Concept of ISD is a facility made available to business having a large share of common expenditure and where billing/payment is done from a centralized location.

Ex

The Corporate office of ABC Ltd. is at Bangalore, with its business locations of selling and servicing of goods at Bangalore, Chennai, Mumbai and Kolkata. Software license and maintenance is used at all the locations, but invoice for these services (indicating CGST and SGST) are received at Corporate Office. Since the software is used at all the four locations, the ITC of entire services cannot be claimed at Bangalore. The same has to be distributed to all the four locations. For that reason, the Bangalore Corporate office has to act as ISD to distribute the credit. If the corporate office of ABC Ltd, an ISD situated in Bangalore, receives invoices indicating Rs.4 lakh of CGST, Rs.4 lakh of SGST and Rs.7 lakh of IGST, it can distribute the ITC of CGST, SGST as well as IGST of Rs.15 lakh amongst its locations at Bangalore, Chennai, Mumbai and Kolkata through an ISD invoice containing the amount of credit distributed.

ISD can be registered only for input services and not for inputs and capital goods.

Refer Section 2(61) for meaning of “Input Service Distributor”

Section 20(1) [Inserted wef 01-04-2025]

Any office of the supplier of goods or services or both which receives

tax invoices towards the receipt of input services,

invoices in respect of services liable to tax u/s 9(3) or (4),

for or on behalf of distinct persons referred to in section 25,

shall be required to be registered as ISD u/s 24(viii) and

shall distribute the ITC in respect of such invoices.

Analysis of Section 20(1)

Amendments mandates that any office of a supplier that receives tax invoices for input services, including those under RCM, for its distinct persons (branches with the same PAN) must register as an ISD and

shall distribute ITC in respect of such invoices.

Refer Para 25.5 of Guide on section 25(4) & (5)

Section 20(2)

ISD shall distribute the credit of central tax or integrated tax

charged on invoices received by him or,

in respect of services liable to tax u/s 9(3) or (4) paid by a distinct person registered in the same State as the said ISD,

in such manner, within such time and subject to such restrictions and conditions as may be prescribed.

Rule 39(1)(c, d & e)

An ISD shall distribute ITC in following manner

Cl

Credit of tax paid on input services attributable to

shall be distributed

(c)

a recipient of credit

only to that recipient

(d)

more than one recipient of credit

amongst such recipients to whom input service is attributable

on pro rata basis of t₁/T

t₁ = turnover in a State/UT of R1 recipient, during the relevant period,

T = aggregate turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period

(e)

all recipients of credit

amongst such recipients

on prorate basis of t₁/T

t₁ = turnover in a State/UT of R1 recipient, during the relevant period,

T = aggregate turnover of all recipients and which are operational in the current year, during the said relevant period

Before 01-04-2024, above conditions were provided in section 20(2)(c, d & e)

Rule 39(1)(f)

ITC distributable as per rule 39(c, d & e),

to one of the recipients ‘R1’, from amongst the total of all the recipients to whom ITC is attributable shall be

C1 = (t1÷T) ×C

where,

C₁ = ITC distributable to each recipient

C = ITC to be distributed,

t1 = Turnover in a state/UT of R1 during relevant period, and

T = Aggregate of turnover of all recipients to whom ITC is attributable and which are operational in the current year, during relevant period.

The credit attributable to a recipient is distributed even if such recipient is unregistered or is making exempt supplies.

Before 01-04-2024, above provisions were provided in Rule 39(1)(d)

[1][Explanation to Rule 39

for the purposes of this section,

“Relevant Period”

(b) “recipient of credit” means supplier of goods or services or both having same PAN as that of the ISD;

(c) ‘‘turnover’’, in relation to any RP engaged in the supply of taxable goods as well as goods not taxable under this Act, means turnover excludes Central Excise Duty, State Excise Duty, Central sales tax and VAT.

ITC of input services is distributed only amongst those recipients to whom the input services are attributable.

ITC is distributed amongst the operational units only.

Before 01-04-2024, above provisions were provided in explanation to section 20.

