The Input Service Distributor (ISD) mechanism under GST facilitates the distribution of Input Tax Credit (ITC) for common input services (e.g., audit, software) consumed by both a head office (HO) and its branches, but invoiced only to the HO. Historically, this led to an unfair revenue distribution where only the HO’s state received the tax share. To rectify this, the Indian government made ISD mandatory, effective April 1, 2025, via Notification No. 16/2024. As per Section 2(61) of the CGST Act, an ISD is an office that receives input service invoices on behalf of distinct persons (branches) and distributes the associated ITC. ISDs are required to file a monthly return in Form GSTR-6 by the 13th of the succeeding month, detailing inward supplies and ITC distribution. Distribution must occur in the same month, not exceeding available credit, and is pro-rata based on the turnover of recipient branches for common services. Different tax components and ineligible ITC must be distributed separately. While ISD specifically addresses third-party input services, ‘cross charge’ is utilized for distributing ITC on common goods and internally generated services between distinct persons, where the HO raises a tax invoice to its branches. Unlike ISD, cross charge does not require a separate registration and involves different legal bases and compliance forms. The mandatory ISD mechanism aims to ensure equitable ITC distribution and mitigate revenue imbalances among states, complementing cross-charge for other scenarios.
1.What is Input Service Distributor?
ISD refers to Input Service Distributor under Goods and Service Tax regime. It is a mechanism through which head office distributes the Input Tax Credit (ITC) pertaining to common input services (like audit, software subscription, legal, etc.) that are consumed by both head and branch offices but are invoiced only to the head office.
2. Understanding the Need for ISD Under GST – Unfair Distribution of Revenue: A Practical Issue
In a corporate structure, it is a common practice that the goods or services that are used by both head and branch offices to be procured centrally (at H.O), and then head office distributes the same to different branch offices. Here, on acquisition of common goods or services the head office makes the payment on behalf of its branches to the vendor. As per the GST provisions, The vendor shows the details of its supplies in Form GSTR 1 and consequently it is communicated to recipient (head office) in Form GSTR 2B. Thus, the Head office takes the full ITC – even for services consumed at branch offices—leading to unjust revenue allocation, where only the head office state receives the tax share.
When the services are billed to only head office while consumed at different branch offices located in different states. This results in unfair distribution of revenue. Since, only head office gets the credit of these services and utilises this credit to minimise its outward tax liability. Suppose, if these common services were inter – state the head office would get IGST credit and have utilised the same to set off their CGST + SGST liability. As per the provisions of Section 18 of IGST Act, if IGST Credit is utilised for the payment of SGST liability, the centre would apportion the proportionate revenue to appropriate state government. Therefore, the head office state would get revenue out of this transaction while the branch offices state would get nothing.
3. Government’s Response: Making ISD Mandatory
To address the issue of revenue misallocation between the Centre and the States, the Government has taken a proactive step by making the Input Service Distribution (ISD) mechanism mandatory under GST.
In this regard, Notification No. 16/2024 dated 06th August 2024 mandates the implementation of ISD provisions, which shall come into effect from 01st April 2025.
4. Legal Definition and Framework of ISD
As per Section 2(61) of CGST Act, 2017 “Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or (4) of section 9, for or on behalf of distinct persons referred to in section 25, and is liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20.
Now, with ISD provisions becoming mandatory the head office would have to distribute the input tax credit (ITC) pertaining to common input services with all the service consuming branches.
5. Monthly Filing of return in Form GSTR-6
As per Section 20 of the CGST Act, 2017 read with Rule 65 of the CGST Rules, 2017:
- Every Input Service Distributor must file a monthly return in Form GSTR-6.
- GSTR-6 is a mandatory return to be filed on monthly basis. A ‘Nil’ return must be filed in case of no ITC being available for distribution or no ITC is being distributed during the month.
- Form GSTR-6 contains details of tax invoices on which input tax credit (ITC) has been received and distributed.
6. Timeline for Filing for Form GSTR-6
| Particulars | Details |
| Periodicity | Monthly |
| Due Date | 13th of the succeeding month |
| Mode of Filing | Online through GST Portal www.gst.gov.in |
7. Information to be Reported in Form GSTR-6
- Details of inward supplies received for distribution of ITC.
- Details of ITC distributed among various GSTINs of the same PAN.
- Amendments to information furnished in earlier returns, if any.
- Debit or credit notes received and corresponding distribution details.
