With the introduction of GST we have seen a lot of concepts from the erstwhile law have also been carried forward in GST with some or the other modifications. One such concept which is carried forward in GST is the concept of Input Service Distributor. A new concept of cross charge is also introduced in GST. However for some or the other reason these two concepts are used interchangeably and misunderstood as the same. However on careful reading of the relevant laws and provisions we can conclude that there is a significant difference in both the concepts. In this Article we will try to explain both the concepts and the major difference between them and when it’s suitable to use or not use these concepts.

Input Service Distributor(ISD)

Input Service Distributor Mechanism

In the daily operation of any business there are various services procured for the business purpose and most of these are invoiced to the Head office irrespective of were these services are provided because most of the large organisations have centralised system of accounting and payment. To name some common services procured are Audit services, legal services, rental services, IT support services etc. This leads to several issues like

  • the problem of credit accumulation at one location
  • credit is available only to the unit on which Invoice is raised. This leads to blockage of the Working capital as the centralised billing location may not have sufficient outward supply to utilise the ITC available
  • the other branch offices may have output tax liability but may not have sufficient credit to utilise because of the centralised billing policy and hence result in extra cash outflow

Keeping in view all these issues ISD concept was introduced in the erstwhile Service Tax regime and hence carried forwarded in the GST regime as well.

Statutory definition of “Input Service Distributor” which is provided under section 2(61) of the CGST Act 2017 reads as under-

Input Service Distributor” means an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.

From the above definition, following inferences can be drawn

1. It is an office of supplier and not the actual supplier of goods or services. Thus in ISD there is no actual outward supply of services. It is just an administration and distribution mechanism by which a business can distribute the common credit attributable to other units having different GSTIN number based on the same PAN number (distinct entities).As per Sec 24 of the CGST Act(compulsory registration) an office of the supplier which intends to act as Input Service Distributor has to obtain a compulsory registration under GST. ISD registration is separate from the registration of the Head office and branches taken for the purpose of credit distribution compliance under GST.

2. ISD shall deal with only input services and not with goods including capital goods. Credit of goods and capital goods used for common operations of the head office and branches cannot be distributed via ISD mechanism.

3. ISD shall receive tax invoices for taxable supplies and distribute the tax charged on such invoice to appropriate supplier having the same Permanent Account Number (PAN).

4. ISD must issue an appropriate document to distribute the ITC. This is not a supply invoice but just a simple invoice to distribute input credit received by ISD.

Example: XYZ Ltd has Head office in Mumbai and branch offices in Kolkata, Delhi and Bangalore. XYZ Ltd may be procuring Audit /Legal/IT support services which is a common service for the head office and the branch offices. XYZ has a centralised system of billing and all ITC is accumulated at the billing centre Head office. To avoid such accumulation ISD registration can be taken at say Mumbai location and common credit can be distributed to the respective units utilising the services in a manner to be discussed below as per Sec 20 of the CGST Act(read with Rule 39 of the GST Act).

Manner of Distribution of ITC though ISD mechanism

The credit is to be distributed in a manner prescribed in Sec 20 of the CGST Act 2017(read with Rule 39 of the GST Act).

> Timing of Distribution-The concept of ISD in GST as discussed above is similar to the one that existed in the Service Tax regime except the timing of distribution of the credit. In service tax the timing of distribution of credit was not prescribed. However in GST ISD shall distribute the credit available for distribution in the same month (reflecting in ISD’s monthly GSTR 6A) and details of such distribution shall be furnished in Form GSTR-6 (to be filed by 13th of every month).

> Document through which credit is to be distributed– An ISD can distribute credit through an Invoice as prescribed by Rule 54 of the CGST Act 2017. The Invoice should contain the following particulars:

a) name, address and Goods and Services Tax Identification Number of the ISD

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

f) signature or digital signature of the Input Service Distributor or his authorised representative

Provided that where the Input Service Distributor is an office of a banking company or a financial institution, including a non-banking financial company, a tax invoice shall include any document in lieu thereof, by whatever name called, whether or not serially numbered but containing the information as mentioned above.

