ISD under GST has evolved into a benchmark of tax governance. Discover how leadin businesses distribute ITC strategically.
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Input Service Distributor (ISD) under GST: Concept, Applicability, Compliance and Practical Implementation
Introduction
One of the core strengths of the GST framework is the seamless flow of Input Tax Credit (ITC). However, for organisations operating through multiple locations under the same PAN, the utilisation of ITC on common input services often becomes a grey area. Services such as statutory audit, legal advisory, ERP software, HR consulting, brand management, and corporate insurance are usually billed centrally but consumed across several registered units.
To address this challenge, GST law introduced the concept of Input Service Distributor (ISD)—a structured and legally recognised mechanism for distributing ITC related to input services among multiple GST registrations of the same entity.
With recent amendments making ISD compliance mandatory from 1 April 2025, understanding this mechanism is no longer optional. This article explains ISD in a comprehensive yet practical manner—covering its legal framework, applicability, working mechanism, benefits, compliance requirements, and strategic considerations for Indian businesses.
What is an Input Service Distributor (ISD)?
Under Section 2(61) of the CGST Act, an Input Service Distributor is:
An office of the supplier of goods or services which receives tax invoices for input services and distributes the credit of CGST, SGST, UTGST or IGST to its registered units having the same PAN.
In essence, an ISD is a facilitator of ITC distribution, not a supplier of goods or services. Its sole function is to receive invoices for input services and allocate the eligible ITC to recipient units in a prescribed manner.
Key Characteristics of ISD
- Applicable only to input services
- Operates across multiple GSTINs under the same PAN
- Requires separate GST registration as ISD
- Distribution done through ISD invoices
- Monthly compliance via GSTR-6
Why the ISD Mechanism is Required
In large and mid-sized organisations, centralised procurement of services is common. Without ISD, businesses often faced:
- Incorrect ITC claims by a single branch
- ITC accumulation at the head office with no output liability
- Audit objections and denial of credit
- Litigation due to arbitrary cross-charging practices
The ISD mechanism ensures:
- Equitable and transparent ITC allocation
- Legal backing for credit flow
- Consistency in compliance
- Audit-ready documentation
Recognising its importance, the government has now made ISD registration mandatory wherever common third-party input services are received centrally and used by multiple GST registrations.
When is ISD Registration Mandatory?
A business is required to register as ISD when all the following conditions are satisfied:
1. The entity has more than one GST registration under the same PAN
2. Input service invoices are received at one office (typically head office)
3. The services are used by multiple registered units
4. ITC needs to be distributed to such units
From 1 April 2025, eligible businesses cannot bypass ISD by using alternative mechanisms.
Situations Where ISD is Not Required
ISD registration is not required where:
- The entity has only one GSTIN
- Input services are used exclusively by the same GSTIN
- No centralised billing of services exists
- Services are internally generated (these may require cross-charge instead)
How the ISD Mechanism Works – Practical Flow
Step 1: ISD Registration
The head office or designated office must obtain a separate ISD registration under GST by selecting the ISD option in the registration application.
Note: An ISD registration is distinct from a normal GST registration, even though both share the same PAN.
Step 2: Receipt of Input Service Invoices
All vendors supplying common services must issue invoices directly to the ISD GSTIN. Incorrect invoicing is a common reason for ITC denial.
Only input services qualify. Credit related to goods or capital goods cannot be distributed through ISD.
Step 3: Identification of Recipient Units
The ISD must identify:
- Which GST registrations have consumed the service
- Whether the service is used by all units or selected units only
Proper internal documentation is critical at this stage.
Step 4: Allocation of ITC
ITC must be allocated on a reasonable and consistent basis, such as:
- Turnover of recipient units
- Usage metrics
- Headcount (where justified)
The law requires consistency and traceability, not a specific formula.
Step 5: Issue of ISD Invoices
The ISD issues ISD invoices to each recipient unit, reflecting:
- Amount of ITC distributed
- Type of tax (IGST / CGST / SGST)
- Reference to original vendor invoice
This invoice does not represent a supply—it is only for credit distribution.
Step 6: Filing of GSTR-6
The ISD must file GSTR-6 every month by the 13th of the following month, detailing:
- ITC received
- ITC distributed
- Recipient GSTIN-wise allocation
No late filing = no credit to branches.
Step 7: ITC Claim by Recipient Units
Once GSTR-6 is filed:
- ITC reflects automatically in recipient units
- Credit can be claimed in GSTR-3B
- ITC becomes available for utilisation
Benefits of ISD for Businesses
1. Legally Robust ITC Distribution
ISD provides statutory backing for ITC flow, significantly reducing litigation risk.
2. Improved Cash Flow Management
Credits reach the units where output tax liability exists, preventing credit blockage.
3. Audit & Departmental Confidence
ISD invoices and GSTR-6 returns create a clear audit trail.
4. Operational Discipline
Encourages structured vendor invoicing, central oversight, and compliance hygiene.
Statutory Compliance Requirements
| Compliance Area | Requirement |
|---|---|
| Registration | Separate ISD GST registration |
| Eligible Credit | Input services only |
| Distribution | Same tax type, proportionate allocation |
| Return | GSTR-6 (monthly) |
| Due Date | 13th of following month |
| Records | Maintain for 72 months |
| Penalty | ₹10,000 or credit amount (whichever higher) |
ISD vs Cross Charge – A Critical Distinction
| Aspect | ISD | Cross Charge |
|---|---|---|
| Nature | ITC distribution | Taxable supply |
| Applicable To | Third-party services | Internal services |
| GST Liability | No | Yes |
| Registration | Mandatory ISD | Normal GST |
| Return | GSTR-6 | GSTR-1 & 3B |
From April 2025 onwards, ISD cannot be substituted by cross-charge for common third-party services.
Strategic Takeaway for Businesses
ISD is no longer a technical option—it is a mandatory compliance obligation for businesses with multiple GST registrations and centralised service procurement.
Companies that proactively implement ISD will:
- Protect their ITC entitlement
- Reduce audit exposure
- Improve compliance maturity
- Align with evolving GST enforcement trends
Businesses that delay may face credit denial, penalties, and avoidable disputes.
Disclaimer: The information on Viproinfoline is for educational purposes only and does not constitute a professional tax, legal, or financial advice. We strive for accuracy but tax laws change frequently. Always consult a qualified professional before making financial decisions. Viproinfoline and its Contributors are not liable for any losses arising from the use of this information. Refer to our Disclaimer Page for more details.
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