Input Service Distributor Registration and Compliance New Change from 01.04.2025

Input Service Distributor Registration and Compliance New Change from 01.04.2025

Input Service Distributor (ISD) provisions under the CGST Act, 2017, keeping in mind the amendments by the Finance Bill 2025:

What is the penalty if person does not comply Input Tax Credit Distribution provisions

If a taxable person takes or distributes input tax credit in contravention of Section 20, or the rules made thereunder, they are liable to a penalty.

The penalty will be ₹10,000 or an amount equivalent to the input tax credit availed of or passed on or distributed irregularly, whichever is higher.

Definition of Input Service Distributor (ISD)

• • Explanation of Section 2(61) of CGST Act 2017 Input Service Distributor
  • An ISD is an office of the supplier of goods or services that receives tax invoices for input services and distributes the input tax credit to distinct persons.
  • The definition explicitly includes invoices in respect of services liable to tax under reverse charge.
  • Example: A company’s head office receives invoices for security services used by both the head office and its branch offices. The head office, acting as an ISD, distributes the input tax credit to the respective branches.

Amendments by Finance Bill 2025

• • Clause 116 amends Section 2 of the CGST Act.[Section 2(61) of CGST Act 2017 Input Service Distributor]
  • Clause 120 amends Section 20 of the CGST Act.[refer Section 20 CGST Act 2017 – Manner of distribution of credit by Input Service Distributor]
  • These amendments explicitly provide for the distribution of input tax credit by ISDs for inter-state supplies on which tax is paid on a reverse charge basis.
  • This is achieved by inserting references to Section 5(3) and 5(4) of the Integrated Goods and Services Tax (IGST) Act, 2017.
  • Effective date of these amendments: April 1, 2025.

Registration of Input Service Distributor

• Specific Scenarios for Compulsory Registration: Input Service Distributors are required to be registered under the CGST Act, regardless of the threshold limit specified in Section 22(1) of CGST Act 2017 . Read Who needs to register as Input Service Distributor in GST
• ISDs cannot opt for composition◦
• An ISD cannot take multiple registrations in a State
• How to Register Input Service Distributor on GST Portal

Conditions for Credit Distribution

• • The input tax credit must be distributed in the same month it is available, with details furnished in FORM GSTR-6.
  • The credit distributed cannot exceed the available credit.
  • Credit for input services attributable to a specific recipient should be distributed only to that recipient.
  • Credit for services attributable to multiple recipients should be distributed pro rata based on turnover in a State or Union territory during the relevant period.

Manner of Distribution of Credit

• • Section 20 of the CGST Act, 2017 outlines how an ISD distributes credit.[Refer Section 20 CGST Act 2017 – Manner of distribution of credit by Input Service Distributor]
  • An ISD must be registered under Section 24(viii).
  • The credit of central tax or integrated tax charged on invoices is distributed by the ISD.
  • This includes credit for services subject to tax under Section 9(3) or 9(4) paid by a distinct person registered in the same state as the ISD.
  • The credit of central tax is distributed as central tax or integrated tax, and integrated tax is distributed as integrated tax or central tax.
  • Example: An ISD in Maharashtra receives input tax credit of both CGST and SGST. It can distribute CGST as CGST to recipients in Maharashtra and as IGST to recipients outside Maharashtra.

Documents for Credit Distribution

• • Input Service Distributor Invoice: Must be issued for the distribution of input tax credit.
    • It should clearly indicate that it is only for the distribution of input tax credit.
    • Rule 54(1) details the required information, including the name, address, and GSTIN of the ISD and the recipient, the invoice serial number, the date of issue, and the amount of credit distributed.[Refer Rule – 54 Tax invoice in special cases]

Input Service Distributor Credit Note:

Issued for the reduction of credit if the input tax credit already distributed decreases for any reason.

