Essential Questions and Answers on Input Service Distributor (ISD) under GST

Starting April 1, 2025, the Indian government has enforced mandatory registration for Input Service Distributors (ISD) for companies utilizing shared services. This new regulation aims to streamline the process of Input Tax Credit (ITC) allocation from Head Offices to their various branches, enhancing adherence to Goods and Services Tax (GST) rules and minimizing potential discrepancies. This document addresses frequently asked questions regarding the ISD mechanism, assisting businesses in transitioning from cross-charge to the new ISD framework.

1. Your business operates with multiple GSTINs under a single Permanent Account Number (PAN).

2. You receive invoices for services, such as advertising, legal, consulting, or software, that are commonly utilized across various branches or units.

3. Centralized service expenditures are incurred by the head office and subsequently allocated to different branches.

4. You currently employ cross-charge methods for distributing Input Tax Credit (ITC) pertaining to shared services from external suppliers.

5. GST legislation mandates ISD registration for the distribution of ITC related to these services, irrespective of your business's turnover limits. | | Will businesses retain the option of using Cross Charge once ISD is compulsory? | Yes, both the Input Service Distributor (ISD) and Cross Charge mechanisms will operate concurrently. Cross Charge will continue to be applicable for services generated internally and provided by a Head Office (HO) to its branches. Conversely, ISD will facilitate the distribution of Input Tax Credit (ITC) for both eligible and ineligible input services acquired from external suppliers that benefit multiple GSTINs under the same PAN. | | What is the procedure for Input Tax Credit (ITC) distribution under the ISD framework? | Input Tax Credit (ITC) designated for distribution must be allocated monthly. The distribution process adheres to these guidelines:

6. Credit is apportioned among distinct entities based on the ratio of their individual turnover in the prior financial year to the combined turnover of all such distinct entities during the same period.

7. Should a receiving unit lack turnover in the previous financial year, the turnover from the latest quarter for which complete recipient details are accessible, preceding the distribution month, is to be utilized.

8. The ISD is responsible for identifying and separately allocating both eligible and ineligible ITC. This distinction must be explicitly stated during the credit transfer.

9. Information regarding the distribution must be submitted using Form GSTR-6 by the 13th day of the subsequent month.

10. Even in months where no ITC is available for distribution, a nil return must be filed. | | How are different tax types (CGST, SGST, IGST) managed during ISD distribution, particularly in inter-state scenarios? | When the Input Service Distributor (ISD) and the receiving unit are situated within the same state, credits for Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), or IGST are distributed as their respective tax types. Conversely, if the ISD is in one state and the recipient unit is in a different state, any credit held by the ISD—regardless of its original type (CGST, SGST, or IGST)—is converted and distributed as IGST to the recipient unit in the other state. | | What primary duties are associated with an entity operating as an ISD? | An entity performing the role of an Input Service Distributor (ISD) is subject to several key obligations:

11. Secure a distinct GST registration specifically for ISD operations.

12. Verify that invoices for shared input services are issued under the ISD's GSTIN, requiring communication with vendors.

13. Claim Input Tax Credit (ITC) exclusively for invoices reflected in GSTR-6A.

14. Distinguish and separate eligible from ineligible ITC for subsequent distribution.

15. Execute credit distribution on a monthly cycle.

16. Issue an ISD invoice to all recipient units for the distributed credit, ensuring it includes particulars specified by Rule 54 of the CGST Rules.

17. Submit a monthly GSTR-6 return by the 13th day of the succeeding month, even if no ITC was distributed.

18. Confirm that the distributed ITC amount does not surpass the available ITC.

19. Generate ISD credit notes if adjustments to distributed ITC become necessary. | | Is the ISD mechanism applicable for distributing Input Tax Credit (ITC) linked to Reverse Charge Mechanism (RCM) obligations? | Indeed, the Input Service Distributor (ISD) mechanism is applicable for the allocation of Input Tax Credit (ITC) concerning services where tax is settled under the Reverse Charge Mechanism (RCM). The head office can remit RCM tax on shared services, claim the corresponding ITC, and subsequently issue an invoice to the ISD, referencing the vendor's original invoice. The ISD can then avail and distribute this credit. Nevertheless, the initial RCM liability payment must originate from the entity's standard GST registration before being transferred to the ISD for distribution. | | What key preparations should businesses undertake for the compulsory ISD implementation? | To prepare for the mandatory adoption of the Input Service Distributor (ISD) system, businesses should follow these critical steps:

20. Evaluate whether they fulfill the conditions for compulsory ISD registration.

21. Secure ISD registration(s) for the specific office(s) that receive invoices for shared input services. It's important to note that only the office procuring invoices for other branches requires ISD registration; individual registration in every state where units are located is not necessary, unless multiple offices independently procure such invoices.

