Details of Changes in Input Service Distributor From 1st April 2025

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

• ISD Mechanism: Used for distributing ITC received from third-party vendors.
• Cross Charge: Applies when the Head Office provides services to branches internally (e.g., in-house IT or HR 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. Cross charge will remain applicable only for internally generated services.

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.

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

Consider an ISD registered in Ahmedabad that incurs ₹1,00,000 worth of services in April 2025 with GST of ₹18,000 (CGST+SGST). The ITC is distributed based on turnover:

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

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.