Input Service Distributor (ISD) Registration under GST
In the GST regime, companies are eligible to claim Input Tax Credit (ITC) on the tax paid on the purchase of goods and services, which can be utilized as an offset for their own tax liability. There are certain provisions in GST for organizations that are obligated to transfer input tax credits between different branches or units. One such provision is the Input Service Distributor (ISD) mechanism. This mechanism facilitates easy transfer of input tax credit on services availed from various branches or units of an organization.
This article will provide a step-by-step explanation of ISD registration under GST, its significance, and how to obtain ISD registration.
What is an Input Service Distributor (ISD)?
An Input Service Distributor (ISD) is a GST registered party who gets tax invoices for services, but the services are utilized for onward distribution to other branches, units, or establishments. The primary purpose of the ISD is to pass on the Input Tax Credit (ITC) on the services to the concerned branches or units who have borne the cost of the service.
For example, if a business provides services from a head office but has a number of branches owned by it, the head office can pass on the input tax credit on the services utilized, such as consultancy or common services, to the branches using the ISD mechanism. This will enable the branches to avail themselves of the input tax credit, even though the head office has already been taxed on the services.
Who Should Come Forward for ISD Registration?
Under the GST law, the following are mandatorily required to register as an input service distributor:
Centralized Service Provider: An organization providing services from the central office but having several branches, units, or establishments spread across different locations. The sentence is now grammatically correct.
Recipient of Services: The business is likely to be receiving services and is required to have the necessary tax invoices or debit notes.
Non-Manufacturing Enterprises: Non-manufacturing enterprises, such as traders or service providers, can also get registered under ISD in case they have to pass input tax credit on services to various branches.
However, firms that merely deal in goods and are not required to pay input tax credit on services need not register under ISD.
Benefits of ISD Registration
There are several advantages to obtaining ISD in GST:
Effective Credit Allocation: ISD registration allows effective and centralized input tax credit allocation on services. It allows input tax credit on services to be available from various locations, leading to cost savings.
Improved Working Capital: Through allowing the remittance of input tax credits, ISD reduces the tax burden at the branch level. This improves the company's working capital position.
Enhanced Compliance: Participation in ISD registration under GST provisions compliance, as it offers a legal forum for claiming ITC on services, thereby avoiding legal issues.
Centralized Services: Organizations with centralized services are able to claim input tax credit on services and shift it to units where services are being consumed. This may involve services such as HR, accounting, and marketing services that are being offered centrally.
Requirements for ISD Registration
Before deciding on ISD registration, the companies need to fulfill some conditions:
The firm needs to be registered under GST.
The services received need to be utilized by various branches or units enrolled under GST.
The goods or services received should be taxable and employed for business purposes.
The firm must raise a GST invoice to the receiving branch or unit, indicating the amount of credit being released.
The firm must keep accurate records of the input service and its distribution to different units or branches.
Procedure for ISD Registration
ISD registration is identical to regular GST registration with a few extra steps for transferring the input tax credit. The following is a step-by-step procedure for ISD registration:
Login on the GST Portal: Go to the official GST portal (www.gst.gov.in) and log in with your credentials.
Application for Registration: On the "Services" menu, visit "Registration" and select "New Registration" from the drop-down list. Select "ISD" as the registration option.
Enter Your Business Details: Fill in the business details, i.e., business name, PAN number, business address, etc., which are the mandatory details.
Provide the Details of the Branches:
As you are an ISD, you are required to furnish details of the units or branches through which you want to transfer the input tax credit.
Documents Needed: Add the documents needed for registration, like a PAN card, business proof, and other documents asked for by the GST portal.
GSTIN Application: Once you fill up the application form and upload required documents, you must submit the form. After the verification of the application form, your GSTIN number will be given to you.
GSTIN of ISD: Upon approval of the application, the ISD shall be assigned a GSTIN (GST Identification Number) in the ISD category, and the business can commence passing on input tax credit.
Distribution of ITC by an ISD
Once registration with ISD is finalized, the input tax credit should be credited to the recipient branches. The procedure is as follows:
Distribution of Input Tax Credit: The credit for services consumed must be proportionately distributed over the turnover of each branch or unit. The turnover of each branch is the basis for calculation of the share of the input tax credit.
GST Returns Filing: Monthly returns in Form GSTR-6, which contains the services and the credits allocated to the branches, should be filed by the ISD. Filing such returns within the due date is mandatory to avoid penalty.
Proportional Credit Distribution: Credit on services is distributed to branches proportionate to the turnover and can be utilized for input tax credit by the respective branches.
Problems Encountered by ISD
While ISD registration has numerous benefits, there are some drawbacks that companies may encounter:
Complexity of Distribution: Distribution of the input tax credit to multiple branches is a complicated task that requires thoughtful planning and computation. Miscalculation in distribution can lead to compliance issues.
Timely Filing of Returns: The ISD must make timely filing of returns and provide all the branches or units with their due share of the input tax credit. Delay in filing may attract penalties.
Lack of Awareness: Some companies are not at all aware of the mechanism of ISD, and they lose claims for input tax credit and face non-compliance.
Overview
ISD registration is one of the most important features of the GST regime that enables smooth passing of input tax credit on services availed by different units or branches of a business. It enables businesses to avail themselves of maximum tax credits, enhance working capital, and achieve GST compliance. With the knowledge of the intricacies of ISD registration, businesses can escape penalties and enjoy the maximum tax benefits under GST. But they need to maintain proper records and file returns within time to enjoy the maximum benefits of the ISD mechanism. For GST Registration online and offline, you can contact a best consultant; Registration Guru is one the them, where you can get full support during registration process