• • • Rule 54(1) specifies the details to be included. [Refer Rule – 54 Tax invoice in special cases]
  • A registered person with the same PAN and State code as the ISD may issue an invoice, credit note, or debit note to transfer the credit of common input services to the ISD.
    • Rule 54(1A) outlines the necessary details for these documents.[ Refer Rule – 54 Tax invoice in special cases]

Reverse Charge Mechanism (RCM)

• • Explanation of RCM and its relevance to ISD.
  • Amendment to include explicitly inter-state RCM transactions under the ISD mechanism.
  • Example: Head office located in State A receives legal services from an advocate located in State B. The head office is liable to pay tax under RCM. The ITC on such services can now be distributed to branch offices.

Distinct Persons

• • Explanation of “distinct persons” as per Section 25 of the CGST Act. [ Refer Section 25. Procedure for registration ]
  • Each registration is treated as a distinct person for the purposes of the Act.
  • An establishment in one State or Union territory and another establishment in a different State or Union territory are considered establishments of distinct persons.
  • Example: A company has its head office in Delhi and a branch office in Haryana. Even though they are under the same legal entity, for GST purposes, they are considered distinct persons.

Compliance and Recovery

• • GSTR-6: The return to be filed by the ISD. [ Refer Rule – 65 Form and manner of submission of return by an Input Service Distributor]
  • GSTR-6, the return for Input Service Distributors, should be filed in the same month the input tax credit is available for distribution. The details of the distribution must be furnished in FORM GSTR-6 according to Chapter VIII of the CGST Rules.
  • Last date to file : GSTR-6 returns are to be filed by 13th after the end of the Month.For example, the GSTR-6 return for January 2025 was due by February 13, 2025.
  • Excess Distribution: Section 21 addresses the recovery of credit distributed in contravention of Section 20, resulting in excess distribution.
  • The excess credit will be recovered from the recipients along with interest, and Section 73 or 74 , 74A will apply for determining the amount to be recovered.

Late fees for GSTR 6

The late fee for failing to furnish the return in FORM GSTR-6 by the due date is ₹100 for every day the failure continues, but the total amount cannot exceed ₹5,000.

However, the Central Government can waive the amount of late fee payable by any registered person who fails to furnish the return in FORM GSTR-6 by the due date. Any amount exceeding ₹25 for every day during which such failure continues may be waived.

Thus Late Fees is Rs 25 per day in CGST Act and Rs 25 Per day under SGST Act 2027 subject to Maximum of Rs 10000( Rs 5000 under CGST and Rs 5000 under SGST Act)

Practical Examples and Scenarios

• • Illustrate the application of ISD provisions with different scenarios, including:
    • Distribution of ITC related to specific departments or units.
    • Distribution of ITC related to services used by all branches.
    • Adjustments for credit notes and debit notes.
    • Impact of the amendments on inter-state transactions and RCM.

Distribution of ITC related to specific departments or units.

An Input Service Distributor (ISD) can distribute Input Tax Credit (ITC) related to specific departments or units. Here’s an explanation with an example:

Scenario:

A company has its head office in Delhi, which acts as an ISD. The company has two main departments:

• • Marketing Department
  • IT Department

The head office receives invoices for the following input services:

• • Advertising services specifically for the marketing department: ₹10,000 (plus GST of ₹1,800)
  • Software maintenance services specifically for the IT department: ₹15,000 (plus GST of ₹2,700)

Distribution Process:

1. Identify the Recipients: The ISD identifies which departments or units are the recipients of the input services. In this case, the marketing and IT departments are the recipients.
2. Distribute Credit to Specific Recipients: The credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient.
   • The ₹1,800 GST paid for advertising services is distributed solely to the marketing department.
   • The ₹2,700 GST paid for software maintenance is distributed solely to the IT department.
3. Input Service Distributor Invoice: The ISD issues an ISD invoice clearly indicating it is only for the distribution of input tax credit.
   • The invoice includes the name, address, and GSTIN of the ISD (Head Office in Delhi).
   • It also includes the name, address, and GSTIN of the recipient (Marketing Department or IT Department).
   • The amount of the credit distributed is specified (₹1,800 to Marketing, ₹2,700 to IT).
4. GSTR-6 Return: The ISD reports these distributions in its GSTR-6 return for the relevant month, providing details of the tax invoices on which credit has been received and those issued under Section 20.
5. Manner of Distribution of Credit:
   • If the recipients are located in the same State/Union territory in which the ISD is located, credit of central tax and State tax or Union territory tax is distributed respectively.
   • If recipients are located in a different State/Union territory, it is distributed as integrated tax.

