Budget 2024: Mandatory ISD Registration Proposed For Inter-Branch Services Under GST

According to the Finance Bill 2024, an amendment has been proposed for mandatory Input Service Distributor registration of an office, which receives invoices for common input services.

Under the GST regime, several disputes have risen in the past over which methodology should be used, so that tax credit pertaining to common input services can be availed.

While some businesses were adopting the ISD mechanism to distribute the credit on inter-branch services, others were cross-charging such expenses from the head office to the branch offices.

Under GST, different branches of the same legal entity are treated as separate taxable entities. Therefore, supply of services to each other, even though without consideration, is a taxable supply.

Including expenses pertaining to inter-branch services into the value of services provided by the head office would result in the transfer of such common credits to the branch offices, which were subsequently claimed as tax credits. This is known as the cross-charge mechanism.

The ISD mechanism is meant for distributing the credit on common invoices pertaining to input services. For example, a company might have a head office in Delhi and several branch offices in other states. Since bills pertaining to certain services will be raised on the head office but the services will be used by other branches as well, the head office can distribute input GST credit among different branches under this mechanism, so that there is no blockage of credits for the branches.

ISD mechanism enables proportionate distribution of credit of input services among all the consuming units.

Even though these are two separate concepts, they have been at crossroads with each other, as they both deal with availing input tax credit arising out of common services.

However, the proposed amendment ought to put the controversy at rest after it is implemented, according to Sudipta Bhattacharjee, partner at Khaitan & Co.

While the proposed amendments clarify the position and should clear any ambiguity, businesses may now need to review and reset their processes in line with the proposed amendment to ensure that they are compliant with the provisions of the law, Manish Mishra, partner at JSA Advocates & Solicitors, told NDTV Profit.

The proposed changes necessitate a review of inter-branch transactions and potential changes in business processes and compliance. This change may also trigger new disputes between taxpayers and GST authorities, underscoring the need for clarifications before implementation, said Bhattacharjee.