> Invoice to specifically mention that it is issued only for the purpose of distribution of credit

> The credit distributed shall not exceed the total credit available for distribution. In case of excess distribution of credit to one or more recipients, such excess amount shall be recovered from such recipients along with interest.

> The credit to be distributed to all the units of an entity having the same PAN and which utilises the common service no matter whether the unit is registered or not registered under GST. Since unregistered unit cannot avail ITC it shall result in the increase in cost.

> The ISD cannot keep the credits in its own books and it have to transfer all the credits be it eligible credit or ineligible credit. Hence it should determine as a part of its working eligible and ineligible credit and should distribute them separately.

> Distribution to one recipient– Where credit of input services is attributable to one recipient, same shall be distributed to that recipient only. For example ISD in Maharashtra receives an Invoice for IT maintenance service provided in branch located in Kolkata then ISD shall distribute that particular credit to Kolkata branch only. In GST one important criteria of credit availment under Sec 16 of the CGST Act is that supply of service must have been received. So accordingly only the actual recipient of service should enjoy the benefit of credit availment.

> Distribution to one or more recipients– Where credit of input services is attributable to more than one recipient or to all the recipients then such credit shall be distributed among such recipients on prorata basis taking turnover in a state or turnover in a union territory of such recipient during the preceding financial year(FY) as base.

However if one or more such units among which credit to be distributed does not have turnover in the preceding Financial year then the turnover of 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 is taken for turnover calculation.


XYZ Ltd has ISD registration in Mumbai with Head Office in Mumbai and Branch offices in Kolkata, Delhi and Bangalore. Audit services procured at head office Mumbai but service provided to all the branches as well. Invoice was raised by the auditor on ISD quoting ISD GSTN. Now consider two scenarios
1. All the branches with head office have turnover in the preceding FY in the ratio as follows

Mumbai: Kolkata: Delhi: Bangalore = 60 lakh:20lakh:10lakh:10lakh=6:2:1:1

Hence credit on audit service to be distributed in the above ratio

2.  Branch Delhi was newly registered and did not have turnover in the preceding FY. Audit services are taken say during month August 2020. So we will see the turnover of the Quarter April-June 2020 to distribute the credit to all the branches and the head office.

Formula for credit distribution is :

Credit to be distributed=Credit available for distribution (Eligible/Ineligible)*Turnover of the recipient during the relevant period(Preceding FY or Latest quarter as discussed above)/ the aggregate of the turnover(Preceding FY or Latest quarter as discussed above )of all recipients to whom the input service is attributable

Note: For the purpose of computing “turnover”, the turnover of goods or services not taxable under this Act shall also be included. However, while computing such turnover, the amount of any duty or tax levied under entry 84 of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule, shall be excluded.

The above mechanism of distribution of common credit is to be applied separately for CGST, SGST and IGST credit. The Credit to be distributed by ISD is summarised in the table below:

Credit to be distributed Recipient unit located in the same state as that of ISD Recipient unit located in the Different  state as that of ISD

Credit Note/ Debit Note issued by ISD treatment-

Credit Note: If a credit note is received by an ISD reducing the ITC available the ISD has to issue an ISD credit note to the recipients to whom the credit has been distributed on the basis of the original invoice. The credit note to be issued in the same ratio as the ratio in which original credit had been distributed. The ISD credit not to be issued in the same month in which Credit note reflects in GSTR6A of the ISD.

Debit Note: In case ISD receives a debit note it’s not necessary to distribute extra credit in the same ratio as that of original invoice credit. ISD debit note to be issued in the same month in which such debit note reflects in its GSTR6A.

Note: If any ITC is distributed in excess to any unit in a particular month then credit note may be issued to such unit to which the ITC is wrongly distributed. Such credit note shall be issued in the month in which such error is noticed. Similarly if short credit is distributed to any unit in any month then debit note may be issued in the month in which short distribution is noticed.

