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The Finance Bill, 2024 has introduced amendments to the Central Goods and Services Tax Act, 2017 (“CGST Act”).  These amendments primarily focus on distribution of credit by Input Service Distributor (“ISD”) and the imposition of penalties for non-registration of specific machinery utilized in the manufacturing of designated goods under a special procedure.  Following the recommendations from the 52nd GST Council Meeting, revisions are proposed in the definition of ISD and the mechanism for credit distribution by ISD. Additionally, aligning with the recommendations from the 49th and 50th GST Council Meetings, penalties are proposed for instances where persons involved in the manufacturing of goods like tobacco, pan masala, and similar items, or any goods specified under special registration procedures outlined in Section 148 of the CGST Act, fail to comply with the prescribed procedures.  Our comprehensive analysis compares the existing provisions with the newly proposed provisions outlined in the Finance Bill.

Definition of Input Service Distributor

Current Provisions: Section 2(61)

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax, or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

Proposed Provisions: Section 2(61)

“Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;

Effect of Proposed Provisions:

The proposed amendment makes ISD mechanism mandatory for distributing ITC related to input services which are applicable to both the Head Office and Branch Office or exclusively to one or more Branch Offices (distinct persons under section 25 of the CGST Act).  It allows the ISD to settle GST for input services under the reverse charge mechanism and distribute ITC related to such input services pertaining to distinct persons, including in respect of services received from an unregistered supplier of goods or services or both.

Distribution of credit by Input Service Distributor

Current Provisions: Section 20

Specifies the conditions and manner in which an ISD shall distribute the credit of central tax or integrated tax.

Proposed Provisions: Section 20

Requires any office of the supplier receiving tax invoices for input services for distinct persons under section 25 to be registered as an ISD.  It mandates the distribution of the input tax credit of central tax or integrated tax charged on such invoices within the prescribed time, manner, and subject to specified conditions.

Effect of Proposed Provisions:

The proposed changes make it mandatory for offices of suppliers to register as ISD for distributing credit related to common input services. It seeks to ensure uniformity and adherence to specified guidelines in the distribution of credit for common input services. The amendment aims to streamline the process, making it compulsory for ISD to distribute credit for common input services and anticipated to reduce litigation with respect to the issue of ISD vis-à-vis cross charge mechanism.  The substantive rules for distribution of input credit by ISD is expected in due course.

In the meanwhile, a strategic guideline has been provided as an Annexure at the end of this article for the proposed new ISD mechanism.

Penalty for Failure to Register Machines used in manufacture of goods as per special procedure

New Section: Section 122A

Levies a penalty of one lakh rupees for every unregistered machine used in the manufacturing of goods, following a special procedure under section 148. Additionally, provides for seizure and confiscation of unregistered machines, with an exception if the penalty is paid, and registration is completed within three days of receiving the penalty order.

Effect of Proposed Section:

The newly proposed Section 122A introduces a penalty for the failure to register machines used in the manufacturing of goods as per special procedures (tobacco, pan masala and similar items).  It imposes an additional penalty of Rs. 1 lakh per unregistered machine, and each unregistered machine is liable to seizure and confiscation.  The penalty is in addition to other penalties specified under the CGST Act. Similar penal provisions are expected to be replicated by state GST Authorities. The section aims to ensure compliance with special procedures for specified goods.  The special procedure was earlier notified in January 2024 and the penal provisions have now been proposed.

Annexure

 Strategic guidelines for New ISD mechanism

While the rules governing the ISD mechanism would be notified in due course, certain processes could be streamlined in anticipation of the rules.  By adhering to below strategic guidelines, organizations could navigate the implementation of ISD seamlessly, strengthening compliance efficacy and operational excellence in the dynamic landscape of tax regulations.

Identification of Registration Requirements:

• Assess whether a single ISD registration or multiple registrations are needed based on the organization’s structure and the locations it operates in.
• Begin the GST registration process well in advance, considering the potentially time-consuming nature of the process.

Development of a Comprehensive Implementation Strategy:

• Engage tax and software experts to understand the implications of the ISD mechanism.
• Develop a comprehensive strategy for implementing ISD in line with the organization’s structure and operations.

Analyzing Nature of Expenses:

• Create a detailed summary of all expenses incurred across locations.
• Identify common expenses applicable to multiple locations for effective utilization of the ISD mechanism.

Vendor Communication for GSTN Update:

• Communicate with vendors to update the ISD registration number in their records.
• Emphasize the importance of accurate GSTN to avoid complications in invoicing and ITC distribution.

Workforce Training:

• Conduct training sessions for the workforce to educate them on the ISD compliance requirements.
• Provide periodic updates on the computation workings for the distribution of common ITC and the issuance of prescribed documents.

Organizations should maintain proactive vigilance regarding updates related to ISD mechanism, fostering organizational readiness to accommodate prescribed distribution methodologies swiftly. In summary, a proactive and well-organized approach, involving collaboration with experts and effective communication with all the stakeholders, will be crucial for a smooth transition into the ISD mechanism.  Keeping abreast of updates and maintaining flexibility will be essential as the implementation progresses and new provisions are introduced.