All About Input Service Distributors (ISD)| Key Amendment W.e.f. 1st April, 2025

The Input Service Distributor (ISD) concept has been part of Service Tax and GST since the initial phase. The concept of ISD applies to entities which are having multiple GST registrations across India and have obtained ITC to common input services in one state, i.e., ITC is claimed in one state. In contrast, the services are used for more than one GST registration of the same PAN. However, it has more significance post-amendment in ISD provisions in 2024 and 2025. Not only Reverse Charge Transactions are brought under ISD purview, rather, the ISD provisions have become mandatory with effect from 1st April 2025.

This article shares a comprehensive analysis of ISD provisions and their implications on the business before and after amendments.

1. What is an Input Service Distributor?

• The concept of Input Service Distributor applies to entities having GST registration across different states and where Input Tax Credit is received by any one branch on behalf of all other branches or more than one branch. Such common ITC is availed generally by the head office or any other specific branch.

• E.g., There is no exhaustive list of services that are specified under ISD provisions. A service is classified as a common Input service depending on its nature such as Advertisement Service, Accounting Service, Audit Service, Insurance Service, Banking service, etc.

• Invoice for Advertisement service is generally raised in the name of the Head office and the entire ITC is also availed by the Head office itself. However, such advertisement expenses benefit the sale of all GST registrations. Accordingly, Input Service Distributor provisions require the Head office to obtain registration as an ISD and distribute such ITC to all beneficiary GSTINs.

• As per Section 2(61) of CGST Act, “ “Input Service Distributor” means an office of the supplier of goods or services or both that 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;”.

• The Definition of ISD got an amendment to vide Finance Act, 2024 dated 15th February 2025 w.e.f. 1st April, 2025. 

• Accordingly, as per the definition, any office that receives common Input Services, including services liable to GST under RCM, shall be liable to distribute such ITC as per Section 20.

2. What is the Cross Charge under GST?

• The Cross Charge concept is also used for the distribution of common Input Tax Credits.

• Under this scenario, the head office or office receiving common Input services raises the invoices to the other branches for which such service is utilized and charges the GST on such invoice.

• Such invoice is declared as a “B2B” supply in GSTR-1 and accordingly, the output tax liability is discharged on such supply and the counter branch is entitled to claim the ITC of such invoice.

3. ISD Vs Cross Charge

• The key difference between Input Service Distributor and Cross Charge is, that ISD is used for distribution of common Input Tax Services received from third party.

• Whereas, Cross Charge can be used for the distribution of common Input services 

received from the third party or internally generated goods or services. E.g. The software is developed by the head office and the same is utilized by other branches. In such a case, the head office shall raise the invoice on other branches for software development services.

• The Key Question arises is whether the Head office is allowed to distribute ITC through cross charge or the same is required to be done through ISD only.

• In this context, the CBIC issued a detailed clarification vide Circular No. 199/11/2023-GST  dated 17th July 2023.

• As per Point No. 1 of the circular, Concerning common input services procured from a third party, the distribution of the ITC can be made by the HO to a BO through Ithe SD mechanism or through raising tax invoices under section 31 of the CGST Act, i.e., through cross charge.

4. Amendment with effect from 1st April, 2025

• So far, the registered persons are allowed to distribute the ITC of Common Input Services through ISD or Cross charge, as clarified vide Circular No. 199/11/2023-GST  dated 17th July 2023. The circular was issued post-clarification in the 50th GST Council meeting.

• However, in the same meeting, the GST Council recommended an amendment in GST Law to make ISD provisions mandatory prospectively. 

• As per the recommendation of the GST Council, the definition of Input Service Distributor was amended through Finance Act, 2024 to make the distribution of common Input Tax Credits mandatorily through ISD. Further, the Service on which GST is payable under RCM under section 9(4) and (5) of CGST Act, was also covered under ISD provisions. 

• Further, Vide Finance Bill 2025, the definition of ISD was amended to include RCM supplies under the IGST Act.

• Therefore, w.e.f. 1st April 2025, the registered person is mandatorily required to distribute ITC through the ISD mechanism only including invoices covered under RCM under the CGST Act and IGST Act.

5. Compliances as Input Service Distributor

Any taxable person who is required to distribute Input Tax Credit as ISD w.e.f. 1st April 2025, is required to act proactively to have complied:

5.1 GST registration as ISD

• As per Section 20(1) of the CGST Act, any person who is liable to distribute Common Input Tax Credit as ISD is required to register as an Input Service distributor under Section 24(viii) of the CGST Act. GSTIN shall be separate as ISD from regular GSTIN.

• The taxpayer has to make sure that all Common ITC is received on the GSTIN of ISD for further distribution.

5.2 Raise ISD Invoice

For distribution of Common ITC, the taxpayer is required to raise an ISD Invoice. As per Rule 54(1) of CGST Rules, the Invoice shall contain the following details:

1. name, address, and GSTIN of Input Service Distributor
2. Consecutive serial number not exceeding 16 characters, in one or multiple series, containing alphabets or numerals or special characters or any combination thereof
3. date of issuance of an  invoice
4. name, address, and GSTIN of the recipient branch
5. amount of the credit distributed
6. signature or digital signature of the ISD or his authorized representative

5.3 Filing of return

• The ISD-registered taxpayer is required to file an ISD return in Form GSTR-6 by the 13th of the following month.
• The return shall disclose the amount of ITC received against common Input Service, as auto-populated in GSTR-6A, and ITC distributed by the ISD to the branch offices.
• ITC distribution can’t exceed the ITC received by ISD.
• ITC in GSTR-6A shall auto-populate based on the invoice uploaded by the respective supplier in GSTR-1.
• Further, the ITC available for distribution shall be distributed in the same month.

