Understanding Input Service Distributors (ISD) in GST

ISD, or Input Service Distributor, is a specific type of taxpayer within the Goods and Services Tax (GST) framework. This entity is responsible for allocating GST input tax credits (ITC) from common input service invoices to its various branches or units that operate under different GSTINs but share the same Permanent Account Number (PAN). As of April 1, 2025, it has become mandatory for eligible entities to register as an ISD and adhere to ITC distribution and GSTR-6 filing requirements, particularly if they receive unified input service invoices for multiple GSTINs. Recent Updates 1. February 1, 2025: The Union Budget brought amendments to Sections 2 and 20 of the CGST Act, specifically clarifying the applicability of reverse charge mechanism provisions under Sections 5(3) and 5(4) of the IGST Act. 2. August 6, 2024: The government previously made the ISD mechanism mandatory, effective from April 1, 2025, through amendments to Sections 2(61) and 20 of the CGST Act, 2017. Prior to Notification No. 16/2024-Central Tax, ISD provisions were optional. 3. July 10, 2024: The CBIC modified Rule 39 of the CGST Rules, 2017, via Notification No. 12/2024-Central Tax, to detail the methodology for ITC allocation by an ISD. This particular amendment awaits formal notification. These changes will take effect once the respective notifications are officially released.

Defining an Input Service Distributor (ISD) under GST

An ISD is a taxpayer that receives service invoices intended for its various branches. It then distributes the associated Input Tax Credit (ITC) to these branches on a proportional basis by issuing specific ISD invoices. While the branches must have distinct GSTINs, they must share the same PAN as the ISD entity.

Example: Consider M/s ABC Limited, whose head office is in Bangalore with branches in Chennai, Mumbai, and Kolkata. The head office manages and pays for an annual software maintenance service used by all branches and receives the invoice for it. Since the software benefits all locations, the entire ITC cannot be claimed solely by the Bangalore head office. Instead, this credit must be distributed among all three branches. In this scenario, the Bangalore head office acts as the Input Service Distributor.

Eligibility Requirements for ISD Registration under GST

An entity qualifies for ISD registration under GST if it meets the following criteria:

It must be an office involved in supplying goods or services, or both.
It receives tax invoices for input services procured on behalf of its units or branches, which have different GSTINs but are registered under the same PAN.
The ISD office must be located where the common input services are received.
It is authorized to distribute ITC on input services, including those where GST is paid under the reverse charge mechanism.
Multiple ISD registrations are permissible if common services are received at different offices situated in various states or districts.
It must issue a specific ISD invoice document to distribute the Input Tax Credit for CGST (or SGST under State Acts) and/or IGST paid on these services to its units or branches sharing the same PAN but having distinct GSTINs.

Scenarios Where ISD is Not Applicable

ISD provisions do not permit the distribution of Input Tax Credit in these situations:

ITC paid on inputs and capital goods, such as raw materials or machinery purchases.
ITC cannot be distributed to outsourced manufacturers or service providers.

Legal Framework and Governing Provisions

Section 20 of the CGST Act governs the manner in which an Input Service Distributor distributes ITC.
Section 2(61) of the CGST Act defines an ‘Input Service Distributor’ as an office of a supplier of goods or services (or both) that receives tax invoices for input services. This includes invoices for services subject to reverse charge under Section 9(3) or 9(4) of the CGST Act. These services are received on behalf of distinct persons (as defined in Section 25 of the CGST Act), and the ISD must distribute the associated ITC as stipulated in Section 20.
CGST Rule 39 outlines the compliance procedures for ITC distribution by an ISD across various scenarios.
CGST Rule 54(1) specifies the regulations concerning the issuance of ISD invoices.

Objective of ISD Registration

The ISD concept provides a beneficial mechanism for businesses with significant common expenditures and centralized billing or payment operations. Its primary goal is to streamline the credit claiming process for entities, thereby enhancing the seamless flow of credit within the GST framework.

Required Documentation for ISD Registration

Having the necessary documents readily available helps entities obtain their ISD GSTIN quickly, which can then be shared with vendors for accurate tax invoice generation. Key documents needed for GST ISD registration include:

Existing GST Registration Certificate (for regular GST registration).
PAN card.
Proof of business constitution (e.g., Memorandum of Association, Articles of Association, Certificate of Incorporation for companies; relevant documents for partnership firms, LLPs, or sole proprietorships).
Proof of address for the ISD office (e.g., utility bill for rented property, or sale deed/ownership document for owned property).
Authorized signatory details (e.g., identity proof, photograph, authorization letter).
Bank account details (e.g., bank statement, cancelled cheque).
Description of business activities.
If requested by a GST officer, a list of invoices, values received, input service agreements, and a summary of distributed ITC.
Financial statements and a self-declaration affidavit confirming GST compliance if the GST officer calls for it.

