Mapping ISD under GST in Oracle EBS: Process Document

 Definition: Input Service Distributor (ISD)

Who is an Input Service Distributor (ISD) under GST? An Input Service Distributor (ISD) is a taxpayer that receives invoices for services used by its branches. It distributes the tax paid known as the Input Tax Credit (ITC), to such branches on a proportional basis by issuing ISD invoices.

 

Input Service Distributor (ISD) Under GST:

An Input Service Distributor (ISD) is a special type of GST taxpayer that plays a role in the distribution of the Input Tax Credit (ITC) for services to its branches or establishments. ISD is not involved in the direct supply of goods or services but acts as a conduit to allocate ITC to various units or branches that use the input services.

What is ISD in India:

ISD (Input Service Distributor) is a mechanism under the GST (Goods and Services Tax) framework in India where the head office (or a centralized office) receives invoices for services (like consulting, audit, legal, advertisement, etc.) that are used by multiple branches or units across different states. ISD facilitates the fair distribution of Input Tax Credit (ITC) to the respective branches.

 

How ITC is Distributed:

The Input Tax Credit (ITC) on the central services is distributed proportionately to different branches (based on their turnover or usage).

This distribution is done using a special invoice called the ISD Invoice.

Each branch or unit that receives the ITC must be eligible to use the credit (i.e., they must be registered under GST).

 

Conditions for Distribution:

The distribution is based on a pro-rata basis or a ratio as per the turnover of each branch, but the method has to be consistently applied.

No Direct Supply of Goods/Services: The ISD does not make any outward supply of goods or services; it only distributes the credit.

 

Registration: 

Business gets an ISD registration for the location handling shared services (common expenses).

Only one ISD registration per legal entity is allowed.

The location with receipt of service bills for common expenses must register as ISD.

ISD only applies to input services, not goods.

Parent Company needs to define Additional Inventory/OU with ISD Location and the first party needs to define at the OFI Setups.

 

Simplified ISD approach under GST that end users are required to follow

 

1.      Expense & GST Accounting:

ISD location receives invoices (Bill to) for common services (expenses).

The ISD location accounts for the common expenses.

 

    ISD location (Head office) claims ITC in GSTR-6

It pays the applicable GST on services received.

The GST paid becomes eligible for ITC (Input Tax Credit).

 

2.      ITC Allocation to Branches: 

The ISD allocates the ITC and proportionate expenses to branches under the same PAN.

This is done via internal transactions (manual intercompany AR Invoices) for the services used by each branch.

 

3.      Branches Claim ITC: 

Branches record accounts payable (AP) invoice received from ISD.

They apply the GST to claim the transferred ITC.

 

4.      Utilization & Settlement: 

Branches use the credited ITC to offset their output GST liabilities. Branches receive ITC and reflect it in their GSTR-3B

The ISD can offset its overall IGST/CGST/SGST liabilities against its ITC during GST return filing. 

 

Example of an Input Service Distributor (ISD)

Let’s take a real-world example to better understand the concept of ISD under GST:

Example:

Suppose there is a company called ABC Ltd., which has its head office and 3 regional offices in different states. ABC Ltd. centralizes certain services like legal services, accounting, and IT support in its head office.

The head office of ABC Ltd. receives an invoice for legal services worth ₹100,000 and pays a GST of ₹18,000 on the service (₹100,000 * 18% GST).

The head office is registered under GST and is eligible to receive the Input Tax Credit (ITC) of ₹18,000 on these services.

However, the legal services are not only used by the head office but are also used by the 3 regional offices. Therefore, the GST credit needs to be distributed among the head office and regional offices based on their turnover.

Let’s assume that the turnover of the offices is as follows:

Head office: ₹50,00,000

Regional office 1: ₹30,00,000

Regional office 2: ₹10,00,000

Regional office 3: ₹10,00,000

The total turnover is ₹1,00,00,000.

Now, the ISD will distribute the ₹18,000 ITC to each office based on their turnover proportion.

Calculation:

Total turnover = ₹50,00,000 (head office) + ₹30,00,000 (regional office 1) + ₹10,00,000 (regional office 2) + ₹10,00,000 (regional office 3) = ₹1,00,00,000.

Each office’s share of the ITC:

Head office: ₹18,000 * (₹50,00,000 / ₹1,00,00,000) = ₹9,000

Regional office 1: ₹18,000 * (₹30,00,000 / ₹1,00,00,000) = ₹5,400

Regional office 2: ₹18,000 * (₹10,00,000 / ₹1,00,00,000) = ₹1,800

Regional office 3: ₹18,000 * (₹10,00,000 / ₹1,00,00,000) = ₹1,800

Result:

The Head office will retain ₹9,000 of the ITC.

Regional office 1 will get ₹5,400 of the ITC.

Regional office 2 and 3 will get ₹1,800 each.

Reference Document Source: 

1. OFI: What is The Functionality To Raise Input Service distributor (ISD) Invoice And Is There Any Separate trial balance Available for that? (Doc ID 3042592.1)

2.    OFI: Need To Understand The Functionality For (Input Service Distribution) ISD Under GST (Doc ID 2287567.1)