5.4 Key points to be considered while distributing ITC

• ITC of common input service shall be distributed to the person to whom such ITC pertains;
• The amount of eligible ITC and ineligible ITC (as per Section 17(5) of CGST Act) shall be distributed separately;
• ITC on account of CGST, SGST, and IGST shall be distributed separately;
• IGST Credit shall be distributed as IGST to all recipients;
• CGST & SGST credit shall be distributed as:
  • CGST & SGST, if the recipient is located in the same state;
  • IGST, if the recipient is located in another state

• ISD shall issue a credit note as per Rule 54(1) where distributed credit is required to be reduced due to any reason. Distributed ITC shall be reduced in the same in which it was distributed;
• An additional amount of ITC shall be distributed through Debit Note;
• ITC is to be distributed to even those recipients who are engaged in making exempt supply or are otherwise not registered under GST Law.

5.5 Manner of Distribution of Input Tax Credit

As per Rule 39 of CGST Rules read with Section 20 of CGST Act, the ITC shall be distributed in the following manner with effect from 1st April 2025:

• ITC shall be distributed proportionately based on turnover of on Prorata basis of the recipient state during the relevant period.
• ITC to be distributed shall be computed through the following formula:

C 1 = (t 1 / T) x C

Where,

“C”: Credit to be distributed,

“t1 ” turnover of the recipient during the relevant period;

“T” is the aggregate of the turnover of all recipients, to whom common ITC is to

be distributed, during the relevant period

• Relevant Period shall mean:
  • If the recipient is having turnover during the preceding financial year then such preceding financial year;
  • If some or all recipients do not have any turnover in the preceding financial year then the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed;

• Turnover shall, concerning any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entries 84 and 92A of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule.

5.6 Example of distribution of ITC:

• Input Service Distributor is registered in the state of Delhi
• Common ITC: INR 70,000 under IGST and INR 1,40,000 under CGST & SGST;
• Recipients: 4 GSTIN located in Delhi, West Bengal, Maharashtra and Punjab
• Turnover of the recipients:
  • Delhi: 20 Lakhs
  • West Bengal: 50 Lakhs
  • Maharashtra: 30 Lakhs
  • Punjab: 40 Lakhs

• In such case following ITC shall be distributed:

5.7 Procedure for distribution of ITC under RCM

• Where any common input service is covered under the reverse charge mechanism, in that case, the regular GST registration in the state where ISD is registered shall pay the GST on such service through RCM while filing GSTR-3B.
• Then such ITC shall be transferred to the ISD through raising an invoice, as specified in Rule 54(1A) of CGST Rules;
• Now, the ISD would avail and distribute this ITC to the recipient(s) in the same manner of distribution as discussed above for forward charge invoices.
• The provision of distribution of ITC under RCM shall become applicable w.e.f. 1st April, 2025.

6. Key Action Points for business

Considering the limited period for implementation of mandatory Input Service Distributor provisions, the business needs to react proactively to such a GST amendment and take all necessary actions that are required for the smooth distribution of common input services through ISD provisions.

The following are key action points for FY 2025-26:

1. Obtain GST registration as ISD: The Taxpayers are required to distribute common ITC as Input Service Distributor. For this purpose, the taxpayer is required to obtain separate GST registration as ISD in the state from where the ITC is to be distributed. Considering the time taken by the process for granting GST registration, the taxpayers are required to apply for GST registration at the earliest.

2. Incorporate changes in Software: ISD is required to generate invoices for distribution of ITC and the same is to be accounted for precisely in books of accounts. Therefore, the taxpayers are required to make necessary amendments to the software to generate a proper invoice.

3. Compute turnovers of all branches in Advance: Turnover is the base for distribution of ITC to branches. Therefore, taxpayers are required to compute the turnover of all branches in advance for the smooth implementation of ISD provisions.

4. Update ISD GSTIN with all the suppliers: All the vendors are required to be informed in advance about Input Service Distributor GSTIN so that common ITC is received in ISD GSTIN and gets distributed from there.

7. Penalties for non-compliance of ISD provisions

• As per Section 21, Where the ISD distributes the credit in contravention of the provisions of the CGST Act which results in excess distribution of ITC then such excess distributed credit shall be recovered from such recipients along with interest, as specified under Section 73 or section 74 or section 74A of CGST Act.

• Further, as per Section 122(1)(ix) of CGST Act, where a taxable person takes or distributes ITC in contravention of section 20 then such person shall be liable to pay higher the following amount:
  • penalty of INR 10,000; or 
  • An amount equivalent to input tax credit distributed irregularly.

• Where any taxable person is liable to register as Input Service Distributor but fails to register then a penalty shall be imposed of INR 10,000/-.

Conclusion:

The ISD provisions were earlier could have been avoided earlier by raising the invoice through cross charge mechanism and no separate registration was required as an Input Service Distributor in that case. However, w.e.f. 1st April 2025, the provisions of ISD are made mandatory and all entities receiving common ITC are required to obtain separate GST registration as Input Service Distributors and required to distribute common ITC through the filing of GSTR-6