What is an Input Service Distributor (ISD)?
An Input Service Distributor (ISD) is a business entity under GST (Goods and Services Tax). It receives invoices for services used by its various branches. The Input Tax Credit (ITC) is distributed to those branches. These branches may have different GSTINs (GST Identification Numbers) but must be registered under the same PAN (Permanent Account Number).
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Large businesses often have expenses, for instance software subscriptions or office maintenance, that benefit multiple branches. However, since the invoice is received at the head office, the ITC cannot be used only by that location. Instead, the tax credit must be fairly distributed among all branches that benefit from the service. This is where the ISD mechanism helps ensure a seamless transfer of tax credits.
Latest Updates on ISD Under GST
- Union Budget 2025: New amendments clarify how ITC is handled under the Reverse Charge Mechanism (RCM).
- Mandatory ISD System: Businesses must register as an ISD starting April 1, 2025. This is compulsory if they are distributing ITC across branches.
- Method for Allocating ITC: CBIC (Central Board of Indirect Taxes and Customs) has laid down rules for ITC allocation. However, the final notification is awaited.
How Does ISD Work? (With Example)
Let’s take ABC Ltd., a company headquartered in Bangalore, with branches in Chennai, Mumbai, and Kolkata.
- The Bangalore office purchases software that is used by all branches.
- Since the invoice is raised in Bangalore, the entire ITC is initially claimed there.
- However, this credit needs to be shared with other branches.
- Bangalore office (ISD) issues ISD invoices to distribute the credit proportionally based on branch turnover.
When ISD is NOT Applicable?
- ITC on Goods & Capital Goods: ISD cannot distribute credit for raw materials, machinery, or other physical goods.
- Outsourced Manufacturers/Service Providers: ITC cannot be distributed to third-party vendors.
Difference Between Earlier Tax Regime and GST Regime
| Feature | Earlier Regime | GST Regime |
|---|---|---|
| Who can be ISD? | Manufacturer, producer, or service provider | Any supplier of goods/services |
| How is credit distributed? | Via invoices, bills, or challans | Through ISD invoices |
| Type of tax credit distributed | Service Tax Credit | CGST, SGST, IGST |
| To whom is it distributed? | Own units & outsourced vendors | Only branches with the same PAN |
Key Conditions for ISD Registration
- Mandatory Registration: Businesses must register as ISD separately under GST.
- ISD Invoicing: ITC must be allocated using an ISD Invoice.
- Returns Filing: ISD must file GSTR-6 by the 13th of each month to report ITC distribution.
How is ITC Distributed Among Branches?
If an ITC applies to multiple branches, the distribution formula is:
Branch Turnover / Total Turnover × Available ITC
For example, if total ITC is ₹1,00,000. The Mumbai branch has 30% of total turnover. So, Mumbai will get ₹30,000 in ITC.
What Happens If ITC is Wrongly Distributed?
If ISD distributes ITC incorrectly:
- The extra credit must be paid back with interest.
- GST officials can initiate recovery actions under the ‘Demand and Recovery’ provisions.
Conclusion
Registering as an Input Service Distributor is crucial for large businesses with centralized expenses. The mandatory ISD system from April 2025 ensures transparency in ITC distribution. By following GST rules, businesses can optimize tax credits and avoid penalties.
For smooth compliance, companies should keep proper records, file GSTR-6 on time, and ensure correct ITC allocation.
