Input Tax Credit (ITC) Distribution And Utilisation In GSTR-6

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Unlocking the benefits of input tax credit (ITC) distribution and utilisation in GSTR-6 can be a game-changer for businesses. With the correct understanding and strategy, organisations can optimise their tax credits, reduce liabilities, and boost cash flow. In this article, we delve into the intricacies of ITC distribution and utilisation in GSTR-6, providing insights and actionable tips to make the most of this feature. Whether you’re a tax expert or a business owner navigating the complexities of GST, this article aims to demystify the ITC process and help you unlock its full potential.

Who distributes Input Tax Credit under GSTR-6?

Under GSTR-6, the responsibility of distributing credit lies with the Input Service Distributor (ISD). The ISD receives tax invoices for input services and proportionately allocates the corresponding CGST, SGST/UTGST, or IGST credit to eligible supplier units with the same PAN.

Why is the concept of ISD needed under GSTR-6?

The introduction of the Input Service Distributor (ISD) concept enables businesses with shared expenditures across various locations nationwide to centralise their invoicing and billing. ISD registration primarily facilitates the active distribution of credit for services rather than goods.

Role of ISD under ITC

Service Invoices and Distribution: 

ISD receives invoices for shared services from providers who charge GST. ISD issues invoices to units that receive services but share the same PAN, distributing the tax paid to those providers.

Credit Distribution: 

Since ISD doesn’t consume services directly, it can’t claim input tax credit for the tax paid. Instead, it must distribute the credit to actual service recipients within the same PAN.

Regular Taxpayer vs. Input Service Distributor

ISD and Outward Supplies:

 Unlike a regular taxpayer, an ISD taxpayer doesn’t engage in outward supplies.

Credit Claim Difference:

ISD and regular taxpayers receive inward supply invoices, but an ISD can’t claim credit for tax paid on services like a regular taxpayer.

GSTR 3B Filing:

A regular taxpayer files GSTR 3B to record liabilities and input tax credits in GSTN’s ledgers. However, an ISD doesn’t need to file GSTR 3B because it lacks both liabilities and credits, thus having no associated ledgers.

ISD Mechanism

The ISD mechanism permits registered taxpayers to allocate the credit of input services to their different branches or units. The input service distributor must furnish an ISD invoice to each recipient branch within this framework, indicating the distributed credit amount. These recipient branches can use this credit to fulfil their output tax liability.

Also Read: Role and responsibilities of an Input Service Distributor (ISD) under GSTR-6

Distribution of Input Tax Credit by ISD

The Input Service Distributor has the authority to allocate IGST, CGST, SGST, or UTGST credit to the respective recipients of that credit, subject to the following conditions:

  • The ISD can exclusively distribute the tax paid on services the registered person’s units use during their business operations.
  • The available ITC distribution in GSTR 6 within the same month; therefore, deferring credit distribution is prohibited. The ISD must ensure that credit is not distributed beyond what is available.
  • An ISD cannot accept invoices that involve tax payment on a reverse charge basis. It’s important to highlight that a recipient of a service taxable under the reverse charge mechanism they are accountable for settling the tax liability before being eligible to claim the corresponding credit.
  • An ISD must allocate the credit of CGST, SGST/UTGST, or IGST separately, and the eligible and ineligible credit must be divided independently.
  • The credit linked to a specific recipient unit is distributed to that unit, even if it is unregistered or engaged in exempt supplies.
  • Registering separately as an ISD is obligatory, even if the entity has already acquired registration as a regular taxpayer through REG-01. This registeration involves selecting the option under Serial number 14 of the form to indicate registration as an ISD.
  • Different offices of a company can indeed hold separate ISD registrations. In simpler terms, a company is permitted to have multiple registrations as ISD for its various offices.
  • ISD is responsible for issuing an invoice, referred to as the ISD invoice, to the units it aims to allocate the credit of tax paid on services. This invoice must explicitly state its purpose as the distribution of Input Tax Credit (ITC).
  • When a reduction in Input Tax Credit (ITC) occurs through a credit note, the ITC reduction should align with the initial distribution ratio mentioned in the original invoice. This reduction occurs in the month when the credit note is included in GSTR 6. The remaining amount is added to the output tax liability if the distributed credit is less than the reduced credit.
  • If the distributed credit is subsequently decreased for any reason, including situations where credit was wrongly allocated, the process outlined in Point No.11 should be adhered to. Incorrectly distributed credit can be adjusted by issuing an invoice to the eligible recipient. The credit note and invoice need to be documented in the GSTR 6 return for the same month.

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Manner of Distribution of ITC

  • When the recipient is in the same state or union territory as the ISD, CGST is distributed as CGST and SGST/UTGST is distributed as SGST/UTGST.
  • If the recipient is in a different state or union territory from the ISD, CGST is distributed as IGST, and SGST/UTGST is distributed as IGST.

Conclusion

GSTR-6 is a return that needs to be filed by an Input Service Distributor (ISD) for distributing and utilising ITC amongst its branches or units. This return captures all the details of the invoices on which ITC has been distributed, along with the recipients’ details. This helps maintain a transparent system where the ITC is correctly allocated and utilised. GSTR-6 ensures that the correct amount of ITC is distributed to the respective recipients and is utilised by the provisions of the GST law. It streamlines the process and eliminates any chances of misuse or incorrect allocation of ITC.

Also Read: GSTR-6 Applicability: Who Needs to File and When?

Frequently Asked Question(FAQs)

  • How can I distribute credit to my additional units within Form GSTR-6?

You can allocate eligible and ineligible Input Tax Credits (ITC) to the units using Tables 5 and 8 in Form GSTR-6.

  • What happens after Form GSTR-6 is filed?

After filing Form GSTR-6, you’ll receive an Acknowledgment Reference Number (ARN). SMS and email notifications are also sent to your registered mobile and email address to confirm the successful submission of Form GSTR-6.

author avatar
Kiran Jagadale
I am a seasoned marketer specializing in Tax, Finance, and Digital. I bring a wealth of hands-on experience to demystify complex subjects, providing insightful guidance for entrepreneurs, finance enthusiasts, and digital marketers alike.

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