With Notification No. 16/2024-Central Tax (dated August 6, 2024), the Indian government has made the Input Service Distributor (ISD) framework mandatory, effective from April 1, 2025. This change significantly impacts businesses that receive common input service invoices at a central location and distribute Input Tax Credit (ITC) across multiple branches.
Previously, businesses had the option to not register as an ISD, but with this amendment, every company receiving invoices for shared services must comply or risk ITC mismatches, penalties, and tax liabilities.
This guide provides a comprehensive breakdown of the upcoming changes, the correct ITC distribution process, compliance strategies, and how businesses should prepare before April 1, 2025.
What is ISD, and Why is It Mandatory Now?
An Input Service Distributor (ISD) is a GST-registered entity that receives input service invoices at the head office and distributes ITC to its branches based on their turnover. This ensures that businesses do not incorrectly claim ITC at a single location but allocate it proportionally.
Key Changes Effective from April 1, 2025
- ISD registration is now mandatory for all businesses that receive common input services for multiple branches.
- Reverse charge ITC (RCM) can now be distributed via ISD, unlike earlier, when ISD could not claim RCM ITC.
- Businesses failing to comply with ISD rules will face GST notices and penalties.
These changes will impact businesses across industries, especially IT services, retail chains, consulting firms, and manufacturing companies with multiple branches.
Practical Example: How the ISD Rule Impacts Businesses
Scenario: A National IT Company
XYZ Ltd., headquartered in Bangalore, has branches in Mumbai, Chennai, and Delhi. It receives a single software subscription invoice of ₹10 lakh from a vendor.
Before April 1, 2025:
- The head office claimed full ITC, even though the software was used across locations.
- This led to tax mismatches and potential GST audits.
After April 1, 2025:
- XYZ Ltd. must register its head office as an ISD.
- The software vendor issues an invoice to the ISD GSTIN.
- The ITC must now be distributed to branches based on turnover proportion through ISD invoices.
This ensures that each branch gets its rightful share of ITC, preventing future tax disputes and financial penalties.
When ISD is Not Applicable: Key Exceptions
Despite the new mandate, ISD compliance does not apply in certain situations:
-
ITC on Inputs & Capital Goods
- ISD cannot distribute ITC on physical goods like machinery, raw materials, or office equipment.
- ITC on such goods must be claimed by the location where the goods are received.
-
ITC to External Vendors
- If a company outsources manufacturing, logistics, or services, ISD cannot distribute ITC to them.
-
Reverse Charge ITC Before April 2025
- Until March 31, 2025, ISDs cannot claim ITC on reverse charge transactions.
- From April 2025, RCM ITC can be distributed to GST-registered branches.
What Happens if Businesses Fail to Comply?
- GST mismatches leading to rejection of ITC claims.
- Tax notices for wrongful ITC claims at the head office.
- Cash flow issues, as branches would have to pay tax instead of utilizing eligible ITC.
How to Correctly Distribute ITC Under the New ISD Rules
Types of ITC Distribution
- Branch-Specific ITC: Directly allocated to the branch that used the service.
- Multi-Branch ITC: Shared among a few selected branches that used the service.
- Common ITC: Used by all branches, requiring proportionate distribution.
ITC Distribution Formula Under ISD
To avoid GST mismatches, ITC must be allocated based on turnover ratio:
ITC to Branch = (Branch Turnover / Total Turnover) × Total ITC
Example: Multi-Branch ITC Distribution
A company incurs ₹1,00,000 ITC on a shared software license. The turnover of its branches is:
- Chennai: 40%
- Mumbai: 35%
- Delhi: 25%
The ITC distribution will be:
- Chennai: ₹40,000
- Mumbai: ₹35,000
- Delhi: ₹25,000
This ensures compliance and accurate ITC allocation as per GST law.
ISD Registration and Return Filing: Step-by-Step Process
How to Register as an ISD
- Apply for ISD registration via GST REG-01.
- Declare ISD status under Serial No. 14 in the form.
- The GST portal generates a unique ISD GSTIN.
- Businesses must use this GSTIN only for ITC distribution.
Issuing an ISD Invoice
- ISD must issue an invoice to each branch for ITC distribution.
- Separate ISD invoices for CGST, SGST, and IGST are required.
GSTR-6: Monthly ISD Return
- ISD must file GSTR-6 by the 13th of each month.
- Late filing attracts ₹50 per-day penalty.
- ISD must match ITC in GSTR-6 with supplier invoices in GSTR-2B.
Financial Risks of Non-Compliance with ISD Rules
Businesses failing to comply with the new ISD rules will face financial and operational risks.
| Scenario | Without ISD Compliance | With ISD Compliance |
|---|---|---|
| ITC Claims | Branches cannot claim eligible ITC | Proper allocation across branches |
| GST Notices | Higher risk due to ITC mismatches | No compliance risks |
| Tax Audits | Increased scrutiny and penalties | Clear and documented ITC flow |
| Reverse Charge ITC | Cannot be claimed before April 2025 | Allowed after April 2025 |
Frequently Asked Questions (FAQs) on ISD Compliance
Can an ISD distribute ITC on capital goods?
No, capital goods ITC must be claimed by the receiving branch.
Can ITC be equally split among branches?
No, ITC must be allocated based on turnover proportion.
What happens if a business misses GSTR-6 filing?
Late fees apply, and incorrect filings can lead to ITC mismatches and GST audits.
Do businesses with a single GSTIN need ISD?
No, ISD applies only to businesses with multiple GST registrations under the same PAN.
Three-Month Compliance Plan for Businesses
| Timeline | Action Items |
|---|---|
| March 2025 | Identify common services & determine ISD requirement |
| April 2025 | Register ISD, update GST records, and train finance teams |
| May 2025 | Issue ISD invoices, file GSTR-6, and review compliance |
| June 2025 | Conduct internal GST audit to ensure proper ITC allocation |
Immediate Action: What Businesses Must Do Now
With ISD compliance becoming mandatory from April 1, 2025, businesses must:
- Assess their ISD eligibility and register if required.
- Set up ITC tracking mechanisms for accurate allocation.
- File GSTR-6 on time to avoid penalties and ITC mismatches.
- Educate finance and tax teams on the new ISD rules.
Proper ISD compliance will ensure smooth GST operations, prevent tax disputes, and optimize ITC utilization. Preparing in advance will help businesses transition seamlessly into the new compliance regime.
Mayank Wadhera is a seasoned Chartered Accountant and compliance expert, specializing in taxation, business structuring, and management consulting. Connect for insights on making your event business legally compliant and financially efficient!
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