By following this procedure, the company ensures that input tax credit is accurately distributed to the departments or units that utilized the services, adhering to the provisions of the CGST Act, 2017 and related rules.

Distribution of ITC related to services used by all branches.

Here’s an explanation with an example of how an Input Service Distributor (ISD) can distribute Input Tax Credit (ITC) related to services used by all branches:

Scenario:

A company has its head office in Mumbai, which is registered as an ISD. The company has three branch offices located in:

• • Chennai
  • Kolkata
  • Bangalore

The head office receives a consolidated invoice for ₹30,000 (plus GST of ₹5,400) for software subscription that is used by all three branch offices.

Distribution Process:

1. Identify the Nature of Service: The head office identifies that the software subscription is used by all its branches.
2. Determine the Turnover: To distribute the ITC, the ISD needs to determine the turnover of each branch in the relevant period. The “relevant period” is defined as:
   • If the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year.
   • If some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed.
3. Calculate Pro Rata Distribution: The ITC is distributed pro rata based on the turnover of each branch in a State or Union territory during the relevant period.
   • Formula: C1 = (t1/T) x C
     • C1 = Amount of credit to be distributed to a recipient (branch).
     • t1 = Turnover of the specific recipient (branch) during the relevant period.
     • T = Aggregate turnover of all recipients (all branches) during the relevant period.
     • C = Total amount of credit to be distributed.
4. Example Calculation (Assuming Turnover Figures):

   Here’s the table with the calculations, including explicit calculation steps for the proportions:

   Branch	Turnover (₹)	Proportion of Total Turnover	ITC Distribution (₹)
   Chennai	50,00,000	(50,00,000 / 1,50,00,000) = 1/3	5,400 * (1/3) = 1,800
   Kolkata	40,00,000	(40,00,000 / 1,50,00,000) = 4/15	5,400 * (4/15) = 1,440
   Bangalore	60,00,000	(60,00,000 / 1,50,00,000) = 2/5	5,400 * (2/5) = 2,160
   Total	1,50,00,000		5,400

5. Issue ISD Invoices: The ISD (head office) issues an ISD invoice to each branch office, specifying the amount of ITC distributed to them. The invoice must include:
   • Name, address, and GSTIN of the ISD.
   • A consecutive serial number.
   • Date of issue.
   • Name, address, and GSTIN of the recipient (branch).
   • Amount of credit distributed.
   • Signature or digital signature of the ISD or authorized representative.
6. File GSTR-6: The ISD (head office) includes these distributions in its monthly GSTR-6 return. The return requires details of:
   • Tax invoices on which credit has been received.
   • Invoices issued under Section 20.
   • The distribution of ITC to each branch.
   • GSTR-6 can only be filed after the 10th of the month and before the 13th of the month succeeding the tax period.
7. ITC отражение in Branch Books: Each branch office then books the ITC in their respective GST returns (GSTR-3B) and utilizes it to offset their output tax liability.

By following this procedure, the company correctly distributes the ITC related to services used by all branches, in accordance with Section 20 of the CGST Act, 2017, and CGST Rules, ensuring accurate compliance and optimal utilization of input tax credit.

Adjustments for credit notes and debit notes

Here are examples of adjustments for credit notes and debit notes related to Input Service Distributor (ISD) operations, a:

Credit Note Adjustments

Scenario: An ISD distributes input tax credit to its recipients. Later, a supplier issues a credit note to the ISD, reducing the original input tax credit amount..

Adjustment Process:

• • Apportionment: The ISD apportions the reduction in input tax credit to each recipient in the same ratio as the original invoice’s input tax credit was distributed.
  • GSTR-6 Adjustment: The ISD adjusts the credit in its GSTR-6 return in the month the credit note is included.
  • Reduction: The amount is subtracted from the amount to be distributed in the GSTR-6.
  • Output Tax Liability: If the amount to be distributed is less than the adjustment amount (resulting in a negative value), the apportioned amount is added to the recipient’s output tax liability.

