What is Input Tax Credit (ITC)?

Input Tax Credit (ITC) is the tax paid by businesses on purchases, which can be claimed as a deduction while paying output tax. ITC helps businesses reduce their tax liability and avoid the cascading effect of taxes.

What is Input Service Distributor (ISD)?

An Input Service Distributor (ISD) is a GST-registered taxpayer responsible for distributing ITC to its branches that have different GSTINs but are registered under the same PAN. From April 1st, 2024, it is mandatory for every GST taxpayer to register as an ISD.

Why is ISD Important?

When a company has a head office and multiple regional offices across the country, certain services are availed commonly by all offices. Previously, the head office used to claim ITC for such services. However, since these services benefit all offices, the ITC should be fairly distributed among them. The ISD mechanism ensures that the regional offices also get their fair share of the tax credit.

Key Features of ISD

1. ISD applies only to services and not goods.
2. Goods can be easily tracked for distribution, but tracking service consumption is more complex.
3. ITC can only be distributed to regional offices under the same PAN, not to outsourced manufacturers or service providers.
4. ISD ensures a seamless flow of credit under GST.

ISD Return Filing and Compliance

• Every ISD must electronically file a return (GSTR-6) for each month within 13 days of the month’s end.
• ISD must issue separate invoices or credit notes to each recipient for distributed credit.
• The invoices/credit notes must include:
  • ISD’s name, address, and GSTIN.
  • Date of issue.
  • Recipient’s name, address, and GSTIN.
  • Amount of credit distributed.
  • Signature/digital signature of the ISD or an authorized representative.

Rules for ITC Distribution

1. If a service is used only by one entity, ITC is distributed only to that entity.
2. If a service is used by some entities (e.g., 3 out of 5 regional offices), ITC is distributed only to those entities in proportion to their turnover.
3. If a service is used by all entities, ITC is distributed among all offices based on their turnover.

Formula for ITC Distribution

C1=(t1/T)*C

Where:

• C1 = Credit distributed to a particular entity.
• C = Total credit of the company.
• t1 = Turnover of the particular entity for the given period.
• T = Total turnover of the company for the given period.

GST Credit Type Distribution

• IGST credit is distributed as IGST credit.
• CGST credit is distributed as CGST credit within the same state and as IGST for different states.
• SGST credit is distributed as SGST credit within the same state and as IGST for different states.

Steps to File ISD Returns (GSTR-6)

1. Collect invoice details and download GSTR-6A.
2. Reconcile invoices with GSTR-6A and past data.
3. Upload reconciled invoices:
   1. Table 3 (Invoices)
   1. Table 6B (Credit Notes)
4. Upload ISD invoices:
   1. Table 5 (Invoices for distribution)
   1. Table 8 (Credit Notes for distribution)
5. Prepare Table 4:
   1. 4(a) Auto-populated from Tables 3 and 6B.
   1. 4(b) & 4(c) Auto-populated from Tables 5 and 8.
   1. Sum of 4(a) = Sum of 4(b) & 4(c).
   1. Provide details of ITC distribution as per Rule 39 and click ‘Calculate ITC’.
6. File GSTR-6 electronically.

Conclusion

The implementation of ISD ensures a fair and efficient distribution of ITC, helping businesses claim their rightful tax credits while ensuring GST compliance. With mandatory ISD registration from April 1st, 2024, businesses must adapt to this system to optimize tax benefits and streamline operations.