Return filing by ISD

ISD is required to file monthly return in Form GSTR 6 by 13th of every month following the month of whose credit is being distributed(Rule 65 of the CGST Rules 2017). The return is to be filed on the basis of credit reflecting in GSTR 6A and Invoices raised for distributing credit as per Sec 20 of the CGST Act 2017.


SupplierSupplier of service(say IT support service provider) files GSTR 1 by 11th of every month.  


Credit reflects in GSTR 6A

Credit reflects in GSTR 6A of the ISD post 11th of every month.

ISD may confirm/add/delete the credit details and accordingly issues ISD Invoice to the recipient units in the prescribed ratio. These ISD invoices along with input credit details are furnished in GSTR 6 to be filed by 13 th of every month.

Credit reflecting

Credit reflecting in the recipient units GSTR 2A. This credit will be availed by recipient units in GSTR 3B.

 Cross Charge under GST

ISD is simply a mechanism provided to distribute common credit pertaining to various units of an organisation having different GSTIN based on same PAN. However cross charge can be used either were one unit in a particular location say Mumbai provides service to its branch in Kolkata or vice versa or to accumulate the scattered ITC at various locations to a central location for effective ITC utilisation.

ISD is a administrative mechanism with no outward supply but used only for credit distribution whereas Cross charge is a mechanism to charge distinct units for internal service provided or effective cost utilisation. Let’s understand cross charge in details. 

Cross charge mechanism to charge distinct units for common internal service– In big organisations its common to have internal departments of Finance, Admin, HR, Payroll etc which provide services to the company. However these departments are generally centrally located at head office however the benefit of their services is also received by the branches. In such scenarios head office may cross charge the branches for the services provided by its employees the benefit of which is received by the branches.

 As per schedule 1 of CGST Act, any supply between different GST registrations having the same PAN (distinct persons) shall be treated as “supply” even when made without consideration.

 Further, section 25 of the CGST Act states that “A person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of this Act.” Further section 25(5) of the Act states that “Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”

Thus the combined reading of both Sec 7 and Sec 25 of the CGST Act gives rise to the need for cross charge in such cases. However we must note that when any service is provided by the head office employees to branches the cost of employee is indirectly added in the Taxable value. ‘Supply’ excludes activities in Schedule III- Services by an employee to employer in the course of or in relation to his employment. Employees are employed for carrying out duties under the employment contract for the legal entity as a whole & not for a specific location based on physical presence or based on its GSTN registration. This can be a disputed area of cross charge. Any service which is outside the scope of GST cannot be taxed indirectly by way of cross charge. The Finance/Admin/HR/ Payroll functions are provided by employees to the entire organisation and the cost incurred by way of salary paid to them cannot be cross charged as far as the objective of GST is concerned. However this can be challenged by the department as still there is ambiguity in this area of cross charge.

In Case of M/s. Columbia Asia Hospitals Pvt. Ltd, The appellate authority for advance ruling, Karnataka upheld the rulings passed under section 98(4) of the GST Act 2017 vide NO. KAR ADRG 15/2018 dated 27/07/2018 i.e. wherein the activities performed by the employees at IMO providing the services in the course of or in relation to employment such as accounting, administrative and IT system management to their distinct units located at other state is treated as taxable supply as per entry 2 of schedule I appended to Act, read with section 7 of the CGST Act 2017.

Hence if a receiving branch is eligible to avail ITC it is advisable to cross charge for such common services and avail ITC. This will definitely involve increased compliance of issuing multiple cross charge invoices and a complicated accounting structure but save future litigation cost and harassment.

Cross Charge for efficient ITC utilisation- In this scenario cross charge is used to accumulate scattered ITC at various locations of a entity to a common location for effective ITC utilisation. For example say XYZ Ltd has a Head office in Mumbai which is engaged in Supply of Goods across various locations in India. For Marketing and Back office work it has branches in Kolkata, Delhi and Bangalore. These branches may be receiving input goods or services for daily functioning however since it does not have output supply the ITC availed cannot be utilised and is an additional cost to the branches. Suppose ISD registration is in Mumbai. These ITC cannot be routed through ISD since credit can be utilised only by the unit receiving the services i.e the Branches. To shift the benefit of these credits the Branches in Kolkata, Delhi and Bangalore can cross charge the Head Office with Invoice description as Business support services. In this way branches shall pay outward GST by way of utilising the ITC accumulated in its books and the credit is shifted to the head office receiving the service.

