Mandatory ISD Provisions: Do they end the need to cross charge?

The debate between the Input Service Distributor (ISD) vs. Cross Charge mechanism has been ongoing since the introduction of the GST regime. Before this debate gained momentum, the Central Board of Indirect Taxes and Customs (CBIC) FAQ on IT and ITES released on 18 August 2017 inter alia clarified that ISD provision under the CGST Act, 2017, is not mandatory. Extracts of relevant FAQ reproduced hereunder:

Question 26: Is the requirement of transferring credit through the ISD mechanism mandatory?

Answer: The ISD provision under the CGST Act, 2017 is not mandatory. It only provides the manner of distribution of Input Tax Credit (ITC) wherever the business entity wishes to distribute the ITC as an Input Service Distributor. Despite the FAQ, decisions by the Authority of Advance Ruling (AAR) and Appellate Authority for Advance Ruling (AAAR) went against the applicants. Key decisions by AAR/AAAR:

• In Cummins India Ltd. {2022 (58) G.S.T.L. 549 (App. A.A.R. - GST - Mah.)} - Head Office not being entitled to avail and utilize ITC of tax paid to third-party service vendors for common input services received by it on behalf of branch offices/units, appellant bound to take ISD registration if it intends to distribute such credit – Decision given by AAR {2019 (23) G.S.T.L. 559 (A.A.R. - GST)} was upheld.
• In Tata Sia Airlines Ltd. {2021 (49) G.S.T.L. 195 (A.A.R. - GST - Haryana)} - ITC pertaining to services only on the procurement made by HO towards maintenance of aircraft (including lease thereof) shall be distributed by way of ISD mechanism.

Taking note of the issue and the increasing litigation on the topic, the GST Council, in its 50th meeting on 11 July 2023, recommended a significant change by affirming that GST law does not mandate ISD registration. However, the Council hinted at prospective amendments to make the ISD mechanism mandatory for distributing ITC of common input services from third parties. In this relation, Circular No. 199/11/2023-GST was issued on 17 July 2023 by the CBIC, which inter alia clarified that the common charges and GST thereon can be transferred through a tax invoice by adopting the Cross Charging mechanism.