 13th of every month. Ensure timely filing to avoid late fees or penalties.

This step is essential for maintaining ongoing compliance with GST regulations and avoiding potential issues with the tax authorities.

How We Can Help You as a Chartered Accountant:

• Getting ISD Registration – A One-Time Process:

We assist in the seamless and hassle-free registration process for your Input Service Distributor (ISD) under GST. This is a one-time task to ensure your business is compliant and able to avail the benefits of input tax credits.

• Prepare Process Note:

a. Vendor Identification & Communication:

We help identify eligible vendors whose services can be distributed through the ISD mechanism. This ensures that you are taking full advantage of all applicable input tax credits and maintaining proper communication with your vendors.

b. Understanding the Aspects of ISD:

We explain the key aspects of the ISD mechanism, including its scope, eligible services, and how it fits into your overall GST strategy. Our goal is to ensure you fully understand how to utilize ISD in a compliant and efficient manner.

c. Effective Distribution Mechanism of ISD:

We guide you through the distribution mechanism of ISD, helping you allocate input tax credits accurately among your business units. This is crucial for optimizing tax credits and maintaining proper records.

d. Accounting for ISD Transactions:

Proper accounting is essential to ensure accurate reporting of ISD transactions. We assist with setting up the correct accounting treatment, ensuring compliance with GST provisions, and avoiding any future issues.

• Monthly Compliance & Filing:

We ensure timely monthly compliance, filing of GST ISD return in Form GSTR-6, maintaining records, and updating any changes in your ISD transactions. Our team ensures you stay compliant and avoid penalties.

Let Us Know If You Need These Services:

If you need assistance with any of the above or have questions regarding your  ISD registration, feel free to reach out. We are here to help you navigate the complexities of GST and ensure your business stays on the right track!