Change in the definition of ISD – Interim Budget 2024

The Government introduced the Interim Budget on 1^st February 2024. An important change that has been made vide the Finance Bill, 2024 is the change in the definition of Input Service Distributor (“ISD”) u/s 2(61) of the Central Goods and Services Tax Act, 2017.

Earlier the definition read as –

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services 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 Permanent Account Number as that of the said office;

 The new definition states that –

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;

It can be seen that the definition of ISD has been widened to include offices that receive tax invoices for input services, including those services liable to tax under reverse charge mechanisms specified in sections 9(3) and 9(4). This means that ISDs can now handle a broader spectrum of invoices, including those under reverse charge, and distribute input tax credit for both forward charge and reverse charge services across distinct persons specified under section 25.

Section 20 has also been amended, which mandates every such office qualifying as an ISD to register under clause (viii) of section 24. Till now, it was noticed that taxpayers used to cross charge the service proportionate to other units and charge GST, instead of distributing credit through the ISD mechanism, and the recipient unit availed the input tax credit of such GST paid. However, with this amendment, it is now compulsory for units to take an ISD registration in order to distribute the input tax credit.

The said amendment simplifies the input tax credit distribution process by taxpayers having multiple units under the same PAN, especially for services under reverse charge mechanisms. Earlier, businesses had to issue invoices to respective branches for services under reverse charge mechanism, while forward charge services were managed through ISDs. The new definition eliminates this distinction, allowing credit of all invoices for common input services, regardless of their RCM status, to be distributed through ISDs. Further, businesses now have to mandatorily take a registration as ISD and distribute the common credit.

As a way forward, businesses need to review their current GST and input service distribution processes and update the accounting and ERP systems to align with the change. This amendment marks a progressive step towards simplifying GST compliance and enhancing operational efficiency and is expected to streamline the operations, reduce compliance burden, and ensure a smoother input tax credit distribution.