Input Service Distributor( ISD) from 1-4-2025- redefined

Input Service Distributor ( ISD) redefined effective 1st April 2025 for mandatory registration under GST, over this blog, lets analyse various aspects with this change:

Who needs to register? This is not a straightforward question though as Section 20 says any office of a registered person who receives input services, for or on behalf of a distinct person is mandated to get registered under GST from 1st April 2025. This obviously opens up questions such as follows:

1. What will be the nature of such input services? Does it mean services procured from third party or internally generated services or both?
2. Should HO or BO or both register as ISD?
3. Will there be multiple ISD registrations for a PAN?  
4. Difference between cross charge and ISD?

Historically the very concept was brought forward from Service Tax regime. Why a registration is optional until now, and mandate from 1st April 2025, is a puzzle to be solved along with increased understanding of certain changes introduced to Section 20 and rule 39 as part of this amendment. 

Lets understand type of services covered as scope in and scope out for ISD mechanism. Circular No. 199/11/2023-GST dated 17-07-2023 clarified that the internally generated services including payroll cost is irrelevant for this purpose irrespective of whether recipients is eligible to avail credit or not as per second proviso to rule 28 of CGST Rules 2017 over serial # 2 & 3 of the said circular. If no invoices raised by HO, value will be deemed as NIL as per rule 28 among distinct persons. Thus, it is not mandatory to consider the internally generated service for ISD mechanism. But if you do this otherwise for cost accounting purposes, then this can be part of your ISD mechanism or alternatively consider this only for books.

So, only the input services procured from third party, for or on behalf of distinct person is relevant for the purpose of considering who needs to register as ISD. This could fairly be HO or BOs or both, thereby multiple ISD registrations is quite possible as well. This will trigger potential litigation on registration itself unless we develop a fair view on what context these services are exchanged between the distinct persons, whether its one to one or one to many bases, their underlying business model or roles. If these exchanges of services not deemed as 'common services' then very need of registration doesn't arise. This will certainly avoid registrations being taken in rush under section 20.

This amendment also touches on the following aspects:

1. Distinct person within same state as that of ISD, can pass on the credits suffered on input services on a reverse charge mechanism under sec 9(3) or 9(4). And they must issue an invoice along with details as mentioned in Rule 54(1A) (a) especially original supplier details and the taxable value in the invoice issued under clause (a) shall be the same as the value of the common services.

2. Credits distributed to recipients shall be on a pro-rata on the basis turnover of  such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period

3. Vide explanation, Relevant period is clarified as the previous Financial year, and in case of recipients with no turnover in the previous year, then last quarter of the current Financial Year is considered as relevant period.

4. The Input Service Distributor shall separately distribute the amount of ineligible input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount of eligible input tax credit.

5. All debit or credit adjustments to credits already distributed by ISD shall follow the same pro-rate basis originally followed with respective recipients.

Cross charge vs ISD:

Care should be taken not to overlap the ISD mechanism with Cross charge. ISD is strictly among distinct person and relevant primarily for common input services procured from third parties. Whereas cross charge is possible among distinct persons, related entities or subsidiaries or even with third parties in case of reimbursements or as per agreed terms otherwise. Cross charge may cover even goods, internally generated services, there is no direct correlation required with original vendor invoices whereas ISD  mechanism strictly meant for common input services. 

To summarize, don't rush for registration without developing a view on your own business model, whether a transaction alternatively covered as cross charge, keep only common services procured from third parties in mind, for or on behalf of distinct persons.  Multiple ISD registrations is equally possible as an outcome though.

- LDR

The views shared over this blog is that of the author of this blog, exercise care in adopting this or reach out for technical expertise for your specific queries as deem necessary.