Input Service Distributor-ISD

[k.lakshmipati rao]

Input Service Distributor [Section 2(61) of CGST Act,2017]- ISD.

Companies having Registered Office/Corporate Head office/Director’s office- [Office] premises shall get registered as ISD in general, as per the provisions of Section 24(viii) of CGST Act,2017.

Common Services [other than Goods]:- ISD- which receives Tax Invoices towards the receipt of input services, shall be distributed by ISD to respective branches or Units as per the provisions Section 20 (2) & (3) read with Rule 39.

Query-1: Whereas, If an office of ISD which receives Tax Invoices, (exclusively for its operations as ISD) towards the receipt of input on Goods, like Capital Goods [Computers/Printers/Office Equipment etc.,] and other materials like Stationery/Printing Material items etc., what could be the accounting treatment in the Company books of Accounts, with reference to GST element in the Tax Invoices meant for supply of Goods [being used by ISD].

• Does GST element should be added to the cost of Goods [Capital Goods and/or Other Goods/items] while accounting in the Company books of Accounts, since ineligible.

[YAGAY andSUN]

Your question relates to the accounting treatment of GST on goods (e.g., capital goods and other consumables) received and used by an Input Service Distributor (ISD), and whether the GST component on such goods should be capitalized (added to the cost of goods) in the company’s books, considering that the ISD mechanism allows distribution only of input services, not goods.

Let’s break this down under the relevant provisions and professional accounting principles.

✅ Legal Context:

🔹 Section 2(61) of CGST Act, 2017 – Definition of ISD:

An Input Service Distributor is an office of the supplier of goods or services or both which receives tax invoices towards receipt of input services and issues a prescribed document for the purposes of distributing credit of CGST/SGST/IGST/UTGST paid on said services to a supplier having the same PAN.

👉 Key point: ISD can distribute only input tax credit (ITC) on input services — not on goods (capital or otherwise).

🔹 Section 24(viii) – Mandatory Registration of ISD:

Any office intending to distribute ITC under the ISD mechanism must register mandatorily as an ISD.

🔎 Situation in Query:

Your ISD (say, Corporate Office) is:

• Receiving invoices for input services (eligible for distribution via ISD mechanism), and
• Also receiving invoices for supply of goods like capital goods (e.g., computers, printers) and consumables (e.g., stationery) — used by the ISD itself, not by other branches.

Now the GST charged on such goods cannot be distributed via the ISD route as per the CGST framework.

⚖️ Accounting Treatment under GST & Accounting Standards (AS/Ind AS):

📌 1. Input Tax Credit (ITC) Ineligible for Distribution via ISD

• Since ISD cannot distribute ITC on goods, and the goods are being used internally by the ISD office, the ITC becomes ineligible under GST.

📌 2. Treatment in Books of Accounts

As per AS 10 (Accounting for Fixed Assets) and Ind AS 16 (Property, Plant and Equipment):

"The cost of an item of property, plant and equipment comprises its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates."

👉 Therefore:

The GST component (if not eligible for credit) becomes a non-refundable tax, and must be:

✅ Capitalized along with the cost of capital goods, or

✅ Expensed out with the cost of consumables (e.g., printing material, stationery), as applicable.

🧾 Practical Accounting Entry:

For Capital Goods (e.g., Computers – GST ineligible at ISD):

Dr. Computer/Equipment A/c        ₹1,18,000 

     Cr. Creditor / Bank A/c               ₹1,18,000 

     [Being computer purchased – GST not claimable, hence capitalized]

For Consumables (e.g., Stationery):

Dr. Stationery/Office Supplies A/c   ₹11,800 

     Cr. Creditor / Bank A/c                 ₹11,800 

     [Being purchase of stationery – including GST, expensed out]

❗ Important Compliance Note:

If the ISD wants to avail credit on goods used exclusively by it, it should take separate regular registration as a normal taxpayer in that State apart from ISD registration — and not claim the ITC via ISD mechanism.

🔍 ISD registration does not allow availing ITC — it only permits distribution of eligible input services ITC to other locations under same PAN.

✅ Conclusion:

In your case, the GST paid on capital goods or consumables used by the ISD office (not being input services) is not eligible for credit distribution under the ISD mechanism, and therefore, the GST component should be capitalized (in case of capital goods) or charged to P&L (in case of consumables) in the books of accounts.

Disclaimer - This discussion does not constitute any Legal Opinion in any manner.

***

[k.lakshmipati rao]

Dear Mr. YAGAY Sir,

While Thanking you for your response mail, I draw your below comments.

