Applicability, Conditions, Risk of Non-Compliance, and Implementation Framework
Introduction
In the GST regime, each GST registration (GSTIN) under the same PAN is treated as a distinct person. This creates a compliance challenge when a Head Office (HO) incurs input service expenses that are used by multiple branches located in different states, each with their own GSTIN.
In such cases, Input Tax Credit (ITC) is not allowed to be fully claimed at the HO. The law mandates that such common ITC must be distributed appropriately to the relevant GSTINs that are the actual beneficiaries of those services.
The Input Service Distributor (ISD) mechanism under GST is designed specifically for this purpose.
This article provides a comprehensive legal and practical framework on ISD under GST, including:
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Applicability and registration conditions
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Mandatory and optional scenarios
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Industry-specific relevance
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Legal risks of incorrect treatment
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Implementation methodology
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Frequently asked questions
Statutory Framework
Definition under Section 2(61) of the CGST Act, 2017
An "Input Service Distributor" (ISD) is defined as:
"An office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, State tax, integrated tax or Union territory tax paid on said services to a supplier of taxable goods or services or both having the same PAN."
Key features:
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The ISD mechanism applies only to input services
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Distribution is permitted only to other units (GSTINs) under the same PAN
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The ISD must be registered separately under GST
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The ISD must file GSTR-6 for distribution of credit
Governing Rule: Rule 39 of the CGST Rules, 2017
This Rule provides for:
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The manner of distributing credit
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Prescribed format for ISD invoice
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Allocation methodology
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Time of distribution and filing requirements
When Is ISD Mandatory
The ISD mechanism is compulsorily required in the following situations:
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Common input services are received at HO, but the benefit of such services is shared by multiple branches with separate GSTINs.
Examples:
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Pan-India Google Ads billed to HO
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Audit fees or legal retainers at HO for the benefit of all locations
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Cloud software subscriptions used by multiple branches
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Invoice is addressed to HO, and no input service invoice is raised directly to branches.
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The Head Office is not directly involved in rendering taxable supplies to the branches (in which case cross-charge may apply).
When ISD Is Not Applicable or Not Required
The ISD mechanism is not applicable in the following scenarios:
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The input pertains to goods or capital goods (ISD applies only to input services)
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The HO provides services to branches (e.g., HR, IT, administrative services), which constitutes a taxable supply under Schedule I — this must be treated as cross-charge, not ISD
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Input service invoices are raised directly to the concerned branches
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All branches are within a single GSTIN (e.g., within the same state)
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The services pertain exclusively to HO operations
Difference Between ISD, Cross-Charge, and Supply of Goods
| Particulars | ISD | Cross-Charge | Supply of Goods |
|---|---|---|---|
| Legal Nature | Distribution of credit | Taxable supply under Schedule I | Taxable supply of goods |
| Applicable To | Input services only | Goods and services | Goods only |
| Invoice Required | ISD Invoice (Rule 54) | Tax Invoice | Tax Invoice |
| GST Payable on Transaction | No | Yes | Yes |
| Input Tax Credit Distributed | Yes | No (treated as supply) | No (treated as sale/transfer) |
| Typical Examples | Advertising, audit fees | HO IT support to branches | Transfer of assets like laptops |
Practical Examples and Industry Scenarios
| Industry | Typical Services Involved | ISD Required? | Remarks |
|---|---|---|---|
| Hospitality | OTA commission, centralized booking software | Yes | Used by multiple GSTINs across states |
| Retail Chains | CRM, branding, shared digital subscriptions | Yes | Common input services used in many branches |
| Hospitals | Telemedicine platform, cloud diagnostics services | Yes | Shared service usage across locations |
| IT Companies | Invoicing software used across delivery centres | Yes | Credit must be proportionately distributed |
| Manufacturing | Logistics billed to factory, used locally | No | Not common or shared across GSTINs |
| Consulting Firms | Employee services across locations | No (Cross-Charge) | Supply of service under Schedule I, not ISD |
Risks of Non-Compliance
| Error Type | Consequences |
|---|---|
| Claiming full ITC at HO without ISD | Credit reversal, interest, audit exposure |
| Using ISD for goods or capital goods | Total credit disallowance |
| No allocation basis for credit distribution | Partial or full denial of ITC by department |
| Failure to file GSTR-6 | Credit will not reflect in GSTR-2B of recipient unit |
| Issuing tax invoice instead of ISD invoice | Risk of mismatch and disallowance in branch returns |
Correct Implementation – Step-by-Step Guide
Step 1: ISD Registration
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Apply via Form GST REG-01
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Mention “Input Service Distributor” in the registration type
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ISD must have a distinct GSTIN, even at the same address as HO
Step 2: Identify Eligible Invoices
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Only input services are eligible (not goods or capital assets)
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Exclude blocked credits under Section 17(5)
Step 3: Determine Allocation Basis
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May be based on turnover, headcount, service usage, or any rational method
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Must be consistently documented
Step 4: Issue ISD Invoice
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Prescribed format as per Rule 54
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Clearly mention recipient GSTIN, tax amount, allocation logic
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Should not be mistaken for a tax invoice
Step 5: File GSTR-6 Monthly
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Due by the 13th of the succeeding month
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This filing ensures the credit is reflected in the GSTR-2B of recipient units
Step 6: Maintain Records and Reconciliation
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Vendor invoice
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Allocation workings
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Copy of ISD invoices
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Monthly reconciliations between HO and branch GST returns
Key Do’s and Don’ts
Do:
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Register for ISD if you have common service invoices
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Use ISD invoices, not tax invoices
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Document allocation basis clearly
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File GSTR-6 within the due date
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Train accounts teams on ISD vs cross-charge distinction
Don’t:
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Use ISD for goods or capital goods
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Distribute ineligible or blocked credits
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Claim HO-only service credits at branch
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Skip monthly reconciliations
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Use ISD in same-GSTIN scenarios
Frequently Asked Questions (FAQs)
Q1. Can I use ISD to distribute RCM credits?
Yes, if the HO pays the RCM invoice and the service benefits multiple units, the ITC can be distributed through ISD.
Q2. Is ISD mandatory if the benefit of service is limited to one GSTIN?
No. In that case, the credit can be claimed directly by the GSTIN where the service is used.
Q3. Can ISD be used for capital goods or stock transfer?
No. ISD is strictly limited to input services.
Q4. What if I don’t file GSTR-6?
The recipient branch will not see the credit in its GSTR-2B and may lose eligibility for that ITC.
Q5. Can I avoid ISD by foregoing the credit at HO?
Yes, but this leads to loss of eligible credit. ISD allows legal credit flow across GSTINs without creating a taxable supply.
Conclusion: When to Use ISD and When to Avoid It
| Situation | Required Action |
|---|---|
| Common input services used by multiple GSTINs | Use ISD and distribute ITC |
| HO provides services to branches | Treat as cross-charge |
| Goods or capital assets sent to branches | Raise tax invoice |
| Invoice is issued directly to consuming branch | Branch claims ITC directly |
