Input Service Distributor (ISD) GST: Guide to Registration, ITC Distribution & GSTR-6

For businesses operating across multiple locations or having various branches under a single Permanent Account Number (PAN), managing Input Tax Credit (ITC) for services procured centrally can be complex. The Input Service Distributor (ISD) mechanism under GST is designed precisely to address this challenge, facilitating the seamless distribution of ITC on common input services.  

This detailed article explores the Input Service Distributor (ISD) GST, covering its definition, eligibility, the distribution mechanism, compliance requirements, benefits, potential drawbacks, and includes examples to provide a clear understanding. Understanding the GST ISD rules is crucial for businesses with centralized procurement models, especially with recent changes making ISD registration mandatory for certain scenarios from April 1, 2025.  

What is an Input Service Distributor (ISD) GST?

An Input Service Distributor (ISD) is an office of a supplier of goods or services (or both) which receives tax invoices for input services and is registered under GST for the purpose of distributing the credit of Central Tax (CGST), State Tax (SGST), Integrated Tax (IGST), or Union Territory Tax (UTGST) to a supplier of taxable goods or services or both having the same PAN as the ISD.  

In simpler terms, think of an ISD as a head office or a designated central office that receives bills for services used by multiple branches (like advertising, consulting, software services). Instead of each branch trying to claim a portion of the ITC on that bill, the ISD claims the full ITC and then distributes it to the relevant branches based on specific rules.  

The primary purpose of the ISD mechanism is to streamline the flow of ITC within a single legal entity with multiple registration locations, preventing the accumulation of credit at the central office which doesn’t make outward supplies and ensuring the credit reaches the units that actually utilize the services and make taxable outward supplies.  

ISD Eligibility and Requirement

Previously, ISD registration was optional, and businesses often used the “cross-charge” mechanism to distribute common ITC. However, significant changes have been introduced:

• Mandatory ISD Registration (w.e.f. April 1, 2025): As per recent amendments, it is now mandatory for any office of a supplier that receives tax invoices for input services on behalf of multiple “distinct persons” (branches with separate GSTINs under the same PAN) to obtain ISD registration. This includes services where tax is paid under the Reverse Charge Mechanism (RCM).  
• Who Needs to Register as ISD: Businesses with:
  • Multiple GSTINs under the same PAN.  
  • Centralized procurement of input services that are utilized by more than one registered location.

It’s important to note that ISD registration is a separate registration under GST, distinct from a regular taxpayer registration. There is no turnover threshold for mandatory ISD registration if you meet the criteria of receiving common input service invoices for distinct persons.  

Mechanism of ITC Distribution by ISD

The core function of an ISD is the distribution of eligible ITC on input services to its recipient units. This distribution is done through the issuance of ISD invoices (or ISD credit notes if adjustments are needed).  

The rules for distributing ITC are governed by Rule 39 of the CGST Rules, 2017:  

1. Eligible ITC Only: Only eligible ITC on input services can be distributed. ITC on goods or capital goods cannot be distributed through the ISD mechanism.
2. Distribution in the Same Month: The ITC available for distribution in a month must be distributed in the same month.  
3. Recipient-Specific Credit: If an input service is used only by a single recipient unit, the entire eligible ITC related to that service must be distributed only to that specific unit.  
4. Common Credit Distribution (Proportional): If an input service is used by more than one recipient unit (common credit), the eligible ITC must be distributed among such recipient units on a pro-rata basis based on their turnover in the preceding financial year.
   • Calculation: The distribution is based on the ratio of the turnover of a recipient unit in the relevant period to the total turnover of all recipient units to whom the service is attributable in that period.  
   • Relevant Period: Usually the preceding financial year. If some units don’t have turnover in the preceding year, the last quarter for which turnover data is available for all recipients is used.  
5. Tax Head-wise Distribution:
   • ITC of IGST is distributed as IGST.
   • ITC of CGST and SGST/UTGST for recipients located in the same State/Union Territory as the ISD is distributed as CGST and SGST/UTGST respectively.
   • ITC of CGST and SGST/UTGST for recipients located in a different State/Union Territory than the ISD is distributed as IGST, equivalent to the sum of CGST and SGST/UTGST credit.  
6. Separate Distribution: Eligible and ineligible ITC must be distributed separately.

