Input Service Distributor – All you want to know

Mandatory ISD Registration Effective 01.04.2025

Recent amendments now make it mandatory for organizations with multiple GST registrations under the same PAN to register as an Input Service Distributor (ISD). This registration ensures the proper distribution of common input tax credits pertaining to services, such as Business Promotion, Advertisement, Legal services, Audit Services, etc. if any , and other shared credits, across different branches.

Conditions for ITC Distribution by an ISD

To distribute input tax credit (ITC), an ISD must fulfil the following conditions:

• ISD can only distribute ITC on input services
• ITC must be distributed only to units having the same PAN
• Issue ISD invoices to branch offices, clearly mentioning that they are issued for credit distribution purposes only.
• Distribute input tax credit within the same month in which it is received and report the details in GSTR-6.(Due date 13^th of next month)
• Get all the input claim first in ISD and Separately allocate eligible ITC (claimable credit) and ineligible ITC (blocked credit) across different branches.

Method of Credit Distribution

When a service is used by multiple business units and invoiced to the ISD, the credit must be distributed proportionally based on Previous year turnover/Last Qtr. Turnover in case of new company or no turnover in Previous year. For example, if an ISD has three units with turnovers of ₹5 lakh, ₹3 lakh, and ₹2 lakh, the ITC distribution ratio will be 50%, 30%, and 20%, respectively.

Reverse Charge Mechanism and ISDs

ISDs cannot accept invoices taxed under the reverse charge mechanism (RCM) since their primary function is to distribute ITC, not to pay taxes.

GST RCM liability is first paid under the normal GST registration number of the branch where the original invoice is raised. The branch then issues an invoice to the ISD GSTIN to transfer the input tax credit (ITC) to ISD .

Then ISD redistributes the ITC to across the branches based on their turnover proportion by issuing ISD invoices.

Issue of debit note :

If any debit note is issued to the ISD by the supplier of service, the additional credit of tax that he gets on such debit note should be distributed by ISD in the month in which he includes the Debit note in GSTR-6.

Issue of credit note :

If any credit note is issued to the ISD by the supplier of service, the credit of tax that gets reduced in such credit note should be apportioned by ISD to the recipients in the same proportion as the original credit that was distributed. Such apportioned credit gets reduced from the credit of tax distributed in the month in which the credit note is included in GSTR-6.

Role of Invoicing:

– ISD invoices must be issued to distribute the tax credit to your branches.

– These invoices should include essential details such as the name, address, and GSTIN of the ISD and the recipient branch, along with a unique serial number, date of issue, description of services, and the amount of tax credit distributed.

– Each ISD invoice should be signed or digitally signed by the issuer for authentication purposes.

Important Action Plan for Businesses:

1. Obtain ISD Registration
2. Communicate with service providers of common services like Banks, Business Promotion, Advertisement, Professional services, Audit Services etc.) and Bankers to issue invoices in the ISD’s GST registration number instead of Head Office/Branch  GSTINs.