Another Example were service is received by XYZ Ltd in Tamil Nadu were it does not have GST registration. Suppose XYZ Ltd is Organising an event in Tamil Nadu and it receives event related services on which it pays CGST and SGST(of Tamil Nadu). Here this GST paid is an additional cost to XYZ Ltd. to manage this cost it cannot take ISD registration since it won’t be able to utilise the local CGST+SGST of Tamil Nadu in Mumbai or other locations. The only way out here is to take Tamil Nadu GST registration and cross charge the same to Mumbai HO or Branches. 

Value of supply of services between Head office and Branches under cross charge

In cross charge an outward supply tax invoice is raised by HO on Branches or vice-versa. Any supply under GST is to be valued as per Sec 15 of the CGST Act read with GST Rules.

In case of supply between distinct persons, value shall be determined as per Rule 28 of CGST Rules which prescribes the methods to determine the value.

Rule 28 of CGST Rules reads as under-

The value of the supply of goods or services or both between distinct persons as specified in sub-section (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall-

a) be the open market value of such supply;

b) if the open market value is not available, be the value of supply of goods or services of like kind and quality;

c) if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order.

Rule 30 provides for value as 110% of the cost of production or manufacture or the cost of acquisition of such goods or the cost of provision of such services.

Rule 31 provides value shall be determined using reasonable means consistent with the principles and the general provisions of section 15 and the provisions of this Chapter.

Provided that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value of the goods or services.

Based on the above provision, HO shall be required to discharge GST on the following value,

  • Open market value of such supply
  • Value of supply of like kind or quality
  • 110% of cost of acquisition of such goods or cost of provision of such services or
  • Any other reasonable means

In most of the cases HO and branches are able to take the credit and hence value declared in the Invoice should not be objected by the Tax Authorities. However as discussed above Internal Services of Finance/Taxation/HR/Payroll etc are services by Employees to the entire company and not services by HO to branch and hence as per common understanding should be not considered supply at all. However its better to discharge GST on such inter branch transfer of services to avoid departmental litigations in future. Even if we consider it supply by any means the valuation of such service is the biggest challenge.

Lets see how the valuation mechanism would fail to determine the value:

Open Market Value value of supply of service of like kind

and quality

110% of cost of provision of services Reasonable means consistent with the principles and general provisions
Open market value for such internal services not available Not possible to identify like kind or quality as  it is Company specific Difficult to determine what would constitute cost. Exact allocation of cost for time spent by employee towards a specific branch may not possible e.g. it is not possible to identify how much time a HR or a Accounts head or a Director would be spending on work related to HO, even not possible for department to establish the same No such reasonable method exists. Any method would require allocation of cost of people working in such departments of company and any such method used will be vague to justify correctness of cost allocation.

Value of supply of services between Head office and Branches for effective utilization of ITC scattered at various locations

ITC scattered at various locations of a business can be accumulated at one or more places for efficient utilisation of such ITC. As explained above it may happen a company sells all its goods say from Mumbai but has some credits lying at branch office in Kolkata and Delhi . Since Kolkata and Delhi has no outward supply ITC is lying idle in its books. These branches can cross charge the Head office with Invoice description of Business support service and transfer the ITC to the head office. Here valuation of such services should be done as per Sec 15 of the CGST Act 2017 read with Rule 28,29,30,or 31 of the CGST Rules 2017(discussed above) and where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be open market value of the goods or services.  