Example:

• • Original ITC Distribution: The ISD distributed ₹10,000 to two recipients, A (₹6,000) and B (₹4,000).
  • Credit Note Issued: A credit note reduces the ITC by ₹1,000.
  • Apportionment:
    • Recipient A: (6,000 / 10,000) * 1,000 = ₹600
    • Recipient B: (4,000 / 10,000) * 1,000 = ₹400
  • GSTR-6 Adjustment: The ISD reduces the ITC to be distributed to A by ₹600 and to B by ₹400 in the GSTR-6 for the month in which the credit note is included.

Debit Note Adjustments

Scenario: A supplier issues a debit note to the ISD, increasing the input tax credit amount.

Adjustment Process:

• • Distribution: The ISD distributes the additional input tax credit to the recipients.
  • GSTR-6 Reporting: The ISD includes the debit note in its GSTR-6 return for the month and distributes the additional credit.

Example:

• • Original ITC: The ISD had an original input tax credit distribution.
  • Debit Note Issued: A debit note increases the ITC by ₹500.
  • Distribution: The ISD distributes the additional ₹500 among the recipients based on the original distribution ratio.
  • GSTR-6 Adjustment: The ISD includes the debit note in the GSTR-6 and reports the increased distribution.

Additional Points

• • Rule 39(1)(m): Specifies that any additional ITC due to a debit note should be distributed in the same manner as the original credit, and this should be done in the month the debit note is included in the GSTR-6 return.
  • Rule 39(1)(n): Explains that any ITC required to be reduced due to a credit note from the supplier must be apportioned to each recipient in the same ratio as the original invoice.

These adjustments ensure that any changes in the input tax credit due to credit or debit notes are accurately reflected in the distribution and reporting by the Input Service Distributor.

Impact of the amendments on inter-state transactions and RCM.

The Finance Bill 2025 introduces amendments to the CGST Act 2017, with specific implications for inter-state transactions and reverse charge mechanism (RCM) concerning Input Service Distributors (ISD). These amendments, effective from April 1, 2025, explicitly address the distribution of input tax credit (ITC) related to inter-state supplies on which tax is paid under reverse charge.

Here’s an example to illustrate the impact of these amendments:

• Scenario: A head office in Maharashtra (registered as an ISD) receives input services from a supplier in Tamil Nadu. The nature of these services necessitates the head office to pay tax under reverse charge as per Section 5(3) or 5(4) of the IGST Act, 2017. These services are utilized by branch offices in multiple states.
• Pre-Amendment Scenario: Prior to the amendment, there may have been ambiguity regarding the distribution of ITC related to these RCM-based inter-state transactions by the ISD.
• Post-Amendment Scenario (Effective April 1, 2025):
  • Explicit Inclusion: The amendments to Section 2(61) and Section 20 of the CGST Act explicitly allow the ISD to distribute the ITC concerning the inter-state supplies, on which tax has to be paid on reverse charge basis, by inserting reference to sub-section (3) and sub-section (4) of section 5 of the Integrated Goods and Services Tax Act.
  • Distribution Mechanism: The ISD in Maharashtra can now distribute the ITC to its branch offices located in different states. The distribution must be in accordance with Section 20 of the CGST Act, ensuring that the credit is distributed appropriately.
  • Pro Rata Distribution: As illustrated previously, if the software subscription is used by all the branch offices, then the ITC will be distributed pro rata based on the turnover of each branch in a State or Union territory during the relevant period. The formula for calculation is: C1 = (t1/T) x C
    • C1 = Amount of credit to be distributed to a recipient (branch).
    • t1 = Turnover of the specific recipient (branch) during the relevant period.
    • T = Aggregate turnover of all recipients (all branches) during the relevant period.
    • C = Total amount of credit to be distributed.
  • Reporting in GSTR-6: The ISD reports these distributions in its monthly GSTR-6 return, providing details of the tax invoices and the distribution of ITC to each branch.
• Impact:
  • Clarity and Compliance: The amendments provide clarity on the treatment of ITC related to inter-state RCM transactions, ensuring better compliance.
  • Streamlined ITC Flow: The explicit inclusion facilitates a smoother flow of ITC, allowing businesses to utilize input tax credits more efficiently across different states.

