Input Service Distributor(ISD) and Cross Charge under GST

Last Updated On: Aug. 21, 2020, 11:05 p.m.
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INPUT SERVICE DISTRIBUTOR & CROSS CHARGE UNDER GST

An Input service distributor (ISD) is a business that receives invoices for services used by its branches. It distributes the tax paid to such branches on a proportional basis by issuing an ISD invoice.

Let us understand the concept of ISD with an Example:

The Head office of XYZ limited is located in Delhi and it has its branches in Chennai, Bangalore, and Kolkata. The head office incurred annual software maintenance expenses on behalf of all its branches and received the invoice for the same. Since the software is used by all its branches, the input tax credit of entire services cannot be claimed in Delhi. The same has to be distributed to all three branches located. Here, the Head office at Delhi is the Input Service Distributor.

ISD IS NOT APPLICABLE IN FOLLOWING CASES:

ISD cannot distribute the input tax credit :

  • paid on Inputs (Raw materials) and capital goods (Machine purchased)
  • to outsourced manufacturers or service providers.

MANNER OF DISTRIBUTION OF ITC THROUGH ISD:

Timing of Distribution: In service tax, the timing of the distribution of credit was not prescribed. However, in GST, ISD shall distribute the credit available for distribution in the same month (reflecting in ISD’s monthly GSTR 6A) and details of such distribution shall be furnished in Form GSTR-6 (to be filed by 13th of every month).

Required Documents through which credit can be distributed:

  • An ISD can be distributed by issuing an invoice as prescribed in rule 54 of CGST ACT, The invoice should contain the following:
  • Name, Address, and GSTIN of ISD.
  • A consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters- hyphen or dash and slash symbolized as- “-”, “/” respectively, and any combination thereof, unique for a financial year.
  • Date of its issue
  • Name, Address, and GSTIN of ISD of the recipient to whom the credit is distributed.
  • Amount of the credit distributed
  • The signature or digital signature of the Input Service Distributor or his authorized representative

NOTE: If the Input Service Distributor is an office of Non-Banking financial company or Banking company or a financial institution. A tax invoice shall include any document in lieu thereof, by whatever name called, whether or not serially numbered but containing the information as mentioned above.

It also includes the following criteria:

  • The Invoice should mention specifically that it is issued only for the purpose of distribution of ITC.
  • The credit distributed should not exceed the total credit available for distribution.
  • The credit to be distributed to all the units of an entity having the same PAN and which utilizes the common service no matter whether the unit is registered or not registered under GST. Since the unregistered units cannot avail ITC it shall result in the increase in cost.
  • The ISD cannot keep the credits in its own books and it has to transfer all the credits be it eligible credit or ineligible credit

 

CREDIT NOTE/DEBIT NOTE ISSUED BY ISD TREATMENT:

CREDIT NOTE: If a credit note is received by an ISD reducing the ITC available the ISD has to issue an ISD credit note to the recipients to whom the credit has been distributed on the basis of the original invoice. The credit note to be issued in the same ratio as the ratio in which original credit had been distributed. The ISD credit not to be issued in the same month in which Credit note reflects in GSTR6A of the ISD.

DEBIT NOTE: In case ISD receives a debit note it’s not necessary to distribute extra credit in the same ratio as that of original invoice credit. ISD debit note to be issued in the same month in which such debit note reflects in its GSTR6A.

FILING RETURNS BY ISD:

ISD is required to file form GSTR 6 on or before 13th of every month following the month of whose credit is distributed. The return is to be filed on the basis of credit reflecting in GSTR 6A and Invoices raised for distributing credit as per Sec 20 of the CGST Act 2017.

CROSS CHARGE UNDER GST:

Cross charge can be used either were one unit in a particular location say Mumbai provides service to its branch in Kolkata or vice versa or to accumulate the scattered ITC at various locations to a central location for effective ITC utilization.

Cross charge is a mechanism to charge distinct units for internal service provided or effective cost utilization.

CROSS CHARGE OR ISD TO SEZ UNITS:

Cross charge: If any cross charge to be made to distinct units located in SEZ it should be kept in mind that supplies to SEZ are treated as zero-rated supply and considered to be exported.

ISD: An ISD may distribute credit attributable to SEZ under an ISD invoice and SEZ shall be eligible to avail the same.

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