In the past 5 decades, as businesses have grown they have added new facilities within the same state and across National and International boundaries. Whenever an OEM (Original equipment manufacturer) grows in size and expands in geographical boundaries, it asks its Tier-1 and Tier-2 vendors to open plants or services outlets close to it. In many cases, to take local VAT or excise benefits a lot of companies have expanded their horizons across multiple states. Hence, it is easy to find many businesses with distributed units in the same or different states across India.
Now that the companies have grown in size and have multiple Business Units (BU) within and across states they seek to utilize their economies of scale. Hence, they start to procure goods and services centrally and then distribute them within their BUs as per their requirements. This practice has proven to be very fruitful for organizations as it has helped them to bring down their procurement costs and drive standardized products and processes across their group.
However the flip side to the same was that this system of operating from different locations leads to accumulation of input tax credit paid on common inward supplies at the central office. To avoid this scenario, it is ideal to centralize invoices for procurement of common goods and services and then further distribute the input tax credit to each unit and hence was born the concept of Input service distributor (ISD).
A central office of a tax payer (HO), which receives common input tax invoices from goods and service providers has to register itself as an ISD to further distribute the Input tax credit to individual BUs. Under the current tax regime, ISD has to further file returns on bi-annual basis.
To illustrate the role of ISD please refer to the diagram below:
What is the role of Input Service Distributor under GST Model?
It includes an office of the supplier of goods and/or services that receives tax invoices issued by supplier towards receipt of input services and/or goods. ISD is also responsible for issuing a prescribed document for the purpose of distributing the credit of CGST (SGST in State Acts) and / or IGST paid on the said services to a supplier of taxable goods and / or services having same PAN as that of the office referred to above
What is the process of Registration and Filing Returns under GST?
Registration under GST requires business to be registered separately as an ISD. Migration of existing registration would not apply to ISD, because the existing ISD registration will not be migrated to the GST regime. Therefore, it is mandatory to apply afresh for registration. For filing GST returns, businesses can register as both “Supplier of Service” and an “Input Service Distributor” simultaneously. A number would be provided for this application.
How is the credit of CGST, IGST and SGST distributed by ISD?
The business unit to which the input tax credit is distributed is known as the ‘recipient of credit.’ The following are the situations in which the credit will be distributed by ISD:
- ISD and the recipient of credit are located in the same state, the input tax credit of IGST, CGST, SGST, and UTGST should be distributed to the recipient in the following manner:
- Recipient of credit and ISD are located in different states
When the ISD and the recipient of credit are located in different states/union territory, the input tax credit of IGST, CGST, SGST, and UTGST should be distributed to the recipient of credit in the following manner:
How is return of ISD filed under GST?
Earlier ISD used to file Bi-annual returns. Now instead of filing returns twice in a year, they will have to file returns 13 times in a year (12 monthly and 1 annual). The form GSTR-6 is required by ISD to file returns.