1. Introduction
Effective April 1, 2025, the Indian government has mandated Input Service Distributor (ISD) registration for businesses having multiple GST registrations under the same PAN. This change, introduced via Notification No. 12/2024-Central Tax dated July 10, 2024, aims to:
✅ Ensure uniform distribution of Input Tax Credit (ITC) across branches
✅ Prevent misuse of ITC and tax evasion
✅ Streamline compliance, improve tax governance, and eliminate revenue leakage
Before this mandate, businesses could choose whether to register as ISD, leading to inconsistent ITC distribution and possible tax disputes. The new regulation ensures that ITC on common input services must be allocated systematically through ISD.
2. Understanding Input Service Distributor (ISD) Under GST
2.1 What Is an ISD? (As per Section 2(61) of CGST Act, 2017)
An Input Service Distributor (ISD) is a GST-registered entity that:
✔ Receives invoices for input services used by multiple branches.
✔ Does not engage in outward supply of goods or services.
✔ Distributes ITC to branches in proportion to their turnover.
💡 Example:
A corporate office in Delhi receives a ₹10 lakh invoice for legal consultancy services benefiting branches in Mumbai, Bangalore, and Chennai. The GST credit on this service must be distributed to these branches via ISD mechanism.
3. Legal Framework: ISD Under GST
3.1 Key Provisions in CGST Act, 2017
| Section | Provision | Interpretation |
|---|---|---|
| Section 2(61) | Defines ISD | ISD distributes ITC of common services among branches. |
| Section 20 | Prescribes ITC distribution mechanism | ITC must be allocated based on turnover of branches. |
| Section 49 | Governs ITC utilization | Specifies order of ITC utilization for tax payments. |
3.2 Relevant GST Rules (Amended w.e.f April 1, 2025)
| Rule | Provision | Amendment |
|---|---|---|
| Rule 39 | Governs ITC distribution methodology | Revised for mandatory ISD compliance. |
| Rule 54(1A) | Specifies invoice issuance by ISD | ISD must issue ISD invoices instead of tax invoices. |
| Rule 87(13A) | Covers ITC utilization restrictions for ISD | ISD cannot use ITC for outward supplies. |
4. ITC Distribution Mechanism Under ISD
4.1 What Type of ITC Must Be Distributed?
✅ ITC related to input services (not goods).
✅ Only ITC available in ISD’s electronic credit ledger can be distributed.
✅ ITC must be allocated to registered branches/units under the same PAN.
🔹 Direct ITC (specific to one branch) → Distributed only to that branch.
🔹 Common ITC (used by multiple branches) → Distributed pro-rata based on turnover.
4.2 Manner of ITC Distribution (As per Section 20(3) of CGST Act, 2017)
| Type of ITC Received | Can Be Distributed As |
|---|---|
| CGST | CGST or IGST |
| SGST | SGST of the same state (not inter-state) |
| IGST | IGST or CGST (as per recipient’s location) |
💡 Example:
If the corporate office in Delhi receives ₹1,00,000 IGST credit for an advertising campaign covering multiple locations, the ITC must be allocated based on the branches' turnover ratio.
5. Case Studies on ISD ITC Distribution
Case Study 1: ISD Distribution to Two Branches
Scenario:
-
A company has its corporate office in Mumbai and two branches in Delhi and Bangalore.
-
The head office receives a ₹5,00,000 IGST invoice for software services benefiting both branches.
-
Branch Turnover:
-
Delhi: ₹40 crore
-
Bangalore: ₹60 crore
-
Total Turnover = ₹100 crore
-
🔹 Solution: Proportional ITC Allocation
| Branch | Turnover % | ITC Allocation (₹5,00,000 IGST) |
|---|---|---|
| Delhi | 40% | ₹2,00,000 IGST |
| Bangalore | 60% | ₹3,00,000 IGST |
Case Study 2: ISD Distribution to 50+ Branches
Scenario:
-
A retail chain with 50 stores across India has its corporate office in Chennai.
-
The head office pays ₹25,00,000 for pan-India advertising services.
-
The total turnover of all stores is ₹5,00,00,00,000.
-
ITC must be distributed based on each store’s turnover percentage.
🔹 Solution: Step-by-Step ITC Distribution
✔ Step 1: Calculate percentage of turnover per store
✔ Step 2: Multiply percentage with ₹25,00,000 ITC
✔ Step 3: Issue ISD invoices to each branch
| Branch | Turnover (₹ Crores) | % of Total Turnover | ITC Allocation |
|---|---|---|---|
| Mumbai | 50 | 10% | ₹2,50,000 |
| Delhi | 80 | 16% | ₹4,00,000 |
| Bangalore | 70 | 14% | ₹3,50,000 |
| Chennai | 60 | 12% | ₹3,00,000 |
| Kolkata | 40 | 8% | ₹2,00,000 |
| Other 45 Stores | 200 | 40% | ₹10,00,000 (distributed among 45 stores) |
6. Compliance: ISD Return Filing Procedure
6.1 Monthly Filing of GSTR-6
📅 Due Date: 13th of every month
📌 Purpose: Reports ITC received and distributed.
6.2 Auto-Populated GSTR-6A
🔹 Invoices issued to ISD auto-populate in GSTR-6A for reconciliation.
✅ Step-by-Step Process for ISD Compliance
1️⃣ Apply for ISD registration (Form REG-01).
2️⃣ Receive invoices for common services at a central location.
3️⃣ Compute ITC allocation based on turnover proportion.
4️⃣ Issue ISD invoices to distribute ITC.
5️⃣ File Form GSTR-6 before the 13th of every month.
7. Key Takeaways and Strategic Considerations
✅ Benefits of Mandatory ISD Registration
✔ Ensures proper credit utilization and prevents misallocation.
✔ Reduces tax disputes and improves compliance tracking.
⚠ Challenges & Compliance Risks
🚨 Strict Turnover-Based ITC Allocation: If turnover changes, ITC must be revised.
🚨 Penalties for Non-Compliance: Failure to register as ISD can result in interest, penalties, and ITC denial.
8. Conclusion
Mandatory ISD registration from April 1, 2025, is a major GST reform ensuring structured ITC distribution, preventing misuse, and enhancing compliance.
🔹 Businesses must align their ITC processes with the ISD mechanism to avoid penalties and maximize tax benefits. 🚀