Example of ITC Distribution:

Suppose Head Office (registered as ISD) in Delhi receives an invoice for ₹1,00,000 + ₹18,000 IGST for common consulting services used by branches in Delhi, Mumbai, and Bangalore.

• Total ITC to distribute = ₹18,000 IGST.
• Turnover in the preceding financial year:
  • Delhi Branch: ₹2 Crore
  • Mumbai Branch: ₹3 Crore
  • Bangalore Branch: ₹5 Crore
• Total Turnover of recipient units = ₹2 + ₹3 + ₹5 = ₹10 Crore

Distribution:

• Delhi Branch (Same State as ISD): (₹2 Cr / ₹10 Cr) * ₹18,000 = ₹3,600. Since Delhi is in the same state, this is distributed as ₹1,800 CGST + ₹1,800 SGST.
• Mumbai Branch (Different State): (₹3 Cr / ₹10 Cr) * ₹18,000 = ₹5,400. Since Mumbai is in a different state, this is distributed as ₹5,400 IGST.
• Bangalore Branch (Different State): (₹5 Cr / ₹10 Cr) * ₹18,000 = ₹9,000. Since Bangalore is in a different state, this is distributed as ₹9,000 IGST.

The ISD will issue ISD invoices to each branch detailing the distributed credit.  

Compliance for Input Service Distributors (ISD)

An ISD has specific compliance requirements:

1. Monthly Return (GSTR-6): An ISD must file a monthly return in Form GSTR-6 by the 13th day of the month succeeding the relevant tax period. This return details the ITC received and how it has been distributed to the recipient units.  
2. GSTR-6A: Similar to GSTR-2A, GSTR-6A is an auto-populated statement based on the GSTR-1 filed by the suppliers of the ISD. It helps the ISD reconcile the ITC received.  
3. ISD Invoice/Credit Note: The ISD must issue proper ISD invoices or credit notes for distributing/adjusting the credit. These documents have specific content requirements.  
4. No Annual Return: An ISD is generally not required to file an annual return (GSTR-9).  

Advantages of the ISD Mechanism

For businesses with multiple locations and centralized service procurement, the ISD mechanism offers several benefits:

• Streamlined Credit Flow: Facilitates the smooth and compliant flow of ITC from a central receiving point to the actual user units.  
• Reduces ITC Accumulation: Prevents ITC from getting stuck at the head office that may not have sufficient outward tax liability to utilize it.  
• Improved Compliance: Provides a structured and legally recognized method for distributing common ITC, reducing ambiguity compared to other methods like cross-charge (for external services).
• Reduced Burden on Branches: Individual branches don’t need to deal with invoices for common services received centrally.

Challenges and Drawbacks of ISD

While beneficial, the ISD mechanism also comes with certain challenges:

• Separate Registration: Requires an additional GST registration solely for ISD purposes.  
• Specific Compliance: Adds a separate monthly return filing requirement (GSTR-6).  
• Complexity in Distribution: Applying the proportional distribution rules based on turnover requires careful calculation and record-keeping, especially with multiple branches and different types of services.
• Only for Input Services: The mechanism is restricted to distributing ITC on input services and cannot be used for goods or capital goods.  
• Vendor Communication: Requires coordinating with vendors to ensure invoices for common services are billed to the ISD’s GSTIN.  

Conclusion

The Input Service Distributor (ISD) mechanism is a critical component of GST for businesses with multiple registered locations and centralized procurement of input services. While it adds a layer of registration and compliance (GSTR-6 filing), it is essential for the correct and efficient distribution of Input Tax Credit, preventing credit accumulation and ensuring compliance with GST law. With the recent mandate for ISD registration for common input services, businesses need to ensure their processes are aligned with the GST ISD rules to avoid potential penalties and disruptions in their credit flow. Proper implementation of the ISD mechanism is key to optimizing ITC utilization across the organization.