In this paper, a fuel cell is integrated into a voltage source inverter (VSI) based DSTATCOM for power quality improvement in a distribution system. An efficient control technique called ‘i-cos-theta’ (IcosΘ) control algorithm is chosen to make the distribution system stable and harmonics free even under unbalanced load (single phase fault) condition. The fuel cell is intended to maintain the DC-link voltage of the VSI-DSTATCOM so that excess switching losses and conduction loss of the DSTATCOM due to a single phase fault, can be eradicated. The DC-link voltage is almost constant during steady-state operation, and even an acceptable voltage regulation of 3.35% is achieved during fault conditions. Further, the system supply current is maintained balance, and has the total harmonic distortion (THD) well-below 5%, thus it is satisfying the IEEE-519 standard on the harmonic limit. Moreover, simulation of the proposed system has been performed in SimPowerSystem (SPS)/MATLAB Simulink software.