 Distribution of ITC under RCM

If any person receives any goods or service covered under RCM provisions then it has to get compulsory registration and pay tax. ISD registration is generally taken by companies which have its operation spread at various locations with one or more branches.ISD is only a distribution mechanism and not a supplier of services. If any service is obtained by the company with ISD registration then ISD cannot pay GST under RCM neither there is any provision in GSTR 6 to show details of inward supplies on which payment is made under RCM. Therefore such RCM payment is to be made by any of its registered units and if any unit is not registered then it has to take registration for payment of GST under RCM.

Example: XYZ Ltd has HO in Mumbai and ISD separately registered in Mumbai and branches in Kolkata, Delhi and Bangalore. If any services covered under RCM(Ex-service from a lawyer) taken by HO or branch office then any of such branch or HO registered can pay GST say Mumbai HO pays under RCM and raise a self Invoice from HO Mumbai. In such Invoice Mumbai will be shown as person liable to pay GST and ISD located in Mumbai shown as service recipient. On basis of this self Invoice ISD will distribute credit (paid under RCM) to units availing such service.

However if lawyer service pertains to only one unit say Kolkata then it is advisable that Kolkata branch pays GST under RCM and issue self invoice with service recipient as Kolkata and here there is no need to route the Invoice through ISD.

Cross Charge or ISD to SEZ Units

Cross Charge to SEZ– If any cross charge is to be made to a distinct unit located in SEZ it should be kept in mind that supplies to SEZ are zero rated and treated as exports. Hence cross charge can be made to SEZ with payment of IGST or under LUT without payment of IGST.

ISD to SEZ– An ISD may distribute credit attributable to SEZ under an ISD invoice and SEZ shall be eligible to avail the credit on the same.


A company can use ISD mechanism only to distribute the credit of Input Services which are commonly used by various units of a entity and were a entity follows centralised system of accounting. On the other hand cross charge is used to charge the distinct units for common internal services provided or to use the scattered ITC at various locations efficiently. In no ways cross charge can be used to distribute the credit availed on external input services like that of Audit. However ISD is a very complex mechanism which requires additional compliance in the form of monthly credit reconciliations while filing GSTR 6, monthly filing of GSTR 6, accounting complexities and configuration difficulties in the ERP system. Also credit of Input Goods and capital goods cannot be distributed by ISD mechanism. One way to avoid or reduce the routing of credit through ISD is to shift to decentralised accounting model. The supplier wherever possible can bill directly to the branches for common services based on some valuation technique adopted by the company. If decentralisation option is not viable for the company it can continue with centralised model and take ISD registration however for unit specific input service invoice should be raised on that particular unit instead of routing it through ISD.

Disclaimer: Every effort has been made to keep the information cited in this article error-free. Suggestions and feedback to improve the task are welcome. The article and opinions therein is based on my understanding of the GST law and provisions prevailing as on date. The content of this article are for information purposes only and does not constitute an advice or a legal opinion and are personal views of the author. The opinion may vary according to one’s interpretation of the law. It should not be relied upon as the sole basis for any decision which may affect you or your business.

The author can be approached at agarwal.priyanka1705@gmail.com

Author Bio

Qualification: CA in Job / Business
Company: Worked in RPG Enterprise Ltd's group company-Zensar Technologies Ltd as a Indirect Tax Associate and Group Management Resource
Location: Kolkata, West Bengal, IN
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    I have query:ISD,input credit/inpit tax credit transfer from HO having a GST Registration to their different unit(s) having separate GST Registration. UNDER GST Act,is it a supply of service(though there is no consideration) and liable to pay tax? please response

    1. ilovegst says:

      An entity is required to take ISD registration only when it receives common services Invoiced at a Single location say for Audit services the chartered accountant raises invoice on the head office. However the audit service is also received by the branches. To ensure correct distribution of ITC the entity has to take ISD registration. ISD registration is prescribed by GST law only to distribute credit and not for providing any kind of service. It can only raise ISD credit distribution Invoice and no Invoice pertaining to output service can be raised.
      So to conclude, in my opinion it will not be a supply under GST and hence no GST liability on mere distribution of credit by ISD to the head office and the branches.

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