❗ Important Compliance Note:

If the ISD wants to avail credit on goods used exclusively by it, it should take separate regular registration as a normal taxpayer in that State apart from ISD registration — and not claim the ITC via ISD mechanism.

Query:- 1. Does GST Audit dept., would raise any objection for the use of Goods when the Goods are exclusively using by ISD for ISD operations (Physically available in ISD Office) only and not for furtherance of Business, if correlated ONE to ONE use.

2. If situation is that, except Registered Office in the same State, ISD do not have any Business operations Units or Branches within the State, but have Business operations in other States.

[YAGAY andSUN]

Scenario: ISD with Operations in Other States

In the scenario where the ISD has business operations in other states but does not have any business operations or branches within the state of registration, the ISD is still required to comply with the provisions of the CGST Act. The absence of operations in the state of registration does not exempt the ISD from its obligations under the Act.​

If the ISD intends to avail credit on goods used exclusively by it, it should consider obtaining a separate regular registration as a normal taxpayer in that state, apart from the ISD registration. This would allow the ISD to claim ITC on such goods directly, rather than through the ISD mechanism.

[k.lakshmipati rao]

Dear Mr. YAGAY Sir,

Thank you for your quick response and Noted your Remarks. If the ISD intends to avail credit on goods used exclusively by it, it should consider obtaining a separate regular registration as a normal taxpayer in that state, apart from the ISD registration. This would allow the ISD to claim ITC on such goods directly, rather than through the ISD mechanism.

The point to be noted here is that there is no outward supply within the State, in which, ISD Registration is done. In such a situation, as to how the ISD can claim ITC on such goods directly. I feel, the ITC element should be added to the Cost of Goods, as there is no opportunity for set-off.

Please suggest, is there any other way out /opportunity.

[YAGAY andSUN]

🔍 Is There Any Other Way Out?

As of now, under the present GST framework, there is no direct mechanism to utilize or transfer ITC on goods procured at an ISD where:

• No outward taxable supplies are made,
• The ISD registration does not permit ITC claims on goods, and
• A separate regular registration does not help due to absence of taxable turnover.

Thus, no legal way exists to claim ITC unless the ISD becomes a supplier of taxable goods/services in that State, which is not the case here.

📝 Final Suggestion:

Until and unless there is:

• A business restructuring allowing outward supply from that State, or
• A legislative change allowing ITC on goods to be distributed through ISD (which currently is not permissible),

the prudent and compliant accounting treatment is to:

• Capitalize (for capital goods), or
• Expense out (for consumables) the GST element, treating it as non-creditable cost.

*** 

[k.lakshmipati rao]

Dear Mr. YAGAY Sir,

Thank you for your confirmation.

[Shilpi Jain]

Take a regular registration and avail the credit related to goods.

Under GST credit is available for expenses used for business unless specifically blocked.

Business is a very wide term and all expenses incurred by the corporate office and accounted in books as business expenses is an expense incurred for business purpose and should be an eligible credit.

If there is no outward supply then it can be regarded that the corporate office is providing support services to the other branches and cross charge invoice can be issued to utilise the credit.

[k.lakshmipati rao]

Dear Mr. YAGAY Sir and Ms. Shilpi Jain Madam

Thank you for your valuable suggestions in the matter.

Whilst I draw your attention to My understanding in the matter as mentioned below that Business entity is required two GST Registrations for having dual role, such as,

1. GST Regular Registration for Business operations, including cross-charge transaction (goods or services) on distinct persons, as per the provisions to Rule 28 of CGST Rules and eligibility of ITC to the recipient entity.
2. Accordingly, the ITC element on the Goods [capital goods and inputs (goods) deployed and used by ISD (Corporate Head Office) is eligible to claim as per the provisions of Section 16 of CGST Act.
3. There is no restriction on ITC element on the Goods used by ISD, since ISD do not fall under the provisions of Section 17 of CGST Act or any other provisions of the Act.
4. GST ISD Registration is exclusively for “distribution of ITC on Services” only.
5. ISD is not making any outward taxable supplies. Similarly, ISD cannot issue RCM invoices, as ISD has no option to disclose RCM invoices and pay GST [like regular taxpayer] and file monthly Returns in GSTR-1 and GSTR-3B.
6. Thus, Self-invoices shall be generated with Regular Registration in the same State for payment of GST under RCM on behalf of ISD, and file monthly GST Returns in GSTR-1 and GSTR-3B.
7. Business entity with Regular Registration in the same State shall issue Tax Invoice on ISD against payment of GST under RCM on behalf of ISD for common services like Advocate Fee, payment of Rent to unregistered Landlord etc.,
8. ISD shall provide its ISD Registration number to Common Service providers, like Statutory Auditors, common Support Services etc., for enable them to submit Tax Invoice and upload their GSTR-1 Monthly Return, duly mentioning the ISD Registration number, so as to get the common ITC Credit by ISD in GSTR-6A.
9. ISD shall issue invoices on distinct persons, and file monthly Return in GSTR-6.
10. ISD Invoices towards credit distributed on services will directly populate in monthly GSTR-2B relates to respective GSTIN of distinct persons of the entity.

