Mandatory ISD Rules From April 2025

November 27, 2025

Effective April 1, 2025, the CBIC has mandated significant changes to the Input Service Distributor (ISD) mechanism under the GST regime.

These changes, introduced through Amendment via Finance Act, 2024 and a Notification No. 16/2024-Central Tax dated August 6, 2024, aim to streamline the distribution of ITC for businesses with multiple GST registrations under a single PAN.

What Is an Input Service Distributor (ISD)?

Section 2(61) of the CGST Act, 2017 states that an 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 under sub-section (3) or sub-section (4) of section 9, 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.

It is important to note:

• The concept of ISD is a facility made available to business having their head Office at one place and units at other places which may be registered separately. There will be common expenditure, where billing/payment is done from a centralized location. Since common expenditure is meant for business of all units, ITC to be apportioned between all the consuming units.

• ISD mechanism is meant only for distributing the credit on common invoices pertaining to Input Services and not goods (inputs or capital goods).

• E.g. 1: ABC Ltd has Corporate Office in Bengaluru and its branches in Mumbai, Hyderabad, Kolkata and Jaipur. Software license is purchased by Corporate Office and invoice is received. Since the software is used at all the five locations, ITC of entire services cannot be claimed at Bengaluru alone, instead it has to be distributed to all the five locations. For that reason, the Bengaluru Corporate office has to register and act as ISD to distribute the credit.
• Circular 199-2023 dated 17th July 2023 clarified 3 aspects:

Scenario	Nature of Service	Taxability & ITC Distribution
1	Common input services procured by HO from third parties (e.g., software license, security services)	- HO has two options: a) Distribute ITC through ISD mechanism (under Sec 20 & Rule 39), or b) Raise invoice under Sec 31 to concerned BO(s) directly for such services.
2	Internally generated services by HO to BO (e.g., Admin, HR, Accounting support) – where full ITC is available to BO	Rule 28 of CGST Rules determines value of supply made to distinct person. a. Open Market value b. Value of supply of goods or services of like kind and quality c. If (a) & (b) fail, Apply Rule 30 (cost + 10%) or Rule 31 (residual method) 2nd proviso of Rule 28 states that the value declared in the invoice shall be deemed to be the open market value of the goods or services, irrespective of the fact whether all costs (employee cost) has been included or no. Even if HO has not raised any invoice to BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value in terms of second proviso to rule 28 of CGST Rules.
3	Internally generated services by HO to BO – where ITC is not fully available	- Salary cost of HO staff involved need not be mandatorily included in taxable value of supply. Note: Deeming provisions of 2nd proviso is not applicable here.

• After amendment, ISD mechanism is now compulsory for offices that receive tax invoices for input services (including RCM transactions) on behalf of distinct persons, from third parties.
• To conclude, ISD is a mechanism for distributing ITC on input services received from external vendors by a centralised office that are attributable to multiple distinct persons such as branches while cross charge deals with the value of internally provided services and external common services procured without GST.
• Consequences of non-compliance

Quantum of Penalty	Type of Non-Compliance	Applicable Provision(s)
₹10,000 or Tax Involved (Whichever is Higher)	Distributing ITC without ISD registration Failing to register despite being liable Wrong distribution of ITC under ISD Wrong availment of ITC (without receipt of services) Issuing invoice without actual supply (fake invoices) Using another person’s GSTIN Supplying services without invoice or with false invoice	Sec 122(1)(i), (ii), (vii), (ix), (xi), (xix); Sec 20 r/w Rule 39; Sec 24(viii)
Tax + 10% of Tax or ₹10,000 (Whichever is Higher)	Wrong availment or distribution of ITC / non-payment of tax (without fraud or suppression)*	Sec 73
Tax + 100% of Tax	Same as above, with fraud, wilful misstatement, or suppression*	Sec 74
₹50 per day (₹25 CGST + ₹25 SGST), max ₹5,000	Delay in filing ISD return (GSTR-6)	Sec 47 r/w Rule 65

* Note that ITC claimed wrongly will be reversed along with interest as per Section 73/74 and will also have legal consequences in case of Scrutiny and Audit.

How to comply with ISD?