22. Pinpoint all common input services and those specific services for which an invoice is received by one GSTIN but pertains to another.

23. Advise vendors supplying common services to issue invoices with the ISD's GSTIN, and update relevant purchase orders and work orders.

24. Confirm that their Enterprise Resource Planning (ERP) or accounting systems are capable of accurately processing invoices received under ISD registration and managing ITC distribution, which might involve setting up distinct business locations for ISD transactions.

25. Develop a procedure for the monthly oversight and reconciliation of vendor-reported invoices (via GSTR-6A) against internal records.

26. Calculate the turnover ratio for all distinct entities to enable proportionate ITC distribution.

27. Educate accounting personnel on the updated procedures and compliance demands related to ISD. | | Which specific details are required on an ISD invoice? | An Input Service Distributor (ISD) invoice must include the following essential information:

28. The name, address, and GSTIN of the ISD.

29. A sequential serial number, distinct for each financial year.

30. The date of issuance.

31. The name, address, and GSTIN of the receiving unit.

32. The total Input Tax Credit (ITC) distributed, itemized by Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST)/Union Territory Goods and Services Tax (UTGST), or Integrated Goods and Services Tax (IGST).

33. A clear designation indicating that the invoice is solely for ITC distribution (e.g., "ISD Invoice").

34. The original invoice number and GSTIN of the supplier.

35. The taxable value, which must correspond to the original invoice.

36. The signature or digital signature of the ISD's authorized representative. | | How should one address suppliers who incorrectly generate invoices using a standard GSTIN instead of the ISD registration? | Prompt identification of such errors is crucial to prevent the forfeiture of Input Tax Credit (ITC) claims. Businesses should request the supplier to revise the invoice to reflect the ISD registration. In instances where an e-invoice has already been issued, the supplier may need to issue a credit note followed by a new invoice. | | What criteria help in identifying common services eligible for ISD registration invoicing? | Common services suitable for Input Service Distributor (ISD) registration invoicing are generally characterized by these traits:

37. They are received by a single office, typically the Head Office (HO), but provide benefits to several distinct units.

38. They are not consumed by the office that initially received the invoice.

39. They originate from third-party vendors (i.e., externally sourced).

40. Their invoices are processed and recorded centrally. Common examples include audit, advertising, software, legal, and marketing expenditures that serve multiple state operations. | | What criteria within an ERP system can differentiate goods from services for ISD purposes? | To distinguish between goods and services for Input Service Distributor (ISD) applicability within an Enterprise Resource Planning (ERP) system, it may be necessary to employ Harmonized System of Nomenclature (HSN) codes for goods and Service Accounting Codes (SAC) for services when processing invoices. This often requires reviewing and potentially modifying your existing ERP configuration. | | How are services categorized for ISD distribution versus cross-charge requirements? | Input Service Distributor (ISD) is designated for services procured externally where the invoice is received at a central point, yet the advantages extend to various distinct entities. Conversely, cross-charge applies to services generated internally and rendered by one distinct entity to another within the same overarching legal structure. | | Which input services are excluded from ISD distribution under Section 17(5)? | The Input Service Distributor (ISD) must identify and separately distribute blocked credits, as outlined in Section 17(5), clearly marking their ineligibility. For instance, services such as health insurance premiums for employees could represent blocked credits. | | What is the protocol for ITC reversal if vendor payment is not completed within 180 days via the ISD mechanism? | The regulation stipulating Input Tax Credit (ITC) reversal when payment to a supplier is not executed within 180 days primarily applies to the recipient of the supply. When an invoice names the Input Service Distributor (ISD), the ISD is regarded as the recipient for claiming the credit. Nevertheless, the recovery of erroneously claimed credit may occur at the recipient unit level. This scenario necessitates meticulous tracking at the branch level, given that payments are typically managed by the Head Office. | | Is it permissible to distribute credit to units involved in exempt supplies or to unregistered entities? | Yes, Input Tax Credit (ITC) must be apportioned among all individually registered units, encompassing taxable, non-taxable, wholly exempt, export-oriented, or Special Economic Zone (SEZ) units. In certain situations, even unregistered individuals may need to be included in the distribution. However, the recipient's eligibility to utilize such credit will depend on the applicable GST laws. For exempt supplies, the recipient might not qualify for the full ITC, and a fair value assessment could be required for cross-charge situations involving such supplies. | | What is the process for transitioning current cross-charge setups to the ISD mechanism after April 2025? | To shift existing cross-charge arrangements to the Input Service Distributor (ISD) mechanism after April 2025, businesses must first evaluate which services presently under cross-charge are, in fact, common input services sourced from external vendors. For these identified services, it will be necessary to obtain ISD registration, instruct vendors to direct invoices to the ISD, and initiate the distribution of Input Tax Credit (ITC) via the ISD framework. Services generated internally will continue to be managed through cross-charge. | | How are credits accumulated at the Head Office before April 1, 2025, handled? Can they be distributed through ISD? | Official resources do not explicitly detail the treatment of credits accumulated at a Head Office prior to April 1, 2025. Given that the Input Service Distributor (ISD) mandate begins on April 1, 2025, and was optional beforehand, further guidance from regulatory authorities may be required regarding the distribution of such pre-existing accumulated credits. | | What are the repercussions of failing to register under the ISD scheme? | Non-compliance with mandatory Input Service Distributor (ISD) registration can result in several adverse outcomes:

