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The Goods and Services Tax (GST) law introduced the concept of Input Service Distributor (ISD) to streamline the credit flow for input services across multiple locations of the same entity. However, this provision remained underutilized due to procedural complexities and limited scope. Recognizing the need for reform, the GST Council has revamped the ISD mechanism, with significant changes effective 1 April 2025.

What is ISD under GST?

An Input Service Distributor (ISD) is an office of a taxpayer that receives tax invoices for input services and is responsible for distributing the eligible Input Tax Credit (ITC) to its various units or branches that are separately registered under GST.

· Key Characteristics:

· ISD can distribute only input service credits (not goods or capital goods).

· ISD must be registered separately under GST.

· Distribution must be done via prescribed document (ISD invoice).

· The credit is distributed in proportion to turnover of the recipient units.

Why ISD Was Underutilized?

• Despite its intent, ISD remained a rarely used mechanism because:
• Businesses found it easier to take direct credit through cross-charging.
• The compliance burden of maintaining a separate registration and monthly returns (GSTR-6) was high.
• The law lacked clarity on mandatory use of ISD, leading to disputes.

Major Changes Effective from 1 April 2025

The Finance Act, 2024 has made ISD mandatory for certain cases and introduced several amendments to bring clarity and uniformity:

1. Mandatory Use of ISD for Input Services Availed at Head Office

• From 1 April 2025, input services procured at the corporate/head office level for use by multiple units must be routed through ISD only.
• Cross-charging of input services will not be allowed where ISD is applicable.

2. ITC of Common Inward Supplies on which tax is payable under Reverse Charge Mechanism also to be distributed by ISD

3. Restriction on Ineligible Credit

• Clear instructions issued for non-distribution of ineligible ITC (blocked credits u/s 17(5) or credits restricted under Rule 42/43).
• Mechanism for reversal of wrongly distributed credit has also been prescribed.

Impact on Businesses

· Compliance Requirement Increases

· Clarity in ITC Distribution

· ERP and Process Changes

· Internal Controls and Audit

Key Takeaways

- Effective 1 April 2025, use of ISD becomes mandatory for head offices distributing input service credit.

- Businesses must assess their existing cross-charging mechanism and migrate to ISD wherever required.

- A robust compliance and accounting framework will be essential to manage this transition smoothly.

Final Thoughts

The amended ISD framework under GST marks a strategic shift towards uniformity and better credit tracking. While it does come with additional compliance responsibilities, it also brings much-needed clarity and consistency. Businesses must proactively adapt their systems and educate their finance teams to ensure a smooth transition before the start of FY 2025–26.

Disclaimer:
The views expressed in this article are solely those of the author and are intended for general information purposes only. They do not constitute legal advice or a legal opinion. Readers are advised to consult with a qualified professional or legal advisor before acting on any information provided herein.