I once again request you to kindly confirm the correctness above my understanding.

Thank you

 

[YAGAY andSUN]

Your understanding is largely on the right track, but let's break it down more systematically based on GST principles to ensure clarity.

Scenario 1: Rental Services from an Unregistered Person in Haryana

In this case, the Haryana office will need to discharge the GST under Reverse Charge Mechanism (RCM) because the supplier is unregistered, and as per GST law, GST needs to be paid under RCM when dealing with an unregistered supplier.

Here’s what needs to be done:

RCM Liability (Self-Invoice): Since the supplier is unregistered, the Haryana office will have to issue a self-invoice under RCM. The GST will be paid by the Haryana office as if it were the recipient of the services.

This invoice is issued by the Haryana office (as the recipient), reflecting the rental payment and the corresponding GST under RCM.

GST Payment & ITC: The Haryana office, upon paying the GST under RCM, can claim the Input Tax Credit (ITC) of the GST paid, but only if the rental services are used for business purposes.

Transfer of ITC to Karnataka (ISD Process): Since the rental services are common to multiple branches, the Haryana office can distribute the ITC to the Karnataka office (and other branches, if applicable) through the ISD mechanism.

The Haryana office, acting as the ISD (Input Service Distributor), will issue a Tax Invoice for the rental services to the Karnataka office.

The Karnataka office will then claim the ITC from the ISD invoice, and the corresponding credit will be distributed to the respective units/branches.

Scenario 2: Rental Services from a Registered Person in Haryana

If the rental services are provided by a GST-registered person in Haryana, the situation changes in terms of how the invoice is issued.

Tax Invoice from Registered Supplier (Haryana): The registered supplier in Haryana will issue a Tax Invoice for the rental services to the Haryana office (as the recipient).

The Place of Supply (POS) for rental services will be Haryana (because the property is located there). Therefore, the invoice will be issued to the Haryana office.

ITC in Haryana Office: The Haryana office can claim the Input Tax Credit (ITC) for the GST paid on the rental services.

ITC Transfer to Karnataka (via ISD): Since the rental services are common to all branches, the Haryana office can distribute the ITC to the Karnataka office (and other branches) using the ISD mechanism.

The Haryana office (as the ISD) will issue a Tax Invoice to the Karnataka office for the rental services, reflecting the amount of ITC being distributed.

The Karnataka office will claim the ITC from the ISD invoice.

Key Points to Consider:

Self-Invoicing under RCM: When dealing with an unregistered supplier, self-invoicing is a must, and the GST paid under RCM can be distributed through the ISD mechanism.

Place of Supply (POS): The Place of Supply of rental services will be the location of the property (Haryana). This determines where the tax is liable to be paid and who the invoice is issued to.

ITC Distribution through ISD: Both scenarios (whether the supplier is registered or unregistered) allow the Haryana office to distribute the ITC using the ISD mechanism, provided the services are used by multiple branches of the same legal entity.

Your Understanding:

Unregistered Supplier: Correct. If the rental service is from an unregistered person in Haryana, the Haryana office issues a self-invoice under RCM and can claim the ITC. Afterward, they can distribute the ITC to other branches through ISD.

Registered Supplier: Correct again. If the rental service is from a registered supplier, the tax invoice will be issued to the Haryana office, which can claim the ITC and subsequently distribute it to the Karnataka office (and other branches) through ISD.

Conclusion:

Your overall understanding is spot on. Just to summarize:

For unregistered suppliers: The Haryana office issues a self-invoice under RCM, pays GST, and distributes the ITC via ISD.

For registered suppliers: The rental service provider in Haryana issues a Tax Invoice to the Haryana office, which can claim the ITC and then distribute it to other branches via ISD.

This approach ensures that the ITC on common services (like rent) is distributed properly across the organization.