Summary of the Input Service Distributor (ISD) Mandate

The document provides an FAQ-style overview of the Input Service Distributor (ISD) mechanism, which will become mandatory under GST regulations effective April 1, 2025. The ISD mechanism aims to streamline the distribution of input tax credits (ITC) among entities with multiple GST registrations. Key highlights include:

 

1. What is ISD?

An ISD is a taxpayer receiving invoices for services procured on behalf of multiple GST-registered entities (deemed distinct persons). ISD registration ensures proper distribution of ITC to the respective entities.

 

2. Mandate Background

Though optional since GST's inception, ISD registration will become mandatory through legislative amendments (Section 20 of the GST Act) to reduce disputes over credit transfer mechanisms like cross-charging.

 

3. Key Provisions of ISD

• ITC can only be distributed to units for which services are supplied and in proportion to their turnover.
• ISD must file monthly returns (GSTR-6) to report ITC distribution.
• ISD entities do not pay taxes but only distribute ITC.
• Distribution must align with the service's attributability and operational turnover of GST-registered units.

 

4. Comparison with Cross-Charge Mechanism

While ISD deals with vendor-procured services, cross-charging applies to inter-entity service supplies. Both mechanisms remain valid but serve different purposes.

 

5. Preparation for the Mandate

Organizations should:

• Map input services by usage (direct procurement or ISD-based).
• Obtain ISD registration for centralized procurement entities.
• Ensure proper invoicing and ITC distribution compliance.
• Use ISD for shared services like advertising, IT, and regulatory audits, while retaining direct procurement for location-specific services.

 

6. Implementation Steps

• Compile a list of input services and map their consumption.
• Ensure vendor alignment with ISD compliance.
• Plan ISD registration by January 2025, allowing a trial period.

 

The ISD mandate is expected to resolve long-standing disputes and enhance compliance efficiency, particularly for entities with multi-state operations.