The Finance Act, 2024, along with Notification 16/2024 dated 6th August 2024, has introduced a significant amendment in the distribution of Input Tax Credit (ITC) for businesses. Effective from 1st April 2025, businesses procuring common input services from third parties must mandatorily use the Input Service Distributor (ISD) mechanism. This marks a shift from the earlier flexibility where businesses could choose between Cross Charge or ISD for ITC distribution.
What’s Changing?
Before 31st March 2025: Businesses had the choice to distribute ITC via Cross Charge or ISD.
From 1st April 2025: Cross Charge is no longer permitted for common input services from third parties. Instead, businesses must distribute ITC through ISD.
Key Features of the ISD Mechanism (With Examples)
1. Separate GST Registration for ISD
Businesses must obtain a distinct GST registration for ISD. For instance, if ABC Ltd. has multiple branches and procures common IT services centrally (e.g., a Microsoft software subscription for all branches), it must register as an ISD to distribute ITC properly.
2. ITC Distribution Only Through GSTR-6
Every ISD-registered entity must distribute ITC by filing GSTR-6 monthly. For example, if XYZ Pvt. Ltd. receives an ITC invoice for professional consultancy services, it cannot claim or transfer ITC without filing GSTR-6.
3. Input Service Invoices Must Be in ISD’s GSTIN
Suppliers must issue invoices in the name of the ISD GSTIN and not any particular branch. For example, if Tech Solutions Ltd. purchases cloud storage services for all its branches, the invoice must be issued in the ISD’s name.
4. ITC Distribution Based on Turnover Ratio
ITC allocation among branches will be based on their turnover ratio. Suppose Retail Corp. has three branches with turnovers of ₹50 Cr, ₹30 Cr, and ₹20 Cr, and it has ITC of ₹10 lakh. The distribution would be as follows:
Branch 1 (50%) → ₹5 lakh ITC
Branch 2 (30%) → ₹3 lakh ITC
Branch 3 (20%) → ₹2 lakh ITC
What About Internally Generated Services?
The ISD mechanism applies only to third-party input services. However, internally generated services (such as HR, legal, or IT support provided by the head office to branches) can still be distributed using Cross Charge based on the open market value.
Does This Change Impact Goods Transfer?
No! The ISD mechanism is only for input services. Businesses must continue using e-way bills and delivery challans for transferring goods between branches.
Why Is This Change Being Implemented?
The primary objective of this amendment is to improve compliance and transparency in ITC distribution. By making ISD mandatory, the government can better track ITC utilization, reducing potential misuse.
How Should Businesses Prepare?
If your company procures services centrally and distributes ITC, you must register as an ISD before 1st April 2025.
Businesses should start reviewing their ITC allocation process and transition to ISD compliance before the deadline.
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