Starting April 1, 2025, businesses that receive input service invoices for multiple branches must compulsorily register as an Input Service Distributor (ISD) and distribute Input Tax Credit (ITC) accordingly. The ISD mechanism ensures that ITC from shared services, such as audit fees, legal consultation, and software subscriptions, is correctly allocated to branches that actually utilize these services.
Previously, ISD registration was optional, but with the new mandate under GST, businesses meeting the criteria must comply to avoid potential disallowances or penalties.
This change is enforced under Notification No. 16/2024-Central Tax, dated August 6, 2024, which makes ISD provisions mandatory from April 1, 2025. You can access the full notification here: Official Notification.
What is an Input Service Distributor (ISD) Under GST?
As per Section 2(61) of the CGST Act, an Input Service Distributor (ISD) is an office of a supplier of goods or services that:
- Receives tax invoices for input services on behalf of multiple branches.
- Distributes the input tax credit (ITC) related to those invoices to different branches.
- Issues an ISD invoice for ITC distribution to facilitate ITC transfer.
The ISD mechanism does not apply to goods (inputs or capital goods)—it is only for input services. The central office (HO) acts as a distributor, ensuring that ITC on common expenses is appropriately assigned to the relevant branches.
Who Needs to Register as ISD?
Under the new rules, any business that meets the above conditions must obtain a mandatory ISD registration and distribute ITC among its branches, units, or locations.
Note: The branches to which ITC is allocated should have distinct GST registrations (GSTINs), even if under the same PAN.
For instance, if a company’s head office in Delhi pays for software subscriptions that are used by its branches in Mumbai, Chennai, and Kolkata, then ITC from this invoice must be distributed proportionally to those locations through the ISD mechanism.
How Does ITC Distribution Work Under ISD?
When a business receives invoices for common input services—such as audit fees, software charges, or legal consultancy—these expenses are incurred centrally but used across multiple branches. The ISD mechanism ensures proportionate ITC distribution to all benefiting branches.
Key Rules for ITC Distribution:
Distribution based on turnover:
- ITC is allocated proportionally based on the turnover of the recipient branches in the relevant period.
- Formula for ITC distribution: C₁ =(t₁/T)×C
where:
- C = Total credit available
- t₁ = Turnover of the recipient branch
- T = Aggregate turnover of all eligible branches
Distribution by tax type:
- CGST & SGST: Distributed to branches in the same state.
- IGST: Distributed when branches are in different states.
Eligible vs. ineligible credit:
- ITC must be separately distributed for:
- Eligible ITC (fully claimable)
- Ineligible ITC (blocked credits under Section 17(5)).
ISD invoice & credit note:
- ISD must issue an ISD invoice under Rule 54 when distributing ITC.
- If ITC needs a reduction, an ISD credit note is issued.
Monthly Filing & Compliance Requirements
- GSTR-6 filing: ISDs must file GSTR-6 by the 13th of each month to report ITC distribution.
- ITC reflection in GSTR-2B: The recipient branches will see their allocated ITC in GSTR-2B and claim it in GSTR-3B.
- No annual return required: Unlike other GST taxpayers, ISDs do not need to file an annual return.
Example
Scenario 1: A Single branch uses the service
- Company HQ in Mumbai receives an audit fee invoice of ₹10,000 + 18% GST (₹1,800).
- The audit service is only for Branch A in Bangalore.
- The full ₹1,800 ITC is transferred to Branch A via an ISD invoice.
Scenario 2: Multiple branches use the service
- The Mumbai HQ receives a ₹1,00,000 invoice for software services (with ₹18,000 GST).
- All branches use the service.
- ITC is distributed based on branch turnover:
| Branch | Turnover (₹) | % of Total Turnover | ITC Share (₹) |
| Branch A | 50 lakh | 50% | ₹9,000 |
| Branch B | 30 lakh | 30% | ₹5,400 |
| Branch C | 20 lakh | 20% | ₹3,600 |
| Total | 1 crore | 100% | ₹18,000 |
Each branch claims the ITC as per its share in GSTR-3B.
Preparing for ISD Compliance Before April 2025
Since the mandatory ISD registration is coming into effect from April 1, 2025, businesses should start preparing now.
- Review your current process
- Determine if your business receives centralized service invoices that are used across branches.
- Review whether you need to distribute ITC among multiple GSTINs.
- Ensure your current ITC claim process aligns with the ISD mechanism.
- Implement proper documentation & SOPs
- Define a clear process for tracking common input service invoices.
- Implement internal controls for proper ITC allocation and invoice issuance.
- Ensure proper documentation of ISD invoices and credit notes.
- Automate & integrate GST systems
- Use technology-driven solutions to manage ISD invoices and automate tax filings.
- Ensure your accounting system tracks ITC distribution accurately.
- Follow best practices
- Charge ITC to the right branches.
- File ISD returns (GSTR-6) on time to avoid compliance issues.
- Ensure proper collaboration between finance & tax teams.
- Train your Tax & Finance teams
- Conduct internal training sessions on the mandatory ISD mechanism.
- Educate teams on how to handle ISD invoices, credit notes, and GST filings.
- Monitor compliance and stay updated
- Periodically review ITC allocations to ensure compliance.
- Stay informed about any further GST rule updates from CBIC.
Key Takeaways
- Mandatory ISD registration applies from April 1, 2025, for businesses distributing ITC.
- ISD is only for input services, not for inputs or capital goods.
- Proportional turnover-based ITC allocation is required.
- ISD must file GSTR-6 monthly, and recipient branches claim ITC in GSTR-3B.
- Businesses must align SOPs, automate ITC tracking, and train staff for seamless compliance.
With the ISD mandate approaching, businesses must proactively prepare. Reviewing tax structures, upgrading systems, and ensuring accurate ITC tracking will help businesses avoid last-minute compliance hurdles.