1. Compulsory Registration:

• Section 24 of CSGT Act, states that ISD should obtain compulsory Registration whether or not separately registered under this Act through Form GST REG 01. ISD registration is separate from regular GST registration, even though both are under the same PAN.
• No threshold limit is applicable for ISD registration.
• Can apply for multiple ISD registrations if common services are received at different offices located in different states or districts. One GSTIN, one ISD Registration is permitted.

• While Composition Taxpayer cannot be registered as ISD.
• Procedure for Registration:

Visit gst.gov.in website and go to Services, then Registration and select New Registration’.

• Part A- Declare PAN and State and it gets validated by CBDT database and verified through OTPs sent to PAN linked mobile number and E-mail Address. TRN will be generated using which Part B to be submitted.
• Part B- Business details, Promoters details, authorised signatory etc has to be filled. Kindly note that Reason for registration should be “Input Service distributor”.
• 13th Digit in GSTIN will indicate the number of registrations within a state.

Manner of Distribution of Credit- Section 20 and Rule 39

• Under the scheme of ISD, Rule 36 (Documentary requirements and conditions for claiming ITC) of the CGST Rules permits such ISD to avail the credit on the basis of invoices issued to it. Further, it also permits, other establishments (having same PAN) of the said supplier, to avail the credit, on the basis of an ISD Invoice in accordance with the provisions of subrule (1) of rule 54 of CGST Rules.

  => Continuing with E.g. 1, If Bengaluru branch obtains registration as ISD, it will be allowed to take credit on the basis of invoices issued by supplier and immediately distribute such credit to other branches, by issuing ISD invoice to them. Branches can thereafter be able to claim credit on the basis of ISD invoices issued by head office.

• Although, concept of ISD allows distribution of credit, such distribution is required to be made in certain manner as per Section 20, read with Rule 39.
• The ITC available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6.

  => If Common Input service invoices are received in April 2025, then the same to be distributed within May 13th by filing GSTR-6.

• The amount of the credit distributed shall not exceed the amount of credit available for distribution.

  => If ITC on Software subscription is Rs.18,000, then distribution to 5 branches should not exceed the same.

• Turnover- Gross value of supplies* − (Excise duty + VAT + other similar taxes not under GST)**

  *taxable + non-taxable

  **any excise duties or taxes levied under:

• Entry 84 and 92A of List I (Union List) – e.g., Central Excise, Interstate taxes
• Entry 51 and 54 of List II (State List) – e.g., State Excise, VAT on petroleum and alcohol
• Relevant period-
• The preceding financial year, if recipients had turnover during that year or
• The latest available quarter (prior to distribution) where turnover data exists, if any recipient had no turnover in the preceding financial year.
• Recipient of credit- The supplier of goods or services or both having the same PAN as that of the IS

=> Continuing with above Example, if Turnover of:

• Both Eligible and Ineligible inputs to be distributed
• Separate Distribution

  ITC for each tax type — CGST, SGST/UTGST, and IGST — must be distributed separately.

• IGST will be distributed as IGST, regardless of location.
• SGST/CGST/UTGST will be distributed on the basis of location of recipient:

If recipient is located in same state/UT as ISD- Distribute as CGST and SGST/UTGST

If recipient is in a different State/UT than ISD- Distribute as IGST (sum of CGST + SGST/UTGST)

Documents to be issued by ISD- Rule 54 of CGST rule

Filing of Return- Section 39(4) and Rule 6

• ISD must file GSTR-6 within 13 days after the end of calendar month or part thereof
• GSTR-6A will be auto-populated based on Invoices uploaded by suppliers in their GSTR-1 and it reflects input service invoices received by the ISD.
• After reviewing or editing GSTR-6A, the ISD must furnish GSTR-6, which includes details of ITC received and the credit distributed via ISD invoices to branches or units (i.e., distinct persons).

Action Points for Businesses

• Identify common input services received at HO but used by multiple branches.
• Obtain ISD registration
• Ensure Vendor Invoices are issued in ISD’s name
• Train finance/GST teams on invoice validation, ISD return filing and compliance requirements.
• Discontinue cross-charging for common services covered under ISD rules from April 1, 2025.
• Alternatively, request vendors to issue separate invoices directly to each branch in proportion to their service received, thereby eliminating the need for ISD registration.