Mandatory ISD Compliance Under GST from April 1, 2025: What Businesses Need to Know

The Indian taxation landscape is set for a significant shift with the mandatory implementation of the Input Service Distributor (ISD) framework under the Goods and Services Tax (GST) from April 1, 2025. As per Notification No. 16/2024-Central Tax dated August 6, 2024, this move will impact businesses with multiple GST registrations under the same PAN. Previously optional, ISD registration is now compulsory, and failure to comply could result in financial penalties and compliance issues.

If your business operates with multiple branches receiving common service invoices at a central location, it is crucial to understand how this new ISD regulation will affect your tax credit distribution.

Understanding Input Service Distributor (ISD)

An Input Service Distributor (ISD) is a registered entity under GST that facilitates the distribution of input tax credits (ITC) to its different branches or locations. This system effectively ensures that businesses allocate tax credits from shared expenses while complying with GST regulations.

Key Changes in the New ISD Regulations

Mandatory Applicability

• From April 1, 2025, businesses with more than one GST registration under the same PAN must register under the ISD mechanism.
• Entities that receive common service invoices and distribute ITC must adhere to this framework.
• This change aims to prevent ITC mismatches, penalties, and tax liabilities.

Compulsory ISD Registration

• Every business with multiple GST numbers must obtain a separate ISD registration.
• The ISD unit will have its own GSTIN, distinct from the operational branches.
• Non-compliance will result in a penalty of Rs. 10,000 or the amount of ITC not distributed—whichever is higher.

Common Services That Require ITC Distribution

Businesses incurring expenses on common services must distribute ITC appropriately. These services include:

• Statutory and Internal Auditor Fees
• Company Secretary and Chartered Accountant Certification Fees
• Advocate Services (under Reverse Charge Mechanism)
• Software and IT Services
• Sponsorship and Retainer Fees
• Bank Charges and Loan Processing Fees
• Advertisement, Digital, and Marketing Services

ISD GSTIN Must Be Mentioned on Vendor Invoices

• Vendors providing common services must ensure that invoices are issued in the name of the ISD location.

Manner of ITC Distribution

• ITC from input services used across multiple locations will be allocated based on the proportion of turnover from the previous financial year.
• The formula for distribution: Tax credit for a unit (R1) = (Turnover of R1 in previous year / Total turnover of entity in previous year) * Total credit available

Electronic Filing and Monthly GSTR-6 Returns

• ISDs must electronically file monthly returns via the GST portal.
• The ISD return (GSTR-6) will be mandatory from April 2025.

Updated Documentation Requirements

• ISDs must issue ISD invoices as per Rule 54, clearly stating the purpose of ITC distribution.
• If there is a need to reduce already distributed ITC, ISDs must issue an ISD credit note.
• Additional ITC from supplier debit notes must be redistributed in the same month.

Cross-State ITC Distribution

• If branches are within the same state, ITC will be distributed as CGST and SGST/UTGST.
• If branches are in different states, ITC will be distributed as IGST.

Discontinuation of the Cross-Charge Mechanism

• From April 1, 2025, businesses can no longer use internal tax invoices to transfer common service costs between units.
• The ISD mechanism will fully replace the cross-charge system.

Why Compliance is Critical?

Failure to comply with the new ISD regulations could result in:

• Heavy penalties
• ITC mismatches lead to tax liabilities
• Complications in GST audits and reporting
• Possible business disruptions due to incorrect ITC allocation

To ensure smooth compliance, businesses must take immediate steps to:

• Register for ISD before April 1, 2025.
• Regularly distribute ITC in the same month the credit is received.
• Implement systematic ITC tracking mechanisms.
• Ensure vendor invoices comply with ISD regulations.

How PKPConsult Can Help Businesses Navigate ISD Compliance?

PKPConsult, a leading Chartered Accountancy firm, specializes in GST compliance and advisory services. With extensive experience in taxation and regulatory frameworks, we can help businesses transition smoothly into the mandatory ISD mechanism.

ISD Registration & Advisory

• Assistance in obtaining mandatory ISD registrations before the deadline.
• Guidance on structuring ITC distribution effectively.

ITC Allocation & Calculation

• Expert calculation of ITC distribution based on turnover proportions.
• Ensuring accurate ITC allocation to avoid penalties and mismatches.

Invoice & Documentation Review

• Ensuring vendors correctly mention ISD GSTIN on invoices.
• Preparing ISD invoices and credit notes as per Rule 54.

GSTR-6 Filing & Compliance Reporting

• Monthly electronic filing of GSTR-6 returns.
• Handling reconciliations and dispute resolutions related to ITC claims.

Automation & Process Optimization

• Implementing automation tools to track and distribute ITC efficiently.
• Setting up compliance dashboards for real-time monitoring.

Adapting to the New ISD Framework: Ensuring Compliance and Optimizing ITC with PKPConsult

The mandatory ISD framework under GST marks a significant shift in ITC distribution for businesses with multiple GST registrations. To ensure compliance and avoid penalties, companies must proactively register for ISD, update vendor invoicing practices, and implement structured ITC distribution mechanisms.

PKPConsult, with our deep expertise in GST compliance, stands ready to assist businesses in effortlessly navigating this transition. From registration to ongoing compliance, our team provides end-to-end support, ensuring businesses remain tax-compliant while optimizing ITC utilization.

Act Now! Prepare your business for the ISD transition before April 1, 2025. Contact PKPConsult today for expert guidance on ISD compliance and GST advisory services.