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Simple-to-Learn ISD Mechanism Under GST with Same PAN

Easy-to-Learn ISD Mechanism Under GST for Entities

With the implementation of the goods and services tax (GST) in July 2017, businesses with multi-state GST registrations are under confusion about the process of distributing common input tax credits (ITC) available on services to lower net GST liability.

Some of the entities have chosen the input service distributor (ISD) process to allocate the common ITC to their other GST registrations (under the same PAN), while others have opted for the cross-charge procedure. The Central Board of Indirect Taxes and Customs (CBIC) in July 2023 mentioned that the ISD procedure is not obligatory for distributing common ITC availed from third parties to other GST registrations.

Consequently, the business can opt between the ISD mechanism and the cross-charge method. However, the same arrangement will be revised starting April 1, 2025.

GST Rule from April 1, 2025: ISD Obligatory to Claim ITC

W.e.f April 1, 2025, the government has made the ISD mechanism mandatory. It directed that the distribution of common GST input tax credit (ITC) is to be carried out exclusively through the ISD mechanism.

New GST rules have been explained in the below-mentioned table

GST ITC NatureBooking of GST invoiceConsumption of servicesGST ITC distribution
Input servicesHead officeHead officeNot required*
Head officeLocation other than Head officeMandatory GST ITC distribution through the ISD mechanism

If the services used by the head office are used for supplying services to its other locations, the ITC does not need to be distributed but an outward tax invoice (cross charge) shall be issued.

Examples of services that are used at multiple locations are audit (statutory, tax) services, software license services, manpower supply services, security services, banking, consultancy services, litigation services, compliance services, security services, etc.

Why ISD is Being Made Obligatory from April 1, 2025

To avert the collection of the ITC pertinent to the services used in various locations at a single location and ensure the precise ITC allocation to the locations where the services are actually consumed. The function of ISD is to get the invoices for these services at one registration and thereafter distribute the ITC to the other registrations where the services are used.

What is the Method to Distribute the GST ITC via ISD?

The table mentioned below shows how the ISD distributes the common ITC-

Services TypeISD location and Services consumption locationNature of GST ITC in the hands of ISDDistribution of GST ITC by ISD
Services attracting GST under forward chargeSame StateCGST and SGSTCGST and SGST
Different StateCGST and SGSTIGST
Different StateIGSTIGST
Services attracting GST under reverse chargeSame StateCGST and SGSTCGST and SGST
Different StateCGST and SGST (always)IGST

Requirements for Distributing GST ITC by the ISD

Issues for GST Taxpayers

What Takes Place if the ISD Procedure is Not Complied With?

If a taxpayer is mandated to adhere to the ISD procedure however unable to do the same then the below-mentioned consequences may comply-

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