ISD - Imput Service Distributor Under GST

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ISD - Imput Service Distributor Under GST

Definition and purpose of Input Service Distributor

Definition

As per Section 2(61) of CGST Act, 2017, “Input Service Distributor (ISD)” 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 u/s 9(3) or 9(4), 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.

Purpose of ISD

When a business entity has large share of common expenditure on services and the billing is made to a single location, the ITC available should not be wholly claimed by that centralised location as services are utilised by one or more distinct persons. So, it may take a separate registration as ISD to distribute the ITC to its distinct persons proportionately.

Background of ISD

Earlier, Taxpayers have an option to distribute common input services from third parties either through ISD or cross charge mechanisms.

But, Section 20(1) has been amended with effective from 1st April 2025 vide Notification No. 16/2024-CT dated 06.08.2024 making it mandatory to have registration under ISD for the entities having centralized offices where services are procured for or on behalf of distinct persons referred to in section 25.

Meaning of ISD and Cross Charge

1.Cross charge is a charge of tax on deemed supplies made by HO/centralized office to its distinct entities.

2.ISD is meant for distribution of common ITC on invoices received by HO/ centralized office among its distinct entities referred to in Section 25.

What are External and Internally Generated Services?

1.Common input services/ External services – Procuring input services (common to one or more distinct persons) from external/third party suppliers. (eg– audit services, legal services, Accounting software, Consultation services, Advertisement services, Bank charges, insurance, tele – communication services, Membership fee etc.)

2.Internally generated services – Activities performed by Head office as a whole benefitting its branches having separate GSTIN. (eg- Accounting services, IT services, CEO/CFO/CS/HR services)

Before 01st April 2025

After 01st April 2025

Any entity which has a centralized location receiving input services on behalf of its distinct persons is now required to obtain ISD registration. The Finance Bill removes the option previously available to taxpayers to choose between cross charge and ISD.

Note: Cross charge for internally generated services is not mandatory vide Circular 199/11/2023 – GST dated 17th July 2023. It clarified that in situations where no invoice is raised for ‘internally generated services’ the value can be deemed as NIL where the recipient is eligible to claim ITC.

Functions of ISD

Note:

ISD mechanism cannot be used for transfer of credit to holding company, subsidiary company, group entities, related parties as they have different PAN.

ISD can neither be a supplier nor recipient of goods/services.

Compliances by ISD

A. Forms/ Returns

Every taxable person registered as an ISD shall, for every calendar month or part thereof, furnish GSTR 6, as prescribed under Rule 65, a return, electronically, within thirteen days after the end of such month on the basis of details contained in FORM GSTR-6A.

Just like GSTR 2A, GSTR 6A is an auto-populated form based on GSTR 1 filed by the suppliers.

Eg: For the month of February 2025, the date of filing GSTR 6 shall be 13th March 2025

Late filing of GSTR-6 attracts a late fee of ₹100 per day u/s 47 of the CGST Act (₹50 per CGST & SGST each per day)

B. Documentation

1. Documents issued to ISD

Invoices issued by the supplier of services u/s 31 of CGST Act Debit Notes issued by supplier of services u/s 34 of CGST Act

Invoice issued as per Rule 54(1A)(a) to transfer ITC from regular registration located in the same state as ISD

2. Documents issued by ISD

ISD shall distribute the amount of tax credit to recipients by issuing an ISD invoice as per Rule 54(1).

Distribution of ITC (Rule 39)

A. Conditions/Restrictions for Distribution of ITC

ISD can be used only for transfer of ITC pertaining to Input Services including activities listed in Schedule II of CGST Act as deemed services.

Note : ISD cannot avail and distribute ITC on goods/capital goods

Amount of credit distributed should not exceed Amount of credit available.

ITC should be distributed on monthly basis, i.e., ITC available for distribution in a month should be distributed in the same month.

ISD shall distribute all the ITC received in GSTR 6A. Further, ISD should separately distribute eligible ITC and ineligible ITC. Reversal of Ineligible ITC shall be on part of the recipient.

The excess/wrongly distributed credit can be recovered as per Section 21 from the recipients of credit along with interest by initiating action under section 73 /74 or 74A.

B. Manner of Allocation of ITC

C. Manner of Distribution of ITC

Note: the term “turnover”, in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act reduced by amount of any duty or tax levied under specific entries of the Seventh Schedule to the Constitution of India.

Therefore, Turnover includes all taxable supplies, Zero – rated Supplies, Exempt Supplies and Non – Taxable Supplies but excludes any duty or tax levied.

