Concept of Input Service Distributor(ISD) and its need under GST

The concept of Input Service Distributor (ISD) is not unknown for us as this concept has been there in the current CENVAT credit rules for quite some time. As the service industry and their taxability has progressed in the last few years, an ISD has become an important part of the entity’s service tax compliance. The concept has given an way out to the corporate world to centralize the vendor payments and claim and utilize credit of eligible input services without breaking the credit chain.

Need of an ISD:

Many companies in the manufacturing or service sector have a centralized corporate or marketing office which receives invoices for input services like Information technology, Rent, Legal and Professional Services etc. Though these invoices are received at these centralized offices, these services are essentially utilized at various units of the company engaged in provision of output services or manufacturing of goods. The office basically provides various management or marketing, etc services to other units of the same company.

Since, service by one branch to another (self-supply) is not taxable under the current service tax law, no tax liability arises on the centralized office when it provides services to its other branches. Thus, without any output service tax or excise duty liability, the centralized office is not in a position to avail any input credit of invoices received.

Here comes the concept of ISD to the rescue of the centralized office. It can register as an ISD and distribute credit of service tax paid on services to branches on the basis of turnover of such branches.

A question may arise, can’t a taxable taxable branch take credit of input service invoice received at any other office. In case of an entity having only one factory/office, the same may be taken. But wherever there are multiple branches/factories, and the credit related to multiple branches, taking the same at one specific branch may trigger an inquiry by the tax department.

Therefore, the centralized office registered as an ISD acts as an intermediary to distribute input credit by issuing an invoice to various branches. This ensures service tax paid at centralized office also does not become a cost.

ISD in GST Law:

The Indian economy is not far from implementing GST from July 01, 2017, as the Central GST Bills have already been passed from Lok Sabha. The Government has framed the GST legislations keeping in mind the provisions under current laws which can be continued with under GST also with certain modifications, if required.

The concept of ISD is also present in GST and is defined under Section 2(61) of the CGST Act, 2017.

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under Section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of Central tax, State tax, Integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

As can be seen it has been defined similarly to the current definition under CENVAT credt rules.

But due to we actually need an ISD under GST? 

This moot question stems from entry 2 in Schedule – I to the CGST Act dealing with supplies without consideration:

“Supply of goods or services or both between related persons or between distinct persons as specified in Section 25, when made in the course or furtherance of business”

In accordance with Section 25, branches located in separate States / UT’s will be treated as distinct persons and any service transaction (though without consideration) between them will be subject to GST.

Now coming back to our first example where the centralized office is handling corporate management or marketing of the organization. Comparing the current law and GST, under the current law, the centralized office did not have output liability due to self-supply being non-taxable. Therefore, it was required to be registered as an ISD in order to distribute the input credit to the units having output liability. But under GST, the self-supply is taxable and therefore, the centralized office has an output liability when it supplies services to branches even without consideration. Thus, it can easily avail and utilize GST paid on input service invoices received at its end.

But there can be scenarios where an ISD would genuinely be required.

  • The corporate office of an entity engaged in making exempt supply or both exempt and taxable supply would like to keep distribution of credits separate from inter-branch service GST billing.
  • A company may be expending huge amounts on travel and hotel in a specific State where it does not have a fixed establishment. To take credit of GST paid on such expenditure, it may explore an option of taking ISD registration in that State and transfer the credit to its branches making output taxable supplies.

Lately there has been some informal news that the taxable value of inter-branch service billing from the corporate office (our example above) would be zero to avoid any disputes on such transactions. If that does happen, ISD will again become an important component of GST compliances of organizations having multi state operations.