The Union Finance Minister Nirmala Sitharaman chaired the 55th meeting of the GST Council today (21st December 2024) at Jaisalmer, Rajasthan. The council recommended amendment in provisions pertaining to the Input Services Distributor ( ISD ) mechanism under CGST Act, 2017 and CGST Rules, 2017 The bench suggested adding a reference to supply liable to tax under sections 5(3) and 5(4) of the IGST Act, 2017 in Sections 2(61) and 20(1) of the CGST Act, 2017 in order to specifically cover interstate RCM transactions under the ISD mechanism. Consequently, to alter Rule 39(1A) of the CGST Rules, 2017 and Section 20(2) of the CGST Act, 2017. It was decided that the CGST Act, 2017 modifications would take effect on April 1, 2025. Complete Draft Replies of GST ITC Related Notices, Click Here

Under Sections 2(61) and 20(1) of the CGST Act of 2017, the Input Service Distributor (ISD) mechanism is defined and its operational structure is established. Nevertheless, under the ISD framework, these restrictions do not now specifically cover interstate reverse charge mechanism (RCM) transactions. By bringing the ISD mechanism into compliance with interstate supplies subject to Sections 5(3) and 5(4) of the IGST Act of 2017, the proposed modifications seek to close this disparity.

Taxes paid under RCM for interstate transactions will be covered via the ISD mechanism. In accordance with Section 5(3) (RCM on specified goods/services) and Section 5(4) (RCM on supplies from unregistered suppliers) of the IGST Act, this would include ITC on supplies that are subject to tax. Complete Draft Replies of GST ITC Related Notices, Click Here

Entities can easily divide ITC on interstate RCM transactions among units thanks to the concept. It will clear up any confusion and bring ISD regulations into line with the larger GST framework. By centralizing ITC allocation, businesses can eliminate the requirement for individual units to submit RCM credit claims. By incorporating inter-state RCM transactions, the proposed modifications to Sections 2(61) and 20(1) of the CGST Act, 2017 seek to simplify the ISD system. This would improve compliance and lower litigation risks by increasing the clarity, efficiency, and consistency of ITC distribution within the GST framework. In addition to Chief Ministers from Goa, Haryana, Jammu and Kashmir, Meghalaya, and Odisha, as well as Deputy Chief Ministers from Arunachal Pradesh, Bihar, Madhya Pradesh, and Telangana, the meeting was attended by Union Minister of State for Finance Shri Pankaj Chaudhary and Revenue Secretary Ajay Seth.