41. Imposition of penalties and interest liabilities due to improper Input Tax Credit (ITC) distribution.

42. Reversal of ITC claims, negatively affecting cash flow and working capital.

43. Heightened scrutiny during GST audits and the possibility of legal challenges. | | What sanctions are imposed for persistently utilizing cross-charge instead of ISD for qualifying services? | If common input services from external suppliers continue to be managed via cross-charge rather than distributing Input Tax Credit (ITC) through the Input Service Distributor (ISD) mechanism, this could be deemed an improper claim and distribution of ITC, potentially leading to penalties and interest charges. | | What procedure is used to correct credit mistakenly distributed to incorrect recipients via the ISD mechanism? | In instances where Input Tax Credit (ITC) is erroneously distributed or allocated in an incorrect proportion, the Input Service Distributor (ISD) must issue an ISD credit note to the recipient who received the incorrect or excessive distribution. Concurrently, an ISD invoice or debit note should be issued to the correct recipient or to the recipient who received an insufficient distribution. | | Is individual ISD registration compulsory for each state where business units are situated? | Generally, distinct Input Service Distributor (ISD) registration is not mandated for every state where business units are located. Only the office responsible for receiving tax invoices for input services (on behalf of its branches) is required to obtain ISD registration. For instance, a Head Office in Maharashtra procuring invoices for services utilized by factories in Gujarat and Rajasthan would only need ISD registration in Maharashtra. The Input Tax Credit (ITC) can then be distributed to other states as Integrated Goods and Services Tax (IGST). Nevertheless, if multiple offices in different states independently receive invoices for input services, each such office must register as an ISD within its specific state. | | Do ISD invoices fall under the scope of e-invoicing regulations? | Based on current understanding, Input Service Distributor (ISD) invoices, intended solely for credit distribution, differ from standard supply invoices and may not be governed by e-invoicing mandates. However, this aspect requires additional official clarification from authorities. | | What information must ISD invoices include to satisfy Section 20 compliance? | For adherence to GST regulations, Input Service Distributor (ISD) invoices are mandated to contain the subsequent information, as per Rule 54 of the CGST Rules:

I. Basic Information

• Name, address, and Goods and Services Tax Identification Number (GSTIN) of the ISD (the distributing office).
• A consecutive serial number, up to 16 characters long and distinct for each financial year (e.g., ISD/2025-26/001).
• The date of invoice issuance.

II. Recipient Details

• Name, address, and GSTIN of the recipient unit (the branch or factory receiving the Input Tax Credit - ITC).

III. Credit Distribution Specifics

• The precise amount of ITC distributed, clearly itemized for Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST)/Union Territory Goods and Services Tax (UTGST), or Integrated Goods and Services Tax (IGST).
• A prominent declaration indicating that the invoice is solely for ITC distribution (e.g., marked as "ISD Invoice").