In summary, the amendments clarify and streamline the process for ISDs to distribute input tax credit related to inter-state transactions under the reverse charge mechanism, ensuring that businesses can efficiently manage and utilize their ITC across multiple locations.

Here’s an example illustrating the impact of the amendments concerning inter-state transactions and the reverse charge mechanism (RCM) for Input Service Distributors (ISD), specifically focusing on a head office in Maharashtra receiving legal services from an advocate in Tamil Nadu for branches in Punjab and Haryana:

Scenario:

• A head office (HO) is located in Maharashtra and is registered as an ISD.
• The HO procures legal services from an advocate in Tamil Nadu for ₹100,000.
• These legal services are utilized by the HO’s branch offices (BO) in Punjab and Haryana.
• As per Section 5(3) or 5(4) of the IGST Act, 2017, the HO is liable to pay tax under the reverse charge mechanism (RCM) for these inter-state legal services.

Distribution Process (Post-Amendment, Effective April 1, 2025):

1. Reverse Charge Payment: The head office in Maharashtra pays the applicable IGST on the legal services of ₹100,000 received from the advocate in Tamil Nadu under RCM.
2. ITC Distribution: The HO, acting as an ISD, distributes the input tax credit (ITC) to its branch offices in Punjab and Haryana. The amendments to Section 2(61) and Section 20 of the CGST Act explicitly allow the ISD to distribute the ITC related to these inter-state supplies subject to RCM.
3. Determine Turnover: To distribute the ITC, the ISD needs to determine the turnover of each branch in the relevant period. The “relevant period” is defined as:
   • If the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year.
   • If some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed.
4. Pro Rata Distribution: The ITC is distributed pro rata based on the turnover of each branch in a State or Union territory during the relevant period.
   • Formula: C1 = (t1/T) x C
     • C1 = Amount of credit to be distributed to a recipient (branch).
     • t1 = Turnover of the specific recipient (branch) during the relevant period.
     • T = Aggregate turnover of all recipients (all branches) during the relevant period.
     • C = Total amount of credit to be distributed.
5. Example Calculation (Assuming Turnover Figures):
   

   Branch	Turnover (₹)	Proportion of Total Turnover	ITC Distribution (₹) |
   Punjab	6000000	(6000000 / 10000000) = 3/5	10800
   Haryana	4000000	(4000000 / 10000000) = 2/5	7200
   Total	10000000		18000

   Note: For simplicity, let’s assume the IGST rate is 18%, so the total ITC is ₹18,000.

6. Issue ISD Invoices: The ISD (head office) issues an ISD invoice to each branch office, specifying the amount of ITC distributed to them. The invoice must include:
   • Name, address, and GSTIN of the ISD.
   • A consecutive serial number.
   • Date of issue.
   • Name, address, and GSTIN of the recipient (branch).
   • Amount of credit distributed.
   • Signature or digital signature of the ISD or authorized representative.
7. File GSTR-6: The ISD (head office) includes these distributions in its monthly GSTR-6 return. The return requires details of:
   • Tax invoices on which credit has been received.
   • Invoices issued under Section 20.
   • The distribution of ITC to each branch.
   • GSTR-6 can only be filed after the 10th of the month and before the 13th of the month succeeding the tax period.
8. ITC Claim by Branches: Each branch office then books the ITC in their respective GST returns (GSTR-3B) and utilizes it to offset their output tax liability.

Impact:

• Compliance: The amendments provide clarity on the treatment of ITC related to inter-state RCM transactions, ensuring better compliance.
• Efficient ITC Flow: The explicit inclusion facilitates a smoother flow of ITC, allowing businesses to utilize input tax credits more efficiently across different states.
• Clear Distribution: By following the pro rata distribution method based on turnover, the ITC is fairly distributed among the branches that utilize the legal services.

