🔹 Introduction

In multi-location businesses, certain expenses like audit fees, software subscriptions, or advertising are incurred at the head office but benefit multiple branches. To ensure smooth distribution of ITC (Input Tax Credit) in such cases, GST law provides the concept of Input Service Distributor (ISD). Understanding ISD compliance is essential for companies operating across states.

(Reference: Sec. 20 of CGST Act, Rule 39–43 of CGST Rules, CBIC guidelines till 2025)

🔹 What is an Input Service Distributor (ISD)?

• An ISD is an office of the taxpayer (like head office, corporate office) which receives invoices for common input services and distributes the ITC to units/branches having the same PAN.

• ISD mechanism applies only for input services (not goods or capital goods).

🔹 Who Can Register as ISD?

• Any office of a business that wants to distribute ITC on common input services.

• ISD must obtain separate registration (distinct from normal GSTIN).

• Usually the head office acts as ISD.

🔹 Distribution of ITC by ISD

✅ Eligible ITC Distribution

• Credit of input services used by more than one branch/unit.

• Distributed to units proportionately based on turnover of each branch.

❌ Ineligible ITC

• ITC restricted under Sec. 17(5) (blocked credits – motor vehicles, personal expenses, etc.) cannot be distributed.

✅ Method of Distribution

• IGST ITC → Distributed as IGST to all units.

• CGST/SGST ITC → Distributed as IGST if recipient in different state; otherwise CGST/SGST.

🔹 Step-by-Step ISD Process

📌 Step 1: Vendor raises invoice on Head Office (HO).
📌 Step 2: HO (ISD) records invoice and identifies eligible ITC.
📌 Step 3: HO issues ISD invoice to branches distributing ITC.
📌 Step 4: Branches claim ITC in their GSTR-3B.
📌 Step 5: HO files GSTR-6 monthly with ITC details.

🔹 Practical Example

Example 1: Multi-State Company
HO in Delhi pays ₹12 lakh for audit fees benefiting 3 branches:

• Delhi Branch turnover: ₹2 crore.

• Noida Branch turnover: ₹3 crore.

• Ghaziabad Branch turnover: ₹1 crore.

Total turnover = ₹6 crore. Distribution ratio: Delhi 33%, Noida 50%, Ghaziabad 17%.
ITC distributed accordingly via ISD invoices.

Example 2: Advertising Campaign
Company incurs ad expense of ₹5 lakh at HO. ITC distributed to all branches based on turnover ratio using ISD mechanism.

🔹 Compliance Requirements for ISD

• Separate registration required for ISD.

• File monthly GSTR-6 by the 13th of next month.

• Maintain detailed records of ITC received and distributed.

🔹 Common Mistakes

• Distributing ITC of goods/capital goods via ISD (not allowed).

• Distributing ineligible ITC (u/s 17(5)).

• Wrong turnover ratio applied for distribution.

• Non-filing of GSTR-6 leading to ITC blockage for branches.

🔹 Penalties

• Wrong distribution of ITC → Recovery under Sec. 74A (FY 2024-25 onwards).

• Late filing of GSTR-6 → Late fee ₹50/day (₹25 CGST + ₹25 SGST).

• Wrong ITC claim by branches → Reversal with interest u/s 50.

🔹 Best Practices

• ✅ Use ERP systems for automated ITC allocation.

• ✅ Reconcile ITC between HO & branches monthly.

• ✅ Ensure proper vouchers & ISD invoices issued.

• ✅ Train accounts staff on Rule 39 compliance.

• ✅ Review ITC distribution during internal audit.

🔹 FAQs

Q1. Is ISD mandatory for all businesses?
➡️ No, only if company wants to distribute ITC of input services.

Q2. Can ISD distribute ITC on goods?
➡️ No, only input services.

Q3. Which return must ISD file?
➡️ GSTR-6 monthly.

Q4. Can ISD transfer ITC to unregistered units?
➡️ No, only to registered units under same PAN.

Q5. Can HO distribute ITC without ISD registration?
➡️ No, ISD registration is mandatory.

🔹 Conclusion

The ISD mechanism ensures fair distribution of ITC for multi-location companies. Proper compliance with rules, correct ratio calculation, and timely GSTR-6 filing are essential to avoid disputes and penalties.

📌 Need expert help in ISD registration, ITC distribution, or GST reconciliations?
Contact Tech-Tax Solutions – Quality, Trust & Expertise in Ghaziabad, Noida & Delhi.