Input Service Distributor or ISD is one of the crucial concepts under GST , especially for the large taxpayers with hub and spoc system. Through ISD, the common expenditure shared between sub-branches of an organization is centralized, which further strengthens the flow of credit under GST.
Under GST, an ISD (Input Service Distributor) can procure invoices for the services utilized by its sub-branches, and proportionately distribute the ITC to them. This ITC distribution is captured through form GSTR 6. The following points can come in handy for you while distributing Input Tax Credit through GSTR 6.
1.How to issue an ISD Invoice
An ISD can distribute the credit available against an ISD Invoice that contains the prescribed details as mentioned in Rule 54 of CGST rules, which clearly indicates the use of such invoice only for distribution of input tax credit. Similarly, for a reduction in credit, an ISD credit note containing the prescribed details as mentioned in Rule 54 of CGST rules needs to be issued.
2. How to determine ITC Ratio for Input Service Distribution
An ISD can distribute an amount of input credit that does not exceed the amount of credit available for distribution. Furthermore, the credit of tax paid on input service attributable to a recipient shall be distributed only to that recipient. In the case of more than one recipient, the credit shall be distributed pro-rata on the basis of the turnover of such recipient to the aggregate of turnover of all such recipients to whom such input service is attributable and which are operational during the year.
3. How to calculate ITC for Input Service Distribution
The input tax credit that is required to be distributed to one of the recipients ‘R1’, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipient(s) who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula –
C1 = (t1÷T) × C
“C” is the amount of credit to be distributed,
“t1” is the turnover, as referred to in section 20, of person R1 during the relevant period, and
“T” is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of section 20;
4. Distribution of IGST/CGST/SGST under ISD
Input tax credit on account of IGST/CGST/SGST has to be distributed separately.
- Input tax credit on account of IGST shall be distributed as IGST.
- Input tax credit on account of CGST and SGST/UTGST shall be distributed in the following manner :
- If the recipient is located in the same state or union territory in which ISD is located, CGST shall be distributed as CGST and SGST/UTGST shall be distributed as SGST/UTGST.
- If the recipient is located in different state or union territory other than that of ISD, CGST shall be distributed as IGST and SGST/UTGST shall be distributed as IGST.
5. Issuance of Credit Note in ISD
Input tax credit required to be reduced on account of issuance of a credit note to ISD by the supplier shall be apportioned to each recipient in the same ratio in which the input tax credit contained in the original invoice was distributed in terms of clause (d), and the amount so apportioned shall be-
- reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; or
- added to the output tax liability of the recipient where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted.
- Input tax credit available for distribution in a month shall be distributed in the same month.
- ISD shall separately distribute the amount of ineligible input tax credit and the amount of eligible input tax credit.
Reconciliation of ISD Invoices
An Input Service Provider is required to file form GSTR 6, which contains the details of ITC received by an Input Service Distributor and distribution of ITC. Furthermore, under the GST regime, reconciliation has been made a mandate for a taxpayer/business that seeks to claim ITC. Although many organizations opt-in for manual reconciliation, which is both time-consuming and prone to manual errors. Thus, the very last step to a smooth ITC claim is opting for a smart and efficient reconciliation application that can scan through all your invoices and generate reconciliation reports without any hassle.
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