Input Service Distributor (ISD) — Mandatory w.e.f. 1 April 2025

From 1 April 2025 the Input Service Distributor (ISD) mechanism under GST moved from an optional administrative route to a prescribed, mandatory mechanism for distributing ITC on centrally procured input services across multiple registrations under the same PAN. The reforms standardise attribution, tighten process discipline, increase documentary obligations, and require system and governance upgrades at head offices and shared service centres.

The policy intent is threefold: (1) ensure accurate and uniform attribution of ITC when services are centrally procured but consumed across multiple GSTINs, (2) close mismatches and credit leakage by creating a clear paper trail linking supplier invoices to recipient credits, and (3) improve transparency and auditability of credit distribution to simplify downstream matching and reduce disputes.

The change was implemented via amendments to the CGST Act and CGST Rules, supported by effective-date notifications appointing 1 April 2025. Important changes include a revised definition and scope of Input Service Distributor, updates to Rule 39 and related provisions governing distribution mechanics, invoicing by ISDs, and reporting timelines (Form GSTR-6). Clarifications also address distribution of credits related to reverse charge services under specified conditions.

Any registered person receiving invoices for input services at one location that are attributable to other registered persons under the same PAN will generally be required to register and operate as an ISD. ISD status is selected via GST REG-01 (serial no.14). Where head offices or shared-service centres centrally pay for services consumed by multiple GSTINs under the same PAN, they must adopt ISD from the notified date — cross-charging cannot substitute where ISD is prescribed.

ISD distribution covers ITC on input services (not goods) attributable to recipients across locations. The mandatory regime clarifies that credits for services taxed under reverse charge may be distributable via ISD where conditions are met. ISDs must track eligible and ineligible credits separately and must not distribute more than the available eligible credit.

An ISD must issue a specialized ISD invoice or credit/debit note that clearly indicates distribution of ITC. Credits available in a month must be distributed in the same month and declared in Form GSTR-6 for that month. Distributed amounts cannot exceed available credit; supplier adjustments (debit/credit notes) must be reflected in the ISD’s return in the month the adjustment appears, ensuring contemporaneous ITC flows.

Rules require distribution of credit on a reasonable and auditable basis. Typical attribution keys include headcount, revenue, usage metrics, or direct beneficiary mapping for services billed to a specific branch. ISDs must maintain consistent allocation methodologies and supporting working papers. Where services relate to both taxable and exempt activities, only the eligible portion should be distributed.

Mandatory ISD requires ERP upgrades to capture supplier invoices centrally, compute attribution, generate ISD invoices and file GSTR-6; process redesign for invoice intake and approvals; stronger documentary trails (allocation rationales, board approvals) for audits; and alignment of month-end reconciliations since recipients will see ITC only after distribution — affecting cashflow and reporting.

Credits arising on reverse-charge services can be distributable via ISD under specified conditions. Credits attributable to recipients engaged in exempt supplies or otherwise blocked from claiming full ITC must be tracked and distributed carefully — typically by separating eligible and ineligible pools. Cross-charges remain operationally feasible but cannot replace mandatory ISD where the statute requires ISD distribution.

Authorities will scrutinise registration (whether mandatory entities registered as ISDs), correctness of ISD invoices and GSTR-6 filings, and whether allocation methods are reasonable and consistently applied. Non-compliance risks include disallowance of recipient ITC, interest, penalties and reassessment. Expect enforcement focus on reconciliation mismatches between supplier outward invoices, ISD distributions, and recipient ITC claims.

Actionable items: identify centralised services and map supplier invoices to recipient GSTINs; register as ISD via GST REG-01; design and document allocation methodology with board sign-off; configure ERP to capture invoices centrally and populate GSTR-6; segregate eligible/ineligible credits and track reverse-charge credits; reconcile monthly (supplier invoices → ISD pool → GSTR-6 → recipient ITC); retain audit evidence; and train procurement/finance/tax teams.

Beyond compliance, ISD implementation is an opportunity to strengthen procurement transparency and inter-unit cost accounting. Recommended changes include internal ISD audits, documented policy for supplier adjustments, automated reconciliation alerts, and external advisor review of allocation rationales to reduce exposure and improve cross-unit cost accuracy.

The mandatory ISD regime effective 1 April 2025 marks a structural shift in managing centrally procured service ITC under GST. While implementation requires effort — registration, systems changes and SOP updates — it delivers clearer, auditable ITC distribution. Entities that promptly register as ISDs, document allocation rules, and build robust reconciliation processes will reduce compliance risk and benefit from standardised credit flows across registrations.