Question & Answer

Rule 39(1)(h)

ITC of CGST, SGST, UGST & IGST shall be distributed separately as per clause (d & e)

Before 01-04-2024, above provisions were provided in Rule 39(1)(c)

Rule 39(1)(b)

ITC distributed shall not exceed ITC available for distribution

Before 01-04-2024, above conditions were provided in section 20(2)(b)

Rule 39(1)(a)

ITC available for distribution in a month shall be distributed in the same month and

the details thereof shall be furnished in GSTR-6

Rule 39(1)(g)

ISD shall, as per clause (d & e), separately distribute the amount of

ineligible ITC (ineligible u/s 17(5) or otherwise) and

eligible ITC;

Before 01-04-2024, above conditions were provided in Rule 39(1)(b)

Section 20(3)

The credit of

central tax shall be distributed as central tax or integrated tax and

integrated tax as integrated tax or central tax,

by way of issue of a document containing the amount of ITC,

in such manner as may be prescribed in Rule 39

Before 01-04-2024, above conditions were provided in section 20(1)

Rule 39(1)(i & j)

ITC on each tax shall be distributed as follows:

.

Contradiction between section 20 and Rule 39

Section 20 provides that credit of integrated tax be distributed as “integrated tax or central tax”.

However, rule 39 provides that “input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient.

Before 01-04-2024, above conditions were provided in Rule 39(1)(e) & (f)

Question & Answer

Section 20(2)(a)

ITC can be distributed to recipients against a document containing details as prescribed

Rule 39(1)(k)

ISD shall issue an ISD invoice as per Rule 54(1) clearly indicating in such invoice that it is issued only for distribution of ITC;

Before 01-04-2024, above conditions were provided in Rule 39(1)(g)

Rule 39(1)(l)

ISD shall issue an ISD CN as per Rule 54(1) for reduction of credit in case the ITC already distributed gets reduced for any reasons

Before 01-04-2024, above conditions were provided in Rule 39(1)(h)

Rule 54(1)

Refer para 31.14.1 of guide on section 31

Rule 54(1A)

Refer para 31.14.2 of guide on section 31

Rule 39[2][(1A)

For the distribution of credit in respect of input services subject to levy of tax u/s 9(3) or (4),

a registered person, having the same PAN and State code as an ISD,

may issue an invoice/CN/DN as per rule 54(1A) to transfer the credit of such common input services to the ISD,

and such credit shall be distributed by the said ISD in the manner as provided in sub-rule (1).]

Rule 39(1)(m)

any additional ITC on account of DN issued to an ISD by its supplier

shall be distributed as per conditions specified in clauses (a) to (j) and

amount attributable to any recipient shall be calculated as per clause (f) and

such credit shall be distributed in the month in which DN is included in GSTR-6;

Before 01-04-2024, above conditions were provided in Rule 39(1)(i)

Rule 39(1)(n)

any ITC to be reduced on account of CN issued to an ISD by its supplier

shall be apportioned to each recipient in the same ratio in which the original ITC was distributed as per clause (f) and the amount so apportioned shall be-

(i) reduced from ITC to be distributed in the month in which CN is included in GSTR-6; or

(ii) added to the output tax liability of the recipient where the amount so apportioned is in excess of ITC to be distributed by ISD

Before 01-04-2024, above conditions were provided in Rule 39(1)(j)

Rule 39(2)

If ITC distributed by an ISD is reduced later on for any other reason for any of the recipients, including that it was distributed to a wrong recipient by the ISD,

process specified in Rule 39(1)(n) shall apply, mutatis mutandis, for reduction of credit.

Rule 39(3)

Subject to Rule 39(2), ISD shall, on the basis of ISD CN specified in clause 39(1)(l),

issue an ISD invoice to the recipient entitled to such credit and include ISD CN and ISD invoice in the return in GSTR-6 for the month in which such CN and invoice was issued.

[FAQ-1] [FAQ-22/12/18 Q-31]

Will ISD be required to be separately registered other than the existing tax payer registration?

