In an era of expanding business operations across multiple locations, managing Input Tax Credit (ITC) efficiently is crucial for optimizing cash flow and ensuring compliance under the Goods and Services Tax (GST) framework. The Input Service Distributor (ISD) mechanism serves as a structured approach to allocate ITC related to common input services across various branches of an entity.
With new legal mandates effective from April 1, 2025, businesses must adopt ISD as the exclusive mechanism for distributing ITC on services procured from third parties. This makes it essential for businesses to understand the key distinctions between ISD and cross charge, legal amendments, registration requirements, ITC distribution methods, and compliance obligations to avoid penalties.
This guide provides a comprehensive yet practical breakdown of the ISD mechanism under GST, helping businesses navigate the transition smoothly while ensuring maximum ITC utilization and regulatory compliance.
1. Basic Concept of ISD
The Input Service Distributor (ISD) mechanism under GST enables businesses with multiple branches to centrally receive and allocate input tax credit (ITC) related to common input services. As per Section 2(61) of the CGST Act, 2017, an ISD is a registered entity that distributes ITC to its units based on usage.
Common input services covered under ISD include:
Professional services (accounting, IT, ERP support)
Marketing and advertising expenses
Banking, insurance, and telecom services
Facility management and employee travel expenses
2. ISD vs. Cross Charge: Key Differences
| Feature | ISD Mechanism | Cross Charge |
|---|---|---|
| Usage | Distributes ITC received from third-party vendors | Applies when the Head Office provides services to branches internally (e.g., in-house IT or HR services) |
| Applicability | Common input services | Internally generated services |
| Mandatory from | April 1, 2025 | Remains applicable for internal services |
As per CBIC Circular No. 199/11/2023-GST (dated July 17, 2023), businesses had the flexibility to choose between ISD and cross charge until March 31, 2025. However, from April 1, 2025, the ISD mechanism becomes mandatory for distributing ITC related to common input services procured from third parties.
3. Legal Amendments: Finance Act, 2024 & Finance Bill, 2025
Finance Act, 2024: Introduced a mandatory ISD framework for distributing ITC, including reverse charge ITC under CGST.
Finance Bill, 2025: Extended ISD applicability to services covered under reverse charge notifications of the IGST Act.
These amendments take effect from April 1, 2025, making it compulsory for businesses to distribute ITC on common input services through ISD.
4. Registration & Compliance (Effective April 1, 2025)
Businesses must obtain a separate ISD registration as per Section 24(viii) of the CGST Act.
Monthly filing of GSTR-6 (due by the 13th of the following month) is required to report ITC received and distributed.
The ITC distributed through ISD will auto-populate in GSTR-6A, GSTR-2A (Part B), and GSTR-2B of recipient units.
Each branch receiving ITC distribution must be registered under GST and should have a valid GST number (GSTIN).
5. ITC Distribution Rules
Under Section 20 of the CGST Act & Rule 39 of the CGST Rules, ITC must be distributed as follows:
ITC should be allocated within the same tax period in which it is received.
Distribution cannot exceed the total ITC available.
Tax type rules for ITC distribution:
CGST/SGST is allocated as CGST/SGST when the recipient unit is in the same state as ISD.
CGST/SGST is distributed as IGST when the recipient unit is in a different state.
IGST is always allocated as IGST, regardless of location.
ITC distribution is based on the proportional turnover of each unit during the relevant period.
Example: ITC Allocation Process An ISD registered in Ahmedabad incurs ₹1,00,000 worth of services in April 2025 with GST of ₹18,000 (CGST+SGST). The ITC is distributed based on turnover:
| Location | Turnover (₹ Lakhs) | ITC Distributed (₹) | Tax Type |
| Ahmedabad | 5 | 3,750 (1,875+1,875) | CGST+SGST |
| Mumbai | 7 | 5,250 | IGST |
| Bangalore | 8 | 6,000 | IGST |
| Pune | 4 | 3,000 | IGST |
6. Special Process for Reverse Charge ITC (Effective April 1, 2025)
For services under reverse charge, ITC is initially claimed by the GST-registered entity in the same state as ISD.
This ITC is then transferred to ISD using an invoice, as per Rule 54(1A).
ISD subsequently distributes the ITC to relevant branches using the standard allocation process.
7. Invoice & Credit Note Requirements
As per Rule 54(1) & 54(1A), ISD invoices and credit notes must include:
ISD’s name, GSTIN, and address
A unique serial number (max 16 characters)
Date of issue, recipient details, and ITC amount
Signature or digital signature of ISD
Branch GST numbers (GSTINs) must be correctly entered to ensure accurate ITC distribution.
8. Penalties for Non-Compliance
Section 21 of the CGST Act: Incorrectly allocated ITC must be recovered from the recipient unit, along with interest.
Section 122(1) of the CGST Act: A penalty of ₹10,000 or an amount equal to the irregularly distributed ITC (whichever is higher) may apply for:
Failing to register as ISD despite mandatory requirements.
Distributing ITC incorrectly.
9. Steps Businesses Must Take Before April 1, 2025
✅ Obtain ISD registration to comply with new requirements. ✅ Ensure vendor invoices are issued in ISD’s name. ✅ Implement Rule 39(1A) to correctly handle reverse charge ITC. ✅ Train finance & tax teams to align with ISD compliance rules. ✅ Update ERP/accounting software for seamless ITC allocation. ✅ Ensure correct GSTINs for all branches and ISD registration are used in all filings and ITC distribution.
By understanding and implementing these rules effectively, businesses can ensure compliance with the upcoming mandatory ISD framework, optimizing ITC allocation and avoiding penalties.