IV. Tax and Original Invoice Reference

• The original invoice number and GSTIN of the supplier, facilitating traceability of the input service.
• The taxable value, which must precisely correspond to the amount on the original invoice.

V. Authentication

• The signature or digital signature of the ISD’s authorized representative.

VI. Additional Compliance Notes

• ISD Credit Notes: These are necessary if adjustments to distributed ITC are required (e.g., due to credit reversals or errors) and must contain information similar to ISD invoices.
• GSTR-6 Reporting: All ISD invoices and credit notes must be accurately reported in the ISD’s monthly GSTR-6 return. | | What is Form GSTR-6, and what is its filing deadline? | Form GSTR-6 is a monthly return that taxpayers are required to file by the 13th day of the subsequent month. | | Who is obligated to file Form GSTR-6, and is this submission mandatory? | Only entities registered as Input Service Distributors (ISD) are required to file Form GSTR-6. This monthly return is compulsory, and even if no Input Tax Credit (ITC) is available for distribution or is not distributed during a given month, a 'Nil' return must still be submitted. | | What tables are included in Form GSTR-6? | Form GSTR-6 is structured with the following tables:

I. GSTR-6 Invoice Details

1. Table 3: For input tax credit information received for distribution purposes.
2. Table 6B: For details concerning debit or credit notes received.
3. Table 6A: For amending data previously submitted in Table 3 of earlier returns.
4. Table 6C: For making adjustments to received debit or credit notes.

II. GSTR-6 ITC Distribution

1. Table 4: To display information on available Input Tax Credit (ITC), distinguishing between eligible and ineligible ITC that has been distributed.
2. Tables 5, 8: For entering particulars of ITC distribution for ISD invoices and ISD credit notes.
3. Table 9: To provide details on available, eligible, and ineligible ITC that has been redistributed.

III. GSTR-6 Other Details

• Table 10 (Late Fee): To review late fee information for the respective return period. This section becomes accessible only after the return has been successfully filed. | | Is it possible for taxpayers to submit an ISD return even if their counterparties have not filed GSTR-1 or GSTR-5? | Yes, an Input Service Distributor (ISD) is permitted to file their Form GSTR-6 return, even if the corresponding parties have not yet submitted their respective Form GSTR-1 or Form GSTR-5. | | Is an Electronic Credit Ledger maintained for ISD Registrations? | No, an Electronic Credit Ledger is not maintained for Input Service Distributor (ISD) registrants, as an ISD's sole function is to distribute available credit within a tax period. | | Do Input Service Distributors (ISDs) incur reverse charge tax liability? | Prior to April 1, 2025, an Input Service Distributor (ISD) could not accept invoices where tax was payable under the reverse charge mechanism. It's important to understand that the recipient of a service taxable under RCM is responsible for settling the tax liability before claiming credit. Previously, to avail credit for RCM-chargeable supplies, an entity had to register as a regular taxpayer and could not distribute that specific tax credit. However, from April 1, 2025, ISDs are permitted to receive input services subject to GST under reverse charge and subsequently distribute the associated credit to their respective GSTINs. | | What is the procedure for managing Reverse Charge Mechanism (RCM)-paid credits for multi-location services via ISD? | The central office that receives an invoice subject to the Reverse Charge Mechanism (RCM) can remit the tax, claim the Input Tax Credit (ITC) under its standard GSTIN, and then issue an invoice to its Input Service Distributor (ISD) registration. Subsequently, the ISD can allocate this credit to the beneficiary locations, proportional to their turnover ratio. | | What are the prerequisites for submitting Form GSTR-6? | The prerequisites for filing Form GSTR-6 include:

• The recipient must be registered as an Input Service Distributor (ISD) and possess an active GSTIN.

• The recipient must have legitimate login credentials, including a User ID and password.

• The recipient must hold a valid, unexpired, and unrevoked Digital Signature Certificate (DSC), which is mandatory for companies, LLPs, and FLLPs.

• The recipient must have an active mobile number, recorded in their GST Portal registration details or subsequent amendments, for authentication via Electronic Verification Code (EVC).

• Recipients will be allowed to file Form GSTR-6 for cancelled GSTINs for the period in which it was active. |