Any business enterprises that register under Goods and Service Tax (GST) must follow rule 39 of CGST/SGST. Every business owner will be aware of the GST or the Goods and Services Tax, but may not be aware of Rule 39 which we are going to discuss below. Before that, you should know what ITC and ISD mean. ITC or the Input Credit means during the time of paying tax on output, it is possible to reduce the tax you have paid already on inputs. The Input Service Distributor is an officer who is a supplier for goods and services that receives tax invoice on the receipt of input services. A prescribed document to distribute the credit of central tax, state tax, and union territory tax will be issued. Read further to know what exactly Rule 39 of GST is.
What is rule 39 of CGST/SGST rules?
Rule 39 of CGST/SGST is the procedure to distribute the input tax credit by the input service distributor. An input service distributor must dispense the input tax credit in a certain manner and subject to several conditions.
What are the conditions in distributing the ITC or the Input Tax Credit?
- The input tax credit of a month which is available for distribution should be distributed in the same month. The details regarding it should be furnished in the GSTR – 6 forms per the provisions stated in Chapter VIII of such rules.
- In agreement with the provisions of clause (d), the input service distributor must distribute the amount of ineligible input tax credit separately and the amount of eligible input tax credit.
- Likewise, following the provisions of clause (d), the input tax credit on account of state tax. Union territory tax, central tax, and integrated tax should also be distributed separately.
- The input tax credit should be distributed based on the provisions given in clause (d) and (e) sub-section (2) of section 20 to one of the recipients R1. It is should be distributed even when the recipient is registered or not from amongst the total of all the recipients to who the input tax credit is attributable. It should also include the recipients who are involved in making exempt supply or else not registered for any purpose should be the amount, C1, which to be calculated by using the formula C1 = (t1/T) * C. In the formula mentioned, C is the sum of credit that needs to be distributed, t1 is the turnover and T is the aggregate of the turnover.
- The input tax credit on account of assimilated tax shall be dispensed as the input tax credit of integrated tax to all the recipients.
- The input tax credit on account of both central and state tax and even the union territory tax should be in respect of a recipient who is located in the same state or the union territory in which the input service distributor is situated. Likewise, it can also be in reverence of a recipient who is placed in a state /union territory other than that of the input service distributor. The amount should be distributed as integrated tax and should be equal to the aggregate of the amount of input tax credit if central, state, and union territory tax. But this can happen only if it qualifies for the distribution to such recipient in harmony with clause (d).
- An input service distributor invoice should be issued by the input service distributor according to the rules mentioned in sub-rule (1) of rule 54. The invoice should indicate that it is issued only for the distribution of input tax credit.
- An input service distributor credit note should also be issued by the input service distributor as per the sub-rule (1) of rule 54 which is for the reduction of credit if the input tax credit distributed gets reduced due to some reason.
- If any additional amount of input tax occurs when issuing the debit note by the supplier to an input service distributor, the amount should be allocated in a manner and should also subject to the certain condition stated in clauses (a) to (f). The amount attributable to any recipient should be calculated as mentioned in clause (d). Moreover, such credit shall be distributed in the month in which the debit note is comprised in the return in Form GSTR – 6.
- If any input tax credit is required to be reduced when issuing a credit note by the supplier to the Input service distributor, it should be apportioned to every recipient in the equal ratio in which the input tax credit included in the original invoice was distributed as per the clause (d). The amount given shall be deducted from the amount to be distributed in the month during which the credit note is incorporated in the return in GST- 6. Or it should be added to the output tax liability of the recipient.
In case if the amount of input tax credit that is divided by an input service distributor is reduced for any reason for any recipient, the process mentioned in clause (j) of sub-rule (1) shall apply. Furthermore, according to the sub-rule (2), the input service distributor shall issue an input service distributor invoice to the recipient based on the input service distributor credit note which is specified in clause (h) of sub-rule (1). The input service distributor credit note and the invoice should be included in the return in form GSTR -6 for the month in which the credit note and invoice were supplied.
Why is rule 39 of CGST/SGST rules used?
The idea of Input Service Distribution is a facility created for the businesses that have a large share of common expenditure and where billing is done from a centralized location which is the head office of the company. This procedure is destined to simplify the process of credit taking for entities and the facility is meant to support the unified flow of credit under GST.
Examples of rule 39 of CGST/SGST rules in different scenarios
Imagine that ZRR Ltd. has different units as mentioned below.
1. Industrial unit in Cochin, Kerala; closed from 2017-18 onwards, no turnover.
2. Unit in Calicut, Karnataka; turnover of Rs. 27 crores in 2017-18;
C: Service center in Hyderabad, Telangana; turnover of Rs. 1 crore in 2017-18;
D: Service center in Chennai, Tamil Nadu; turnover of 2 crores in 2017-18;
The corporate office of ZRR Ltd.’s functions as ISD. It has to distribute ITC of Rs. 9 lakh for December 2018. An invoice that includes a tax of Rs. 3 lakh pertains to technical consultancy for the Calicut unit. What should be the distribution of the credit?
According to Rule 39(d) of CGST Rules relating to ITC, Rs. 3 lakh is attributable to the Calicut unit, and it will be transferred to the Calicut unit only as per Sec. 20(2) (c). From the remaining Rs. 6 lakh, the Cochin unit will not be authorized to any credit as ITC is dispersed to only those recipients who supply goods and /or services. Rs. 6 lakh have to be distributed between the Calicut unit and the service centers in Hyderabad and Chennai. This should be based on their gross revenue in the previous financial year- in 2017-18.
- Calicut unit will get (27 crore / 30 crore) x 6 lakh = Rs. 5.4 lakh;
- Hyderabad service centre will receive (1 crore /30 crore) x 6 lakh = Rs. 20,000; and
- Chennai service centre will get (2 crore /30 crore) x 6 Lakh = Rs. 40,000.
If Mr. XYZ gets services worth Rs 100000 on which GST of Rs 18000 was paid.
Mr. XYZ distributed this credit to 2 dealers who are A and B in the ratio of 1:2.
A and B claimed the ITC in the GSTR 3B.
Now Mr. XYZ has received a credit note worth Rs 23600 which includes GST of Rs 3600.
This GST of Rs 3600 has to be reversed by A & B in the ratio of 1:2
A will reverse ITC of Rs 1200 (3600 * 1 / 3)
B will reverse ITC of Rs 2400 (3600 * 2 / 3)
This will be incorporated in the GSTR 3B by both A and B in the reversal of the input tax credit section.