D. Pro – rata distribution of ITC

ITC to be distributed to one of the recipients is to be calculated by applying the following formula:

C1= (T1/ T) x C

R1 = one of the recipients, whether registered or not

C1 = ITC to be distributed to R1

C = Total ITC available for distribution

T1 = Turnover of R1 during the relevant period

T = Aggregate Turnover during the relevant period of all recipients to whom the input service is attributable the term “relevant period” shall be—

Scenario Relevant period
Recipients of the credit have turnover in their States/Union Territories in Preceding FY
Preceding Financial year
Some/all recipients of credit do not have any Turnover in their States/Union Territories in P receding FY
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

Eg : A company XYZ Ltd. has its Head Office (HO) in Maharashtra, registered as an ISD. The company has two branches in Maharashtra & Karnataka. The HO receives an invoice for input services (e.g., advertising services) with ITC of ₹1,00,000. The turnover of the branches during the relevant period is ₹5,00,000 & ₹10,00,000 of Maharashtra & Karnataka respectively.

Branch Turnover (₹) ITC Share ITC Type Distribution
Maharashtra (Same State)
₹5,00,000
(5,00,000/15,00,000) × ₹1,00,000 = ₹33,333
CGST ₹16,667 + SGST ₹16,667
Karnataka (Different State)
₹10,00,000
(10,00,000/15,00,000) × ₹1,00,000 = ₹66,667
IGST ₹66,667

Same State (Maharashtra): ITC is distributed as CGST & SGST. Different State (Karnataka): ITC is distributed as IGST.

E. Distribution of ITC by ISD on taxes paid under RCM

For the distribution of credit in respect of input services, attributable to one or more distinct persons, subject to RCM, a registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note as per rule 54(1A) to transfer the credit of such common input services to ISD, and such credit shall be distributed by the said ISD to its recipients. (Notification 12/2024 – CT).

An ISD cannot pay taxes, it can only distribute the ITC to its recipients. Therefore, the following steps need to be followed:

Scenario:

An entity has its head office and ISD registration in Telangana. The head office receives legal services amounting to INR 1,00,000/- on 04th April 2025 on behalf of all its branches.

Step 1: Issuing Invoice to ISD

The head office issues an invoice to the ISD under Rule 54(1A) for transferring the ITC on 4th April 2025.

This invoice is reported in GSTR-1 for the period April 2025, so that it gets reflected in GSTR-6A of ISD.

Step 2: RCM Tax Payment

Since legal services are covered under RCM, the head office in Telangana ( as it has same PAN and is in same state as ISD) pays GST under RCM in GSTR 3B for the period April 2025.

This amount is to be reported in Table 3.1(d) of GSTR-3B.

Step 3: Claiming ITC on RCM

Since the head office has paid GST under RCM, it is eligible to claim the same as ITC under Table 4(A)(3) of GSTR-3B.

Step 4: ISD Distributes ITC

ISD receives ITC in GSTR-6A and distributes the ITC to different branches based on turnover in its GSTR 6 for the period April 2025.

F. What Happens if Distributed ITC Decreases Later?

ISD shall issue ISD credit note for reduction of credit in case where ITC which was already distributed gets reduced for any reason.

ITC on account of ISD-CN shall be reduced in same proportion in which the ITC was distributed on original invoice, and the amount so apportioned shall be-

a. reduced from the amount to be distributed in GSTR 6 in the month of Credit note

b. Where ITC to be reduced exceeds ITC to be distributed for a particular unit, difference shall be added to the output liability of the recipient unit

G. What steps to take if ITC is wrongly distributed?

ISD IMPLEMENTATION – ROADMAP

Identify & Categorize Expenses – Identify common expenses for ISD allocation from the list of all business expenses.

Identify distinct persons using common services – Identify distinct persons receiving common services among all the distinct persons referred to in Section 25

Assess ISD Registration Needs – Decide if common input services should be sourced for multiple units and obtain ISD registration.

Vendor Communication – Identify vendors providing common services and communicate with vendors to update the ISD registration details for raising invoices to ISD.

Manage GST on RCM Expenses

1.Identify common expenses under Reverse Charge Mechanism (RCM).

2.Route GST payments to the registered office in the ISD-registered state.

3.This registered office in same state as the ISD shall transfer the ITC related

to RCM to ISD for further distribution.

Compliances by ISD

1. Ensure invoices are raised to the recipients of the ISD for ITC distributed and distribute the ITC to the recipients of ISD as per Rule 39.

2. Ensure timely filing of GSTR-6 (ISD return). Compliances by Regular Registrations Ensure that regular registrations claim the eligible ITC and reverse the Ineligible ITC distributed by ISD.

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