8. Additional Compliance Obligations
| Sr. No | Compliance Requirement | Remarks |
| 1 | Maintain proper records of inward invoices | Section 35 read with Rule 56 |
| 2 | Distribute credit proportionately and correctly | Based on the turnover of the common input branches |
| 3 | Issue ISD invoices for distributed credits | As per Rule 54(1) |
| 4 | Reconciliation of GSTR-6A and GSTR-6 auto-populated data | Monthly |
9. Format of ISD Invoice – Rule 54(1)
The ISD can distribute the credit of input tax paid on acquisition of common input services by issuing ISD Invoice as per Rule 54(1) of the Central Goods & Service Tax Rules, 2017 which shall contain the following details: —
| a) | name, address and Goods and Services Tax Identification Number of the Input Service Distributor; |
| b) | a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as- “-“, “/” respectively, and any combination thereof, unique for a financial year: |
| c) | date of its issue; |
| d) | name, address and Goods and Services Tax Identification Number of the recipient to whom the credit is distributed; |
| e) | amount of the credit distributed; and |
| f) | signature or digital signature of the Input Service Distributor or his authorised representative: |
Further, If any vendor of the common input services issues the tax invoice to head office GSTIN, then in this case to apportion the credit to all the respective branches , the head office shall issue the invoice to ISD registered unit as per the provisions of Rule 54(1A) of CGST Act and after that the ISD would distribute this credit by issuing ISD Invoice in terms of Rule 54(1) of CGST Act, 2017.
10. Procedure for Distribution of Input Tax Credit
The Manner of Distribution of credit is governed by the provisions of Rule 39 of Central Goods & Service Tax Rules, 2017, specifying the credit and procedures for distribution of input tax credit by ISD:
i. Monthly Distribution and Reporting:
-
- ITC available for distribution must be distributed in the same month and reported in FORM GSTR-6.
- Credit distributed cannot exceed the total credit available.
ii. Attribution to Recipients:
-
- Specific Attribution: Credit attributable to a particular recipient must be distributed only to that recipient.
- Multiple Recipients: Credit attributable to multiple recipients is distributed pro rata based on each recipient’s turnover during the relevant period.
iii. Formula for Pro Rata Distribution:
-
- For distributing to one recipient (“R1”) among several recipients:
Where:
-
- C = Total amount of credit to be distributed
- t1 = Turnover of R1 during the relevant period
- T = Aggregate turnover of all recipients during the relevant period
iv. Ineligible vs Eligible ITC:
-
- Ineligible ITC (under section 17(5) or otherwise) and eligible ITC must be distributed separately.
v. Distribution of Different Tax Components:
-
- ITC on integrated tax is distributed as integrated tax.
- ITC on central tax and state/UT tax is distributed:
- As central and state/UT tax for recipients in the same state/UT as the ISD.
- As integrated tax for recipients in a different state/UT than the ISD.
The Input Service Distributor Mechanism resolves the issue of revenue loss to the branch offices states in case of common input services.
.The Input Service Distributor mechanism covers only services and not the goods..
“A pertinent question arises regarding the common goods that are used at different branch offices but are billed to head office state only? There’s still a loss of revenue to branch offices state.”
11. Cross Charge: A Solution for Common Goods
In Case of Common goods being billed at head office, the businesses use cross charge to transfer the tax pertaining to common input goods.
In cross charge, the head office issues the tax invoice to different branch offices consuming the specified good for distributing the credit to said branch.
In cross Charge, the head office shows the above transaction as its sale to its other branch.
The cross charge is applicable in both goods and services case.
Why ISD is required, why not entities distribute the credit of common input services with cross charge only and reduce the burden of addition compliances?
The answer for the above question is that Cross Charge distributes the credit of common input services and goods that are internally generated i.e. within the entity.
The cross charge cannot distribute the credit of third party. It is applicable only for the internally generated services or goods.
12. Cross Charge Vs. ISD (Input Service Distributor)
| Criteria | ISD (Input Service Distributor) | Cross Charge |
| Legal Basis | Sec 20 of CGST Act + Rule 39 | Sec 25(4), Sec 7(1)(c), Sec 15(4), Rule 28 |
| Purpose | Distribute ITC of third-party input services | Charge for internally generated services (e.g., HR, IT, accounts) |
| Registration Requirement | Separate ISD registration mandatory | No separate registration required |
| Form Used/Invoice | GSTR-6 (monthly return)/ Invoice under Rule 54 | GSTR-1 / Tax invoice under Section 31 |
| Services Covered | Only third-party input services | Both third-party (if invoiced) and internally generated services |
| Valuation Rule | Not applicable (only ITC distributed) | Rule 28 – Open Market Value or Invoice Value if full ITC available |
| ITC Eligibility | BOs claim ITC based on ISD distribution | BOs claim ITC based on invoice from HO |
The ISD mechanism, now mandatory from April 2025, ensures fair distribution of ITC and addresses state-level revenue imbalance. While Cross Charge remains a valid route for goods and internal services.
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