New ITC Rules for Insput Service Distributor from 1st April 2025

New ITC Rules for Insput Service Distributor from 1st April 2025

Effective April 1, 2025, several amendments impact the Input Tax Credit (ITC) distribution rules for Input Service Distributors (ISD). These changes stem from the Finance Bill 2025 and subsequent updates to the CGST Rules, 2017.

Amendments to CGST Act 2017

• Section 2(61): The definition of “Input Service Distributor” is amended to explicitly include the distribution of input tax credit for inter-state supplies on which tax is paid on a reverse charge basis. This is achieved by referencing sub-sections (3) and (4) of section 5 of the Integrated Goods and Services Tax (IGST) Act.
• Section 20: Sub-sections (1) and (2) are amended to explicitly allow Input Service Distributors to distribute input tax credit on inter-state supplies subject to reverse charge, referencing section 5(3) and 5(4) of the IGST Act.
  • Section 20(1) mandates that any office of a goods or services supplier that receives tax invoices for input services, including those under section 9(3) or 9(4), must register as an ISD under section 24(viii) and distribute the input tax credit.
  • Section 20(2) specifies that the ISD shall distribute the credit of central tax or integrated tax charged on invoices, including 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.

Rule 39 of the CGST Rules, 2017

Rule 39 outlines the procedure for Input Service Distributors to distribute input tax credit, with effect from April 1, 2025:

• Manner of distribution: The input tax credit available for distribution in a month must be distributed in the same month, and the details furnished in FORM GSTR-6.
• Credit amount: The amount of credit distributed cannot exceed the available credit.
• Attribution: Credit for tax paid on input services attributable to a recipient must be distributed only to that recipient.
• Multiple recipients: Credit for tax paid on input services attributable to multiple recipients should be distributed among them based on their turnover in a State or Union territory during the relevant period. The formula for calculating the amount of input tax credit (C1) for a recipient (R1) is: C1 = (t1/T) x C, where C is the total credit to be distributed, t1 is the turnover of R1 during the relevant period, and T is the aggregate turnover of all recipients.
• Ineligible and eligible credit: ISDs must separately distribute ineligible input tax credit (under Section 17(5) or otherwise) and eligible input tax credit.
• Tax types: Input tax credit for central tax, State tax, Union territory tax, and integrated tax must be distributed separately.
• Integrated tax distribution: Input tax credit on account of integrated tax should be distributed as input tax credit of integrated tax to every recipient.
• Central/State/UT tax distribution:
  • For recipients in the same State or Union territory as the ISD, the credit should be distributed as input tax credit of central tax and State tax or Union territory tax, respectively.
  • For recipients in a different State or Union territory, the credit should be distributed as integrated tax, equal to the aggregate of the input tax credit of central tax and State tax or Union territory tax that qualifies for distribution.
• ISD invoice: The ISD must issue an Input Service Distributor invoice, as per Rule 54(1), clearly indicating it is only for input tax credit distribution.
• ISD credit note: The ISD should issue a credit note, as per Rule 54(1), for credit reduction if the input tax credit already distributed is reduced for any reason.
• Debit note: Any additional input tax credit due to a debit note to the ISD should be distributed as specified above, and the amount attributable to any recipient should be calculated as provided and distributed in the month the debit note is included in the GSTR-6 return.
• Credit note to ISD: Any input tax credit required to be reduced due to a credit note to the ISD should be apportioned to each recipient in the same ratio as the original invoice. The amount so apportioned should be reduced from the amount to be distributed in the month the credit note is included in the GSTR-6.
• Transferring credit: A registered person with the same PAN and State code as an ISD may issue an invoice or credit/debit note as per Rule 54(1A) to transfer the credit of common input services to the ISD for distribution.
• Excess credit distribution: If an ISD distributes excess credit in contravention of Section 20, the excess credit will be recovered from the recipients with interest, and the provisions of Section 73, 74, or 74A will apply to determine the amount to be recovered.
• Relevant period: “Relevant period” is defined based on whether recipients have turnover in the financial year preceding the year of distribution. If yes, it’s that financial year; otherwise, it’s the last quarter for which turnover details are available before the month of distribution.

GSTR-6 Return

• ISDs are required to furnish a return electronically in FORM GSTR-6, containing details of tax invoices on which credit has been received and those issued under section 20.
• The return must be furnished within 13 days after the end of such month.
• GSTR-6 can only be filed after the 10th of the month and before the 13th of the month succeeding the tax period.
• The Commissioner can extend the time limit for furnishing the return in FORM GSTR-6. For example, the time limit for furnishing the return for December 2024 was extended to January 15, 2025.
• There have been instances of late fee waivers for those who failed to furnish GSTR-6 by the due date.

Key Considerations

• Mandatory ISD Procedure: The ISD procedure may be made mandatory for distributing ITC related to input services procured by the Head Office (HO) from a third party but attributable to both HO and Branch Office (BO) or exclusively to one or more BOs.
• Reverse Charge Mechanism (RCM): The amendments explicitly include inter-state RCM transactions under the ISD mechanism by referencing supplies subject to tax under section 5(3) and 5(4) of the IGST Act.
• Registration: An ISD cannot opt for composition.
• Penalties: Taking or distributing input tax credit in contravention of Section 20, or the rules made thereunder, may attract penalties.

These ITC rules for ISDs from April 1, 2025, aim to streamline the distribution of input tax credit, especially concerning inter-state supplies and reverse charge mechanisms.

Refer Input Service Distributor in GST : Updated Study Material 2025