Input Service Distribution Isd

Input Service Distribution (Isd)

An Input Service Distributor (ISD) under GST is a mechanism used by businesses to distribute ITC related to Services across multiple GST registrations within the same PAN. The ISD acts as a centralized virtual entity that invoices ITC to its branches or units based on their turnover or other prescribed criteria.

Example of Common Services - Legal services, Accounting Services, Compliance services, Audit Services etc.

Previously, ISD registration was optional, but starting April 1, 2025, it will become mandatory for applicable businesses. The government amended sec 2(61) and sec 20 of the CGST Act, 2017 via Notification No. 16/2024-Central Tax dt. 6th August, 2024. It made the ISD provisions mandatory, effective from 1st April 2025.

Applicable businesses and taxpayers can be defined as those with multiple GSTINs under the same PAN, receiving common input services centrally on behalf of multiple GSTINs or their branches.

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 sub- section (4) of section 9, for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20 [read with Rule 39].

ITC Distribution Mechanism under ISD

ITC related to centrally procured services must be distributed via the ISD mechanism.
Allocation shall be pro rata on the basis of the turnover of each branch/unit from the preceding financial year.
ITC shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6.

Reverse Charge Mechanism under ISD

In the case of a common inward supply covered under RCM, the invoice for the common service should first be addressed to the regular GST registration, as RCM payment cannot be made using the ISD registration. Once the payment is made, the regular registration shall transfer the ITC to the ISD registration by issuing a cross-charge invoice and reporting it under GSTR-1. Thereafter, the credit is to be distributed to each unit by the ISD.

Compliance and Reporting under ISD

ISD Registration must issue invoices specifically for ITC distribution and maintain records of all transactions.
Monthly filing of GSTR-6 will be mandatory to report distributed ITC.
Branches receiving ITC from the ISD can claim the same in their respective GSTR-3B returns.
The due date to avail year end ITC by normal registration in case of ISD remains same i.e. 30th November following the end of financial year to which original Invoice pertains.

Other Points Related to ISD

ISD is not applicable on goods
Only Matched ITC is to be distributed
Expenses incurred for specific location needs to be distributed to specific unit and need to be excluded from common expense. 
Both eligible and ineligible ITC are to be distributed separately.
 

Manner of Distribution of ITC

 

Type of Credit  available for  distribution	Recipient Unit	Credit to be  distributed as
IGST	Same State	IGST
CGST	Same State	CGST
SGST	Same State	SGST
IGST	Same State	IGST
CGST	Same State	IGST
SGST	Same State	IGST

Cross Charge Mechanism under GST

As per GST law, transactions between branches located in different states or union territories are treated as inter-state supplies, even if no actual payment is made.

Cross charge refers to the mechanism of charging raising Invoice and GST on the supply of services or goods between distinct persons under the same legal entity.

In simple terms, the cross-charge mechanism is used to distribute internally generated expenses or services, such as when the head office provides common services or goods to different units or performs centralized functions like
finance and accounting, IT management, etc. On the other hand, the ISD mechanism is used for the distribution of externally generated services.

Cross charge and ISD are two mutually exclusive scenarios. Cross charge will continue even after the ISD provision becomes mandatory.

Implications & Steps to be taken for Businesses

Obtain ISD Registration
Update ERP Systems and Processes
Documentation of ISD Invoices and ITC Distribution Workings
Training of Staff/Employees and Awareness and Communication to Vendors/Suppliers
Monitor Compliance Deadlines and File GSTR-6
 

Conclusion

In conclusion, while ISD registration is now mandatory under GST, it is important to note that the cross-charge mechanism will continue to be applicable for internally generated services. We recommend obtaining ISD registration if your business incurs common expenses that can be specifically attributed to other units, such as litigation & Compliance services, stock audits, certification work, etc. However, for statutory and regulatory expenses that are not directly attributable to branches like statutory audits, quarterly reviews, SEBI compliance, BOD expenses, Seating fees, etc businesses may choose not to distribute these costs to branches, as they are the responsibility of the Head Office for continuity of operations.

 

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