Finance Act 2024: Key Amendments Impacting Input Service Distributors

Introduction

The Finance Act, 2024 (‘Act’) furthers the recommendations made in the 53rd Goods and Services Tax Council (‘GST Council’) meeting held on 22.06.2024. The Act has brought a few amendments to the Central Goods and Services Tax Act, 2017 (‘CGST Act’) pertaining to transitional credit in respect of invoices received by ISDs, etc.

These recent amendments have made input services distributor (‘ISD’) mechanisms mandatory and expanded their scope to include input services (‘IS’) under the reverse charge mechanism (‘RCM’).

Background

What is an ISD?

An ISD is a provision under the CGST Act designed to facilitate the centralised receipt and distribution of input tax credit (‘ITC’) for IS. An ISD allows a taxpayer to consolidate invoices for common IS at a single location referred to by the goods and services tax identification number (‘GSTIN’) of the ISD and then distribute the ITC to various branches on a monthly basis according to the prescribed method. If the ITC is not distributed appropriately, no branch can claim the credit, as multiple registered branches consume the service. Expenses such as software costs, outsourced services, HR consultancy, legal and tax advisory services, and cost allocations can be billed to the ISD to enable GST credit for distinct persons. ISD as defined under s. 2(61) of the CGST Act refers to an office of the supplier of goods or services that receives tax invoices for IS on behalf of distinct persons and is responsible for distributing ITC as outlined in s. 20 of the CGST Act.

Amendment made by Act on the recombination of the GST Council Meeting

1. Pertinently, the Act has substituted the definition of ISD given under s. 2(61) of the CGST Act for the provision related to the manner of distribution of ITC by ISD under s. 20 of the CGST Act.

Section/Rules	Existing provision	Amended provision
S. 2(61)	ISD means an office of the supplier of goods or services or both which receives tax invoices issued under s. 31 of the CGST Act towards the receipt of IS 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 PAN as that of the said office.	ISD means an office of the supplier of goods or services or both that receives tax invoices towards the receipt of IS, including invoices for services liable to tax under s. 9(3) or (4) of the CGST Act, for or on behalf of distinct persons referred to in s. 25 of the CGST Act, and liable to distribute the ITC in respect of such invoices in the manner provided in s. 20 of the CGST Act.
S. 20	(1) The ISD shall distribute the credit of central tax 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 being distributed in such manner as may be prescribed. (2) The ISD may distribute the credit subject to the following conditions, namely: - (a) he credit can be distributed to the recipients of credit against a document containing such details as may be prescribed. (b) The amount of the credit distributed shall not exceed the amount of credit available for distribution. (c) The credit of tax paid on IS attributable to a recipient of credit shall be distributed only to that recipient. (d) The credit of tax paid on IS attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable. Such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient during the relevant period, to the aggregate of the 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) Tax credit paid on IS attributable to all recipients of credit shall be distributed amongst such recipients. Such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period.	(1)   Any office of the supplier of goods or services or both which receives tax invoices towards the receipt of IS, including invoices in respect of services liable to tax under s. 9 (3) or (4) of the CGST Act, for or on behalf of distinct persons referred to in s. 25 of the CGST Act shall be required to be registered as ISD under s. 24(viii) of the CGST Act and shall distribute the ITC with respect to such invoices. (2)   The ISD shall distribute the credit of central tax or integrated tax charged on invoices received by him, including the credit of central or integrated tax in respect of services subject to levy of tax under s. 9 (3) or (4) of the CGST Act 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. (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 the issue of a document containing the amount of ITC in such manner as may be prescribed.

Changes due to such amendments

Effect of amendments through Act

These newly brought provisions mandate the compulsory distribution of common ITC through the ISD mechanism for taxpayers with multiple GSTINs under the same PAN, ensuring compliance with s. 20 of the CGST Act. ITC on IS liable for GST under the RCM must also be distributed through the ISD. The ISD is required to distribute ITC specifically for services under RCM, using a prescribed ratio for accurate allocation among the various branches.

Conclusion

The amendments introduced by the Act concerning the definition and functioning of an ISD under the CGST Act establish a more comprehensive framework for the distribution of ITC. The amended provisions mandate that any office of the supplier receiving invoices for IS must register as an ISD to ensure the proper distribution of ITC among distinct persons, thereby promoting transparency and uniformity in tax credit distribution. Additionally, the amended rules provide a clear outline of the method and conditions for ITC distribution, including special provisions for taxes paid under RCM. These changes are aimed at streamlining compliance and ensuring that the ITC benefits are appropriately distributed across various branches of an entity operating under a common PAN, per the revised statutory framework.

Authored by Manmohan Bhola, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinions.