Mandatory ISD Registration from 1st April 2025
Mandatory registration as an Input Service Distributor (ISD) is required for all entities that have more than one GSTIN based on a single PAN effective 1st April 2025. ISD registration was previously optional, but it is now mandatory as per the new GST amendment. This amendment aims to facilitate the distribution of Input Tax Credit (ITC) while ensuring compliance and allowing credit management for entities with multiple branches. Companies receiving standard input service bills at a head office and distributing ITC to multiple branches will be most affected. To comply, they must pre-register as ISDs, establish proper ITC distribution processes, and ensure effective compliance practices from the start.
Understanding Input Service Distributor (ISD)
An input service distributor is an office of the business that receives tax invoices for input services and distributes the available input tax credit (ITC) to related branches or units having separate GSTINs but using the PAN of that business.
Distributing Input Tax Credit The input tax credit (ITC) available for distribution in every month has to be distributed in that month itself and to be reported in Form GSTR-6. Furthermore, the ISD must distribute every tax credit arising from payments made under the reverse charge mechanism under Sections 9(3) and 9(4) to the respective recipients. If the input service is availed only by one recipient, input tax credit should be distributed to that one recipient only. To distribute the available tax credit among multiple recipients who use the input services, they must do so in proportion to their turnover.
The distribution has to be done,
ITC to Branch = (Branch Turnover / Total Turnover) x Total ITC
Branch Turnover = turnover, as referred to in section 20, of person R1 during the relevant period
Total Turnover = the aggregate of the turnover, during the relevant period, of all recipients to whom the input
service is attributable in accordance with the provisions of section 20
Total ITC = the amount of credit to be distributed.
XYZ Ltd. is a company with its head office in Mumbai (ISD) and branch offices in Delhi, Bangalore, and Chennai.
The Mumbai head office receives an invoice from an advertising agency for ₹1,00,000 + 18% GST (₹18,000 GST Credit). This advertisement benefits all three branches, so the ITC needs to be distributed proportionately.
Turnover of Branches:
- Delhi Branch: ₹10,00,000
- Bangalore Branch: ₹5,00,000
- Chennai Branch: ₹5,00,000
- Total Turnover = ₹10L + ₹5L + ₹5L = ₹20,00,000
ITC Distribution Calculation:
Since the ITC of ₹18,000 needs to be distributed based on turnover, the allocation is:
| Branch | Turnover (₹) | Share (%) | ITC Distributed (₹) |
| Delhi | 10,00,000 | 50% | ₹9,000 |
| Bangalore | 5,00,000 | 25% | ₹4,500 |
| Chennai | 5,00,000 | 25% | ₹4,500 |
| Total | 20,00,000 | 100% | ₹18,000 |
Financial Risks of Non-Compliance with ISD Rules-
Failure to comply with Input Service Distributor (ISD) rules poses significant financial and operational risks to business organizations. Non-compliance with ISD protocols would deny branches any allowable Input Tax Credit (ITC) for general services, which would only increase tax cost. Similarly, errors in ISD and/or mismatches of ITC in Goods and Services Tax (GST) returns would increase the likelihood of receiving a GST notice, or auditing, and/or potential penalties.
Non-compliant businesses face increased scrutiny from tax authorities due to uncertainty in ITC apportionment, raising the risk of financial liabilities. The cost of ITC would be much more significant if taxpayers could claim benefits for any Reverse Charge Mechanism (RCM) transactions prior to April 2025, which leads to additional taxes being paid. However, this holds true if the company ensures satisfactory ISD compliance, properly apportions the ITC between branches, reduces compliance risks, and results in lower taxes with a clear flow of ITC. It also supports claiming ITC based on RCM, subsequently after April 2025, improving cash flow for the company's overall improved tax efficiency. To reduce tax litigation and financial losses, companies must value their ISD compliance and ensure proper ITC disbursement.
Conditions to be Met by an Input Service Distributor (ISD)
Registration:
An Input Service Distributor (ISD) is required to separately register as an "ISD" in addition to their regular GST registration. When applying through REG-01, the taxpayer will have to indicate ISD registration at serial number 14. Under the law, only upon making that declaration is the ISD permitted to distribute Input Tax Credit (ITC) to its recipients.
Invoicing :
Raise ISD invoices while disbursing ITC to respective units or branches.
Filing of Returns:
The returns will be filed on a monthly basis in GSTR-6 on or before the 13th of the ensuing month reporting the ITC paid out.
Returns:
The total tax credit paid out by the aggregators should not exceed the available tax credit at the end of the relevant month.
Filling :
ISD has to report the remitted ITC in GSTR-6, to be filed by 13th of next month.
Consequences of Not Registering as an Input Service Distributor (ISD)
From April 1, 2025, companies that do not register as an Input Service Distributor (ISD) can encounter various difficulties, including legal and monetary penalties:
Penalties and Interest
Failure to comply with obligatory ISD registration can invite penalties for improper distribution of Input Tax Credit (ITC). If ITC is claimed in excess, tax officials can recover it from the recipient along with interest under Section 21 of the GST Act.
Increased GST Audits and Scrutiny
Companies that are not registered under ISD are prone to audits and investigation by the tax department. Discrepancies in the claim of ITC can invoke in-depth inquiry, resulting in legal issues.
ITC Reversal and Cash Flow Interruptions
Incorrect or non-registered ISD operations might lead to ITC claim reversal. This makes branches pay tax directly rather than availing eligible ITC, affecting cash flow and working capital management.
Tax Notices and Financial Burdens
Mistaken ITC claims at the head office without ISD registration can result in tax notices. These notices can translate into extra financial burdens and operational interruptions.
Operational Inefficiencies and Credit Allocation Problems
In the absence of an appropriate ISD mechanism, companies might find it difficult to distribute ITC effectively among various branches. This can lead to credit distribution disputes and financial management inefficiencies.
The entity must obtain a separate registration as an ISD, even if it has a normal GST registration.
Step-by-Step ISD Registration Process
- Step 1: Access the GST Portal
- Step 2: Navigate to Registration Application
- Step 3: Fill Part A of Form GST REG-01
- Step 4: Fill Part B of Form GST REG-01
Details of Promoters/Partners:
Authorized Signatory:
Bank Account Information - Step 5: Upload Required Documents
a. Proof of Constitution of Business
b. Proof of Principal Place of Business
c. Identity and Address Proofs of Promoters/Partners
d. Bank Account-Related Proof
e. Photograph of Promoters/Partners
f. Letter of Authorized Signatory in case of partnership firm, company, HUF, etc.
g. DSC in applicable cases like company , etc.
CONCLUSION
We at BMA take satisfaction in streamlining tricky tax regimes, and if each person is best proper to showcase this, it's far the Input Service Distributor (ISD) device beneath GST. Compliance calls for a painstaking recognition on detail, consistency, and a clear information of the way to distribute enter tax credit (ITC) between divisions. That's wherein we step in. We provide full support for businesses with ISD registration, compliance setup, and monthly return filings. Our strong approaches ensure that we assign ITC appropriately and fairly at locations, preventing mistakes, loss of credit, and undue notices from the tax department. Whether you have a decentralized headquarters or are a large company with decentralized operations, we streamline ISD management to ensure your tax credits are compliant and optimized.
With us on your side through BMA , you can cast off tax monitoring issues and cognizance at the boom of your enterprise, as we deal with your ISD requirements with accuracy and on time.
Disclaimer
The above is general information. Material on this site is for general information purposes only. Readers are advised to consult a professional tax consultant before making any tax decision. Despite the exercise of care in updating information, BMA cannot be held liable for error or omission or loss arising from use of such information