In summary, with the amendments effective from April 1, 2025, the head office in Maharashtra can compliantly distribute the ITC related to legal services procured from Tamil Nadu (under RCM) to its branches in Punjab and Haryana, based on their respective turnovers, ensuring efficient utilization of input tax credit across multiple locations.

Rectification of GSTR 6 Return

Yes, an Input Service Distributor (ISD) return can be rectified. If a registered person, after furnishing a return under sub-section (4) of Section 39, discovers any omission or incorrect particulars, they can rectify such errors. This rectification is allowed as long as it’s not a result of scrutiny, audit, inspection, or enforcement activity by tax authorities and is subject to payment of interest.

However, there is a time limit for rectifying any omission or incorrect particulars:

• • No rectification is allowed after the thirtieth day of November following the end of the financial year to which such details pertain.
  • Alternatively, rectification is not allowed after the actual date of furnishing the relevant annual return, whichever is earlier.

If ISD provisions are not follwed from 1st april 2025 then Notice will come under which section of CGST Act ?

If Input Service Distributor (ISD) provisions are not followed from April 1, 2025, notices and actions can be initiated under several sections of the CGST Act, 2017:

• Section 74A: This section, applicable from the financial year 2024-25 onwards, deals with the determination of tax not paid, short paid, erroneously refunded, or input tax credit wrongly availed or utilized. If it appears to the proper officer that input tax credit has been wrongly availed or utilised, a notice will be served to the person chargeable with tax, requiring them to show cause as to why they should not pay the amount specified in the notice, along with interest and penalty.
  • The proper officer shall issue the notice within forty-two months from the due date for furnishing the annual return for the financial year to which the tax relates.
  • The penalty can be equivalent to 10% of the tax due or ₹10,000, whichever is higher, for reasons other than fraud or wilful misstatement. If fraud or wilful misstatement is involved, the penalty will be equivalent to the tax due.
• Section 122: This section outlines offences and penalties. Specifically, Section 122(1)(ix) states that a taxable person who “takes or distributes input tax credit in contravention of section 20, or the rules made thereunder” is liable to a penalty.
  • The penalty for contravening Section 20 is ₹10,000 or an amount equivalent to the tax evaded or the input tax credit availed of or passed on or distributed irregularly, whichever is higher.
• Section 21: This section deals with the manner of recovery of credit distributed in excess. Where an Input Service Distributor distributes credit in contravention of the provisions contained in section 20, resulting in excess distribution of credit, the excess credit shall be recovered from such recipients along with interest. The provisions of section 73 or section 74 or section 74A, as the case may be, shall apply for determination of the amount to be recovered.

Recovery will be done from recipient when the default is made by the ISD

When an Input Service Distributor (ISD) distributes credit in contravention of the provisions in Section 20, resulting in excess distribution of credit to one or more recipients, the recovery is done from the recipients because the excess credit has been wrongly availed by those recipients. Section 21 of the CGST Act explicitly addresses this situation, stating that the excess credit so distributed shall be recovered from such recipients along with interest. This mechanism ensures that any undue benefit obtained due to the ISD’s non-compliance is rectified by recovering the excess credit from those who received it.

The recovery provisions apply regardless of whether the default was made by the ISD because the focus is on correcting the incorrect availment of credit. Sections 73, 74, or 74A of the CGST Act will apply for determining the amount to be recovered.

Relevant Rules and Forms

• • CGST Rule 39: Procedure for distribution of input tax credit by ISD.[refer Rule – 39 Procedure for distribution of input tax credit by Input Service Distributor]
  • CGST Rule 54: Tax invoice in special cases, including ISD invoices and credit notes.
  • FORM GSTR-6: Return for Input Service Distributor.[refer Rule – 54 Tax invoice in special cases]

Impact of GST Council Recommendations

• • Discuss the GST Council’s recommendations regarding ISD and their impact on the amendments to the CGST Act and Rules.
  • Mention the retrospective amendment in section 140(7) of CGST Act regarding transitional credit.