Summary: Starting April 1, 2025, the Indian GST framework mandates that businesses with multiple GSTINs under a single PAN must register as an Input Service Distributor (ISD) for distributing input tax credit (ITC) related to common services. Prior to this amendment, businesses could either use the ISD mechanism or the cross-charge method for distributing ITC, which led to inconsistent practices, such as failure to properly allocate ITC. The change aims to streamline compliance and improve ITC distribution. The amendment, effective from April 1, 2025, replaces the optional cross-charge mechanism with mandatory ISD registration under Section 20 of the CGST Act. ISDs will now be able to accept GST invoices with reverse charges and distribute ITC to different GSTINs, though the option to pay in cash remains unavailable. The amended rules require ISDs to distribute eligible and ineligible ITC separately and to file GSTR-6 by the 13th of each month. Additionally, businesses need to comply with updated methods of ITC distribution as specified in Rule 39, which was amended in July 2024. Challenges include managing and reconciling the separate distribution of forward and reverse charge credits and ensuring timely filing of GSTR-6. The shift to mandatory ISD registration will simplify ITC allocation and improve tax compliance across businesses operating in multiple states or business verticals. The cross-charge mechanism will only apply to internally generated services.
Input Service Distributor registration provisions have been amended, which is effective from 1st April, 2025, though the provisions existed from 2017.
Hitherto (until 1st April, 2025), businesses having different GSTINs under a common PAN were using CROSS CHARGE.
Now the question is whether businesses are allowed to continue the cross-charge mechanism or mandatorily follow the ISD mechanism.
Cross-charge Mechanism:
Under the cross-charge mechanism, any office which was receiving common services was raising a tax invoice on another distinct person. As per the second proviso to CGST Rules 28, where the recipient is eligible for full ITC, the value declared in the invoice shall be deemed to be open market value. But distribution of ITC between different GSTINs based on receipt of services was not properly followed in many cases by many. Some businesses were not at all distributing ITC; the entire ITC was availed in the same state where that unit is registered.
To tide over this, ISD registration has been made mandatory with effect from 1st April 2025 to simplify ITC distribution and improve compliance.
Input Service Distributor (ISD) Registration – Section 20 of CGST Act
Until 31st March 2025, all the GST registered entities having different GSTINs under one PAN (registered in various states or various business verticals) had an option to register under the ISD mechanism or adopt cross charge for distribution of common input services such as consultancy charges, rent, etc., among different distinct persons with different GSTINs operating in different states/union territories or different business verticals.
Section 20 was substituted with effect from 1st April, 2025, by Section 12 of The Finance (No.8) Act, 2024.
Consequent to the above amendment, separate registration as ISD under Section 20 is mandatory with effect from 1st April, 2025 if common input services are received for different GSTINs under common PAN. Cross-charging to be continued for internally generated services between distinct persons vide Section 15 CGST Act and CGST Rule 28.
Services under Reverse Charge
Before 1st April 2025, ISDs were able to accept only GST invoices with forward charge only. In the case of services on which reverse charge is applicable, registered entities have to discharge RCM liabilities under normal registration, but credit cannot be distributed among distinct entities by ISD.
Consequent to the amendment, effective 1st April 2025, ISDs can accept GST invoices with reverse charge also and distribute to distinct persons. But the option for cash payment is not enabled at this point in time. Hence, till such an option is enabled, liability is required to be paid from regular registration in the same state of ISD registration, and an invoice is to be issued by that GSTIN to ISD.
Distribution of ITC by ISD
ISD shall distribute ITC (eligible and ineligible credit separately) in the same month to distinct persons by issuing ISD Invoice before the relevant month end and filing GSTR 6 by the 13th of the following month.
CGST, SGST/UTGST and IGST ITC shall be distributed as it is to distinct persons located in the same state/UTs. For distinct persons located in other states/UTs, ITC of CGST, SGST/UTGST and IGST shall be distributed as IGST.
CGST Rule 39, amended on 10th July 2024 vide Notification No. 12/2024 – Central Tax, prescribes the method of ITC distribution among distinct persons. Notification No. 09/2025-Central Tax intended to bring amended Rule 39 into force from 1st April, 2025. But Rule 39 is not mentioned in Notification No. 09/2025 Central Tax.
Challenges:
GSTR 6 shall be filed by the 13th of the month, and ITC credit shall be distributed within the same month. Only 1 day is time for filing GSTR 6 after filing GSTR 1.
1. ITC shall be distributed separately based on eligible and ineligible credit. Also for accounting purposes, forward and reverse charge credit separately.
2. Reconciliation and accounting between units will become more difficult.
Cross Charge or ISD for Services Received from 3rd Parties
Section 20 of the CGST Act, amended with effect from 1st April 2025, made registration under ISD compulsory.
Original Section 20(2) of the CGST Act, 2017: “may distribute credit”. This made the use of the ISD mechanism optional.
Original Rule 39(1) of the CGST Rules, 2017: “shall distribute input tax credit”. This outlined the mandatory procedure if a business chose to operate as an ISD. Please note that the amended rule which is effective from 1st April 2025 also uses the word “… shall distribute…”.
The amendments effective April 1, 2025, aim to align the Act and the Rules by making the ISD mechanism and the associated distribution mandatory for eligible entities.
Based on the above, one can conclude that ISD registration is mandatory effective from 1st April 2025 for distribution of ITC on services received from 3rd parties. The cross-charge mechanism can be used only for internally generated services.
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