How does Input Service Distributor distribute service tax credit?
MAY 18, 2011
By Anuj Bansal, CA
INPUT Service Distributor means an office of the manufacturer or producer of final products or provider of output service, which receives invoices towards purchases of input services from the provider of input services and further, distribute the Input Tax Credit by issuing invoices, bill or challan to such manufacturer or producer or provider.
Registration of ISD:
ISD shall make an application for registration within a period of thirty days from the commencement of business.
ISD shall issue an Invoice:
Input service distributor shall in respect of credit distributed issue an invoice / bill / challan to each of the recipient of the credit.
Invoice / bill / challan shall have following contents:
++ Serial number.
++ Name, address and registration number of the person providing input services.
++ Serial number and date of invoice of the person providing input services.
++ Name, address and the registration number of the ISD.
++ Name and address of the recipient of the credit distributed.
++ The amount of credit distributed.
++ Signed by the authorized person.
Return:
ISD shall furnish a half yearly return.
Distribution credit by ISD:
As stated above ISD distributes credits to its units providing taxable services or manufacturing excisable goods. The distribution of such credit is subject to the following conditions:
(a) the credit distributed against an eligible document shall not exceed the amount of service tax paid thereon, and
(b) credit of service tax attributable to services used in a unit either exclusively manufacturing exempted goods or exclusively providing exempted services shall not be distributed.
There is no specific method / provision for distribution of credit is prescribed under the law. In the case of Ecof Industries P. Ltd. v. CCE (2010) 17 STR 515 (Tri-Bang.) it has been held that there is no restriction on the distribution of service tax credit. Further, the court observed that in case department wants to place restriction on distribution of service tax credit, the rule is required to be amended. Accordingly, even in case the whole of Input Tax Credit is distributed / transferred to one unit, same shall not be disputed by the department. However, generally the Credit is distributed in accordance to the ratio of turnover of goods / services by each of the unit manufacturing the goods or providing the services. The said method is explained with the help of an example as follows:
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Particulars
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Turnover
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Tax
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(Rs.)
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(Rs.)
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Taxable & Exempted Goods / Services
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Factory Unit - Excisable Goods
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(a)
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20000000
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2400000
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Unit providing Taxable Services
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(b)
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10000000
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1000000
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Unit providing Exempted Services (including trading)
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(c)
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10000000
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1000000
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Input Services :
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Excise
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Input Services Directly related to Factory Unit
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(d)
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200000
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20000
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ISD in relation to Factory Unit
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(e) = (o)
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50000
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Total Input Service Tax Available for set-off
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(f) = (d) + (e)
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70000
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Services
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Input Services Directly related to Unit providing Taxable Services
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(g)
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500000
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50000
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ISD in relation to Unit providing Taxable Services
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(h) = (p)
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25000
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Total Input Service Tax Available for set-off
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(i) = (j) + (k)
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75000
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Common Services Input
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- Advertisement
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(l)
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500000
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50000
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- Rent of office
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(m)
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500000
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50000
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Total
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(n) = (l) + (m)
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1000000
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100000
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Distribution of Input Tax Credit
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ISD in relation to Factory Unit
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(o) = (n) X (a) / [(a) + (b) +(c)]
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50000
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ISD in relation to Unit providing taxable Services
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(p) = (n) X (b) / [(a) + (b) +(c)]
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25000
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ISD in relation to Unit providing Exempted Services
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(q) = (n) X (c) / [(a) + (b) +(c)]
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25000
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In the light of above discussion, it is stated that in order to distribute input tax credit for the common services, the input tax credit shall be first debited to a separate account (hereinafter referred as 'ISD A/c'). Thereafter, the total input tax credit in the ISD A/c. shall be distributed in ratio of turnover of goods manufactured, taxable services provided and exempted services provided. The input tax credit pertaining to Excisable Goods shall be transferred to account of Input tax credit A/c. in regard to Factory Unit (hereinafter referred as ITC (Factory) A/c.) and The input tax credit pertaining to Taxable Services shall be transferred to account of Input tax credit A/c. in regard to Unit providing taxable Services(hereinafter referred as ITC (Service Tax) A/c.). The transfer of input tax credit to both the accounts from the ISD A/c. shall be on the strength of Invoice / challan. The company is also required to pass proper entries in the books of accounts for such transfers. Further, it is also informed that Input Tax Credit pertaining to Exempted Services shall be booked as expense and set-off for the same shall not be available.
In the above example total input tax credit in the ISD A/c. is Rs. 1,00,000/- which is distributed between Factory Unit, Unit Providing taxable services and Unit Providing exempted services. The amount of input tax credit pertaining to Factory Unit is Rs. 50,000/- and the amount of input tax credit pertaining to Taxable Services Unit is Rs. 25,000/-. Said amounts shall be transferred to ITC (Factory) A/c. and ITC (Service Tax) A/c. respectively on the strength of Invoice / challan. Further, amount of input tax credit pertaining to exempted services i.e. Rs. 25,000/- shall be booked as expense in the books of accounts.
