Input Service Distributor Mechanism

Context (NDTV): The Finance Bill 2024 has proposed to amend the definition of Input Service Distributor (ISD) and the manner of distribution of common credit using the ISD mechanism.

Who is an ISD?

An Input Service Distributor (ISD) is a taxpayer that receives invoices for services used by its branches.
It distributes the tax paid, known as the Input Tax Credit (ITC), to such branches on a proportional basis by issuing ISD invoices. The branches can have different GSTINs but must have the same PAN as that of ISD.

Input Tax Credit refers to the tax already paid by a person at the time of purchase of goods or services and which is available as a deduction from tax payable. ITC is a mechanism to avoid the cascading of taxes.

How does the ISD Mechanism work?

For example, a company might have a head office in Delhi and several branch offices in other states. Since bills pertaining to specific services will be raised at the head office. Still, the services will be used by other branches as well; the head office can distribute input GST credit among different branches under this mechanism so that there is no blockage of credits for the branches.
ISD mechanism enables proportionate distribution of credit of input services among all the consuming units.

What is the issue?

Issue: The existing provision of the ISD mechanism does not cover the methodology for the transfer of credit on those common input services on which tax has been deposited under the reverse charge.
Therefore, businesses have adopted varied positions,
- Some have opted for periodic cross charge (weekly/monthly/annually) in respect of common services received at HO or a prominent branch.
- Some have opted for exclusive distribution of ITC.
- Some have opted for a hybrid approach of cross charging for some input services (typically internally generated services) and using the ISD route for some other services (typically third-party services).