Introduction
Starting April 1, 2025, businesses with multiple GST registrations under the same PAN will be required to obtain Input Service Distributor (ISD) registration. This new mandate ensures the seamless and equitable distribution of Input Tax Credit (ITC) across various GSTINs under the same entity. The ISD mechanism under the Goods and Services Tax (GST) regime is designed to distribute ITC on services received centrally to multiple business locations efficiently.
Understanding Input Service Distributor (ISD) in GST
As per Section 2(61) of the CGST Act, 2017, an Input Service Distributor (ISD) is an office of a supplier that receives tax invoices for input services (including services liable to tax under reverse charge) and is responsible for distributing ITC to its branches or units registered under the same PAN but with different GSTINs.
Key Features of ISD Registration
Mandatory ISD Registration: Any entity with multiple GST registrations must register as an ISD to distribute ITC.
Scope of Distribution: ISD can only distribute ITC related to input services; it cannot be used for ITC on raw materials, machinery, or capital goods.
Distribution Basis: ITC is distributed using the turnover ratio of the branches that use the common service.
Compliance and Returns: ISD-registered businesses must issue ISD invoices and file monthly GSTR-6 returns by the 13th of each month.
Who Needs ISD Registration?
Businesses that procure common input services at a central location and use them across multiple branches must obtain ISD registration.
- Example: XYZ Ltd. has its head office in Mumbai and branches in Chennai, Kolkata, and Bangalore. If the Mumbai office incurs software maintenance expenses applicable to all branches, the ITC must be distributed across these locations through ISD registration. The head office acts as the Input Service Distributor in this scenario.
When is ISD Not Applicable?
ISD registration and ITC distribution do not apply in the following cases:
ITC on raw materials, capital goods, or machinery.
ITC distribution to outsourced manufacturers or service providers.
Entities not incurring common input service expenses for multiple branches.
Conditions for ISD Registration
Businesses opting for ISD registration must adhere to the following conditions:
Registration: Apply for ISD registration under GST using Form REG-01.
ISD Invoicing: ITC distribution must be done through ISD invoices issued to branches.
Return Filing: File GSTR-6 by the 13th of each month to report the ITC distribution.
Timely Distribution: ITC must be distributed in the same month of receipt.
Turnover-Based Allocation: ITC is allocated based on the turnover ratio of branches using a specified formula:
Formula:
ITC for a branch (C1) = (Turnover of the branch (T1) / Total turnover of all branches (T)) x Total ITC (C)
Distribution of ITC by ISD
As per Section 20 of CGST Act & Rule 39, ITC distribution follows these rules:
Same State or Union Territory: If the recipient’s location is within the same state/UT as ISD, CGST & SGST/UTGST will be distributed.
Different State or Union Territory: If the recipient’s location is in a different state/UT, IGST will be distributed.
Steps for ITC Distribution
Identify common services received at the ISD location.
Determine the proportionate turnover for each branch.
Issue ISD invoices mentioning the credit distribution.
Report ITC distribution in GSTR-6.
Claim ITC in GSTR-3B by the respective branches.
Compliance Requirements
Documentation for ISD
As per Rule 54(1) & (1A), an ISD must issue specific documents:
ISD Invoice: Clearly marked as ‘for distribution of ITC.’
ISD Credit Note: Issued when previously distributed ITC needs to be reversed.
RCM Tax Credit Transfer: An invoice is issued to transfer ITC on services taxed under reverse charge.
Monthly Return Filing
Every ISD-registered entity must file GSTR-6 electronically, reporting:
Tax invoices received for input services.
ITC distributed to various GSTINs.
Reversals or modifications to previous distributions.
Consequences of Non-Compliance
Failure to comply with mandatory ISD registration or incorrect ITC distribution can result in:
Penalty and Interest: Excess ITC distribution will be recovered from the recipient along with interest under Section 21.
GST Audit & Scrutiny: Mismatches in ITC claims can trigger audits and compliance scrutiny.
ITC Reversal: Incorrect ITC claims may be subject to reversal, impacting working capital.
Roadmap for ISD Implementation
To ensure smooth compliance with ISD regulations from April 1, 2025, businesses should:
Identify Common Expenses: Determine expenses used by multiple locations (e.g., software, IT services, audit fees, advertisement services).
Review GST Registrations: ISD registration should be taken at the office where common services are procured.
Implement Accounting Changes: Adjust ERP/SAP systems to track ISD credits and automate ITC distribution.
Vendor Communication: Inform vendors to update invoices with the correct ISD GSTIN.
Training & Awareness: Educate finance teams on ISD compliance and return filing requirements.
Conclusion
With mandatory ISD registration coming into effect from April 1, 2025, businesses with multiple GST registrations must proactively ensure compliance. ISD registration simplifies ITC distribution for centrally procured services, streamlines tax credits across multiple locations, and reduces compliance risks.
By understanding the ISD framework, documentation requirements, ITC distribution process, and compliance obligations, businesses can seamlessly transition to the new regulatory mandate and optimize their GST credit utilization.