Yes, ISD is required to obtain a separate registration even though it may be separately registered. The threshold limit of registration is not applicable to ISD.

[FAQ-2] [FAQ-22/12/18 Q-32]

Can a tax payer have multiple ISDs?

Yes, different offices of a company like marketing division, security division etc. may apply for separate ISD registration.

Section 39(4) read with Rule 65

Refer Para 39.6 of Section 39

Circular No. 199/11/2023-GST

2

Let us consider a business entity which has Head Office (HO) located in State-1 and a branch offices (BOs) located in other States.

(a) The HO procures some input services e.g. security service for the entire organisation from a security agency (third party).

(b) HO also provides some other services on their own to branch offices (internally generated services).

3

The issues that may arise with regard to taxability of supply of services between distinct persons in terms of section 25(4) are being clarified in the Table below: -

1

Issue-1

Whether HO can avail ITC in respect of common input services procured from a third party but attributable to both HO and BOs or exclusively to one or more Bos?

Whether HO can issue tax invoices u/s 31 to the said BOs for the said input services and the BOs can then avail the ITC for the same?

whether is it mandatory for the HO to follow the ISD mechanism for distribution of ITC in respect of common input services procured by them from a third party but attributable to both HO and BOs or exclusively to one or more BOs?

Clarifications

It is clarified that in respect of common input services procured by the HO from a third party but attributable to both HO and BOs or exclusively to one or more BOs, HO has following options

(i) HO can distribute ITC in respect of such common input services by following ISD mechanism laid down in Section 20.

However, as per the present provisions of the CGST Act and CGST Rules, it is not mandatory for the HO to distribute such ITC by ISD mechanism.

In case, the HO distributes distribute ITC to BOs through the ISD mechanism, HO is required to get itself registered mandatorily as an ISD.

Further, such distribution of the ITC can be made by the HO to a BO through ISD mechanism only if the said input services are attributable to the said BO or have actually been provided to the said BO.

(ii) HO can also issue tax invoices u/s 31 to the concerned BOs in respect of common input services procured from a third party by HO but attributable to the said BOs and the BOs can then avail ITC on the same subject to section 16 and 17.

HO can issue tax invoices u/s 31 to the concerned BOs, in respect of any input services, procured by HO from a third party for on or behalf of a BO, only if the said services have actually been provided to the concerned BOs.

I-2

Issue of Invoice is not mandatory by HO to Bos for internally generated services in case full ITC is available to BOs

In respect of internally generated services, where HO is providing certain services to the BOs for which full ITC is available to the concerned BOs.

Whether the HO is mandatorily required to issue invoice to BOs u/s 31 for such internally generated services?

However, HO may not be issuing tax invoice to the concerned BOs with respect to such services, or the HO may not be including the cost of a particular component such as salary cost of employees involved in providing said services while issuing tax invoice to BOs for the services provided by HO to BOs.

Whether the cost of all components including salary cost of HO employees involved in providing the said services has to be included in the computation of value of services provided by HO to BOs when full ITC is available to the concerned BOs.

Clarifications

The value of supply of services made by a RP to a distinct person needs to be determined as per rule 28, read with 15(4). [Refer Para 15.4.2 of guide on section 15]

As per rule 28(a), the value of supply between distinct persons shall be the open market value of such supply.

The second proviso to rule 28 provides that where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

Accordingly, in cases where full ITC is available to a BO, the value declared on the invoice by HO to the said BO in respect of a supply of services shall be deemed to be the open market value of such services, irrespective of the fact whether cost of any particular component of such services, like employee cost etc., has been included or not in the value of the services in the invoice.

Further, in such cases where full ITC is available to the recipient, if HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28 of CGST Rules.

I-3

Issue of Invoice is not mandatory by HO to Bos for internally generated services in case full ITC is not available to BOs

In respect of internally generated services provided by the HO to BOs, in cases where full ITC is not available to the concerned BOs, whether the cost of salary of employees of the HO involved in providing said services to the BOs, is mandatorily required to be included while computing the taxable value of the said supply of services provided by HO to BOs.

Clarifications

In respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.

Question & Answer