New GST rule from April 1, 2025: ISD mandatory for input tax credit; not following will lead to ITC denial, minimum penalty of Rs 10,000 This means that the distribution of common input tax credit (ITC) must be carried out exclusively through the ISD mechanism
Ashish Karundia
Ashish Karundia is the founder of Ashish Karundia & Co.
Since the implementation of the goods and services tax (GST) in July 2017, businesses with multi-state GST registrations have faced confusion regarding the process for distributing common input tax credits (ITC) availed on services to lower net GST liability.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} While some entities have opted for the input service distributor (ISD) mechanism to allocate common ITC to their other GST registrations (under the same PAN), others have chosen the cross-charge method. In July 2023, the Central Board of Indirect Taxes and Customs (CBIC) clarified that the ISD mechanism is not mandatory for distributing common ITC availed from third parties to other GST registrations. As a result, businesses had the flexibility to choose between the ISD mechanism and the cross-charge method. However, this arrangement will change starting April 1, 2025.
New GST rule from April 1, 2025: ISD mandatory to claim ITC
The government has made the ISD mechanism mandatory, effective April 1, 2025. This means that the distribution of common ITC must be carried out exclusively through the ISD mechanism.The below illustration explains the new GST rule:
Nature of ITC
Booking of invoice
Consumption of services
ITC distribution
Input services
Head office
Head office
Not required*
Head office
Location other than Head office
Mandatory ITC distribution through the ISD mechanism
*If the services consumed by the head office are used for supplying services to its other locations, the ITC need not be distributed but an outward tax invoice (cross charge) shall be issued
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Examples of services that are consumed at multiple locations are audit (statutory, tax) services, software licence services, manpower supply services, security services, banking, consultancy services, litigation services, compliance services, security services, etc.
Why ISD is being made mandatory from April 1, 2025
To prevent the accumulation of ITC related to services consumed across multiple locations at a single location and ensure the correct allocation of ITC to the locations where the services are actually consumed. The ISD's role is to receive invoices for such services at one registration and then distribute ITC to other registrations where the services are truly consumed.
How ITC will be distributed through ISD
The table below illustrates how the ISD distributes the common ITC:Type of Services
ISD location and Services consumption location
Nature of ITC in the hands of ISD
Distribution of ITC by ISD
Services attracting GST under forward charge
Same State
CGST and SGST
CGST and SGST
Different State
CGST and SGST
IGST
Different State
IGST
IGST
Services attracting GST under reverse charge
Same State
CGST and SGST
CGST and SGST
Different State
CGST and SGST (always)
IGST
Conditions of distributing ITC by the ISD
ITC (eligible or ineligible) available for distribution in a month shall be distributed in the same month. ITC needs to be distributed even to unregistered offices or offices supplying exempt supplies where such offices have consumed common input services. Where the input services are consumed at one location, ITC shall be distributed to such location only. However, where the input services are consumed at more than one location, ITC shall be distributed to all such locations on a pro-rata basis in the ratio of the turnover.Problems for GST taxpayers
Separate ISD registration: Every taxpayer to whom the ISD mechanism is applicable is mandatorily required to obtain separate registration for ISD compliance even though the taxpayer has already taken 'regular' registration. Proper bifurcation of common expenses: The taxpayer would be required to mandatorily separate services into (a) services in respect of which benefit is derived/consumed by other locations but the invoice is received at the office (ISD) and (b) services used by the office for supplying internally generated services to other locations (cross-charge). The said exercise needs to be carried out even though the ITC in respect of the common services are ineligible. Restructuring of invoices: The taxpayer needs to carry out an exercise to analyse whether the invoices in respect of services consumed at different locations can be directly received by respective locations instead of the existing practice of receiving such invoices at the head office. Communication with vendors: Invoices in respect of services that are consumed at multiple locations or locations apart from the office need to be received at ISD registration for proper ITC distribution. The taxpayers accordingly need to communicate and share the new GST number (ISD GSTIN) with the vendors for invoicing purposes. Changes in the IT systems: The IT systems need to be equipped with the new ITC distribution requirements, such as the incorporation of ISD registration details, modification in the procurement process such as purchase orders, creation of ISD-specific ITC ledgers, recording of inward ISD invoices, ISD credit notes, the facility to generate outward ISD invoices, ISD credit notes incorporating statutory details, mapping of common input services consumed at more than one location, etc. Teams Training: Proper training needs to be given to those responsible, such as the procurement team, accounts team, and tax filing team, so that they are aware of the new rules and the transactions are appropriately recorded/reconciled. Additional monthly GST compliances: The taxpayer must file a separate monthly return in GSTR 6, incorporating ISD invoices and ISD credit notes. He/she also needs to undertake an additional reconciliation of the transactions appearing in GSTR 6A before filing GSTR 6. Separately, the locations in receipt of ITC from ISD need to appropriately disclose the ITC so received in Table 4 while filing the respective monthly GSTR 3B.What will happen if the ISD mechanism is not followed?
If a taxpayer is required to comply with the ISD mechanism but fails to do so, the following consequences may follow:The eligibility of common ITC (regarding services consumed at other/multiple locations), if any, distributed (using cross charge route) will be disputed, leading to the denial of ITC in the hands of the recipient location. The incorrect (excess) distribution of the ITC by the ISD would be recovered by the tax authorities from the recipient locations along with interest. Penalty may be levied for irregular distribution of ITC for an amount of irregular ITC distributed or Rs. 10,000, whichever is higher.The author is the founder of Ashish Karundia & Co. Views are personal.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
