Input Service Distributor (ISD) VS Cross Charge under GST

  • What is the meaning of Input Service Distributor under GST?

“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 concept of Input Service Distributor, hereinafter referred as “ISD”, exists under the Indirect taxes from the ‘pre-gst’ regime. The idea behind the introduction of this concept was, laying down basis for distribution of Input tax credit in respect of services which are commonly consumed across various ‘cost and profit centers’ engaged in manufacture of goods or engaged in rendering taxable services. Under the GST regime, as well the concept of ISD has continued to exist. The purpose of ISD however has not changed.

There are certain expenses which are incurred by a unit of an entity which does not specifically cater to any outward supply, but only helps to facilitate smooth functioning of the entire entity. The said unit operates as a Head office or a corporate office. There are certain expenses incurred, dedicatedly for the head office or corporate office. Or sometimes the vendors who have the contractual agreements entered at the head office or corporate offices tend to raise the invoices in the name of head office or corporate office. Thus, in these cases, the taxes levied along with the value of services find no place for utilization. The reason being that the registration of the ISD unit under the Pre and Post GST regime, continues to be separate than that of its service units or manufacturing/trading units. Although at an entity level the company may be one and same, but for taxation purpose the registrations of ISD units (Head office or corporate office) is different from that of its other units. The vendors who raise invoices in respect of services rendered to an entity, may raise the invoice indicating the registration number of the ISD unit. The ISD unit will claim the ITC in respect of the tax paid along with the value of invoice. Since ISD unit does not have any outward supply, the ITC will not be utilized to pay taxes, but will be only distributed to its units holding the registration under same PAN. The distribution of ITC would be done, based on certain rules as laid down under the Input tax credit provisions under the CGST Act 2017, and rules relating thereto.

Eg: Keyur Ltd has its head office located in Mumbai Maharashtra. It has a manufacturing unit in Pune Maharashtra. Also, it has units located in Bangalore (Karnataka), Chennai (Tamil Nadu) and Jaipur (Rajasthan). The company has received Chartered Accountancy services from X & Co. the firm has raised invoice for the Audit services rendered for the year 2018-2019.  The Invoice is raised in the name of Keyur Ltd and the GSTIN is that of the ISD registration held by the company. The Invoice is of Rs 4,00,000/- + GST @18%. In this case, the GST credit of Rs 72,000 will be availed by the ISD unit and would be distributed based on provisions of GST Act among the units (Pune, Bangalore, Chennai, Jaipur).

  • What is the meaning of Cross Charge?

There is an irony, that the concept of “Cross Charge” is one of the most discussed concepts under the GST Laws. However, the word “Cross charge” per se does not appear under the CGST Act. With the introduction of GST law, the state-wise registration became mandatory for the entity holding place of business in more than one state. Also, the concept of “distinct person” was defined under the GST Laws. Any person who holds registration under the GST Act, in more than one state, bearing same “PAN”, is recognized as a “distinct person”. As per Schedule-I to the CGST Act 2017, supplies without consideration amongst “distinct persons”, is liable to be taxed. For this purpose, the value is to be determined in accordance with the provisions of CGST act and the CGST Rules (valuation rules). There may be transaction of stock transfer amongst the branches of a same company located across two different state. In such case, by virtue of provisions of Schedule-I to the CGST Act 2017, the same is liable to be taxed. The reason for the same is that GST is a “destination-based consumption tax”. Thus, if the goods were to be consumed in some different state, even if belonging to the same company, for the purpose of GST it was consumption by a distinct person in a different state. Thus, tax is liable to be paid. As far as this transaction is concerned there cannot be a concept of deemed supply coming into picture.

However, let us now understand how “Cross Charge” works. Ace Ltd is a company having its registration under GST Act in Mumbai (Maharashtra) which is its head office. Surat (Gujarat), Indore (Madhya Pradesh). The company has procured Audit services. Now the auditor would be providing audit services for the entity “Ace Ltd”. It is important to note that the benefits of services received would be for all the branches. However, the Auditor has raised an invoice only in the name of “Ace Ltd” Mumbai. In this case, the consumption audit services is actually done by all the branches. Thus, if we think from the “Destination based consumption tax” point of view, one may say that the consumption of audit services is in the state of Maharashtra, Gujarat and Madhya Pradesh. Thus, under the GST Act, it would be necessary, based on some logical equitable manner that the consumption of services should be passed on to the respective states. Now if we refer to the provisions of “Place of Supply”, the auditor has correctly charged GST and issued the bill in the name of Maharashtra office with its GSTIN. However, for the purpose of GST laws the consumption has taken place in all those states where the services are consumed. Thus, the Maharashtra unit will have to raise a Cross charge invoice for the deemed services provided to the units in other states. Or in an instance let us consider a situation of “Courier services agreement” entered by the Maharashtra Branch of Ace Ltd with a courier company based out in Maharashtra. As per the agreement the courier company will be responsible to provide services on Pan India basis to Ace Ltd. However, the entire booking will be made in the name of Maharashtra Branch. Now in this case, there would be a portion of the courier services which would be consumed in Gujarat and Madhya Pradesh. However as per the agreement with the courier company the bill will be raised only in the name of Maharashtra unit. In this case it is deemed that the portion for which services are consumed in Gujarat and Madhya Pradesh respectively, the services are deemed to be provided in those states by Maharashtra unit. Thus, the Maharashtra unit will be required to issue a “Cross charge Invoice”.

  • ISD v/s Cross Charge

If we consider from the GST Laws point of view, “Cross charge” concept is not an option to be considered. It is imperative and mandatory in nature. However, one may take a call if he is really in need of an ISD registration.

ISD registration shall be preferred, if there is a unit which is merely a head office or corporate office, wherein there are no outward supply transactions. In such case whatever expenses are incurred at such office are meant for the common purpose for all the units across the entire country. Thus, the benefits of the common expenses such as Audit Fees, Rent of Head Office or Corporate Office, Advertisement agency fees, Outsourced HR services etc can be enjoyed by units across all the states. In such case, it would be ideal to hold a “ISD” registration, wherein all the common cost can be borne at the head office and the tax credit relating to it can be distributed across all the beneficiary units. Over here more than the deemed consumption it would be necessary that the passing of tax credits is taking place.

On the other hand, where there is no ISD registration, but there is only a deemed rendering of services by one “Distinct person” to another, in such case the same can be dealt with by way of raising a cross charge invoice. Usually in this scenario if the common services are identified to be consumed only in a single state, then the factual position in respect of such services will be required to be studied and based on the same, the relevant share of consumption over the distinct person, can be passed on by way of raising a cross charge invoice.

One may decide to go for an ISD registration only if he holds a specific office or place of business which is just to facilitate the smooth functioning of business but is not engaged in providing any outward supply. However, if only there is an existence in multiple state, but no one dedicated cost center like a head office, then the deemed consumption of services can be passed by way of “Cross Charge Invoices”.

Default image
IndiaTaxes Admin
Articles: 78