Step-by-Step ISD Registration Process

Businesses adopting ISD compliance from April 1, 2025, should note that the registration application (REG-01) is similar to that for a normal taxpayer. An ISD cannot hold multiple registrations within a single state, and a composition taxable person is ineligible for ISD registration. The process involves submitting the GST registration application and completing Aadhaar authentication. Summarized steps for ISD registration under GST are:

Step 1: Access the official gst.gov.in website. Navigate to ‘Services’ > ‘Registration’ and select ‘New Registration’.
Step 2: Complete PART-A with essential business information (legal name, trade name, email, PAN, and mobile numbers), then verify using a One Time Password (OTP). A Temporary Reference Number (TRN) will be generated.
Step 3: Use the TRN to log in and fill out PART-B, providing additional business details, the reason for registration, promoter information, authorized signatory details, place of business, goods and services handled, relevant document uploads, and state-specific information. Within the ‘Reason to obtain registration’ dropdown under the business details tab, choose ‘Input Service Distributor’.
Step 4: Submit the ISD registration application using e-verification. Upon successful submission, an Application Reference Number (ARN) will be issued, and after approval, the ISD GSTIN will be granted. For further details, read our article on step-by-step process of GST registration.

ISD Comparison: Earlier vs. GST Regime

The table below highlights key differences in ISD provisions between the previous tax regime and the current GST regime:

Point of Difference	Earlier Regime	GST Regime
1. Who can be an Input service distributor?	An office of the manufacturer or producer of final products or a provider of output service	An office of the supplier of goods and/or services
2. Document for credit distribution	Receives invoices issued under Rule 4A of Service Tax Rules, 1994, for input services	Receives tax invoices issued by a supplier for input services
3. How to distribute credit?	By issuing an invoice, bill, or challan for distribution to manufacturers, producers, or service providers	By issuing an ISD invoice for distribution to a supplier of taxable goods and/or services with the same PAN as the office
4. Type of tax credit distributable	Credit of service tax paid on the services	Credit of CGST (or SGST) and/or IGST paid on the services
5. To whom can it be distributed?	To its units and outsourced manufacturers	To a supplier having the same PAN; credit cannot be distributed to outsourced manufacturers or service providers

The distinction between the two regimes emphasizes that credit distribution under GST is confined to offices sharing the same PAN. This change likely reflects the shift in the taxable event from manufacturing to supply, where tax liability arises at the point of supply and is eventually offset by the ISD through available input tax credit.

Conditions for ISD Compliance

Registration: An Input Service Distributor must mandatorily register specifically as an “ISD,” separate from any normal GST registration. This requires selecting "ISD" in serial number 14 of the REG-01 form. Credit distribution to recipients is only possible after this declaration.
Invoicing: As previously stated, an ISD distributes tax credit amounts to recipients by issuing an ISD invoice.
Returns: The total tax credit distributed must not exceed the credit available to the ISD at the end of the relevant month. This information is reported in GSTR-6, due by the 13th of the following month. An ISD can retrieve ITC details from the GSTR-2B return. The recipient can view the credit distributed by the ISD in GSTR-6A (auto-populated from the supplier's return) and claim it by declaring it in GSTR-3B. An ISD is not required to file annual returns in form GSTR-9.

Format of ISD Invoice

GST law prescribes the format for ISD invoices issued to its units. Section 54(1) of the CGST Act specifies the following mandatory contents:

Name and address of the ISD.
GSTIN of the ISD.
Unique invoice number.
Date of the invoice.
Name and address of the unit/recipient branch.
GSTIN of the recipient branch/unit.
Amount of ITC distributed.
Signature of the authorized person.

Criteria for Input Tax Credit Distribution

Input Tax Credit available for distribution in a given month must be distributed within that same month, with details filed in the form GSTR-6.
Credit for tax paid under the reverse charge mechanism (as per Sections 9(3) and 9(4)) must also be distributed by the ISD to recipients.
If specific input services are used entirely by a single recipient, the associated tax credit can only be allocated to that recipient for utilization; it cannot be distributed to other recipients.
For input services commonly utilized by multiple recipients of the ISD, the tax credit is allocated proportionally among all operational recipients during the year. The distribution ratio is: (Turnover in a State/Union Territory of such recipient during the relevant period) / (Aggregate turnover of all such recipients).
If input services are commonly used by all recipients of the ISD, the tax credit is allocated proportionally among all operational recipients during the year using the same ratio as above.
CGST, IGST, and SGST credits must be distributed according to the prescribed manner.

Procedure for Recovering Wrongfully Distributed Credit by ISD

The GST Act defines certain distributions of tax credit by an Input Service Distributor as inappropriate, including:

Credit distributed to any recipient exceeding the amount available for distribution.
Credit distributed to any recipient using an incorrect ratio.
Credit distributed in excess of what a supplier is entitled to.

Such inappropriately distributed credit, along with interest, will be recovered from the recipient(s). The provisions concerning ‘Demand and Recovery’ will apply for executing such recovery.

Consequences of Non-Compliance with ISD Regulations

Failure to obtain ISD registration can lead to severe negative repercussions:

ITC Disruption: Utilizing a regular GSTIN instead of an ISD GSTIN for receiving input services may result in a loss of Input Tax Credit.
Audit and Compliance Risks: Non-adherence to ISD regulations can trigger audits and delays in compliance processes.
Regulatory Penalties and Interest: Incorrect ITC allocation or applying cross-charge instead of the ISD mechanism can lead to GST demand notices under Sections 73/74 of the CGST Act for recovery, along with an 18% per annum interest charge. Penalties of up to Rs. 25,000 may also be imposed.

Further Information

For a deeper understanding of ISD procedures, refer to articles on: