Starting April 1, 2025, the GST framework in India will witness a significant shift in how businesses manage their Input Tax Credit (ITC). The government has made it mandatory for businesses to route eligible ITC on common input services through an Input Service Distributor (ISD). This new requirement aims to streamline credit distribution, ensure better compliance, and curb misuse.

What’s Changing from April 1, 2025 for ISD?

Under the new GST rule effective from 1st April 2025, businesses operating multiple GST registrations under one PAN must compulsorily register as an Input Service Distributor (ISD)—a shift from the earlier optional requirement. Until now, many businesses used the cross-charge method or did not formalize the distribution of common ITC across branches or units. This flexibility will no longer be available.

The amendment mandates registration as an ISD under Section 24(viii) of the CGST Act, 2017, starting from FY 2025-26. If any branch or unit of an organization receives common services like legal, audit, consulting, or software services used by other units, the ITC must be passed on using the ISD mechanism.

Consequences of Non-Compliance: ITC Denial and Penalties

Failure to comply with the ISD rule can have serious financial implications. If businesses continue to distribute common ITC through cross-charge or fail to distribute it altogether, they will face:

• Denial of Input Tax Credit for the receiving units.
• Penalties starting at ₹10,000 under Section 122(1)(ix) of the CGST Act.
• Potential interest liabilities on wrongly availed credit.

This move emphasizes the government’s intent to plug loopholes in ITC distribution and ensure greater transparency.

ISD Registration Process

Businesses affected by this rule must obtain a separate GST registration as an ISD. Here’s a brief overview of the registration process:

1. Eligibility: Any head office or unit receiving common input services for distribution.
2. Application: Submit Form GST REG-01 on the GST Portal and select “ISD” as the registration category.
3. Documentation: Provide PAN, proof of business, authorized signatory details, and address proof.
4. Processing: After verification, the GSTIN for ISD will be allotted.
5. Compliance: The ISD will need to issue ISD invoices and file monthly returns in Form GSTR-6.

It’s important to note that ISD registration is separate from regular GST registration and doesn’t allow for outward supply of goods/services.

What Businesses Must Know and Prepare For

• Identify Common Services: Review all services shared across multiple GST registrations to understand the extent of ISD applicability.
• Update Processes: Ensure internal invoicing and accounting practices are aligned with the ISD requirement.
• Train Teams: Educate finance and compliance teams on the new ISD rules and registration formalities.
• Plan for Compliance: Proactively apply for ISD registration before the financial year begins on April 1, 2025.
• Monitor Transactions: Regularly audit ITC distributions through ISD to avoid errors and penalties.

Why This Matters

The mandatory ISD requirement aims to bring uniformity and reduce ambiguity in ITC distribution. While it may increase compliance efforts initially, it helps businesses stay aligned with GST law and avoid costly penalties in the long run.

Key Implications

The revised GST rule broadens the role and responsibilities of an Input Service Distributor (ISD) in three keyways:

1. RCM Services Included: ISDs can now distribute Input Tax Credit (ITC) on invoices for services that fall under the Reverse Charge Mechanism (RCM) as per Section 9(3) and 9(4). This means businesses can centrally manage and distribute ITC on RCM services through their ISD registration, simplifying credit claims.
2. Distribution on Behalf of Distinct Entities: The ISD’s role now includes distributing ITC not just for services received directly by the head office but also for invoices received on behalf of other branches or units (distinct persons under Section 25). This creates a centralized system for ITC distribution within companies having multiple GST registrations under one PAN.
3. Updated Distribution Rules: While the ISD continues to distribute ITC, there are changes in how this distribution happens, aligned with the updated provisions in Section 20. Businesses will need to adapt their processes to comply with these new distribution methods.
4. Simplified ITC Distribution for RCM Services: Including RCM services under ISD simplifies ITC claims for services where tax liability falls on the recipient, ensuring comprehensive credit distribution.
5. Centralized ITC Management Across Entities: The broader role of ISD helps businesses streamline credit flow across multiple branches or units, making tax credit management more efficient and transparent.

IRIS Leads the Way: First to Integrate 2A Data for Enhanced IMS Reconciliation

We are thrilled to announce a game-changing upgrade to our reconciliation capabilities—IRIS is the first to integrate IMS with 2A data, enabling rate-level reconciliation for unmatched accuracy and insights.

Previously, IMS reconciliation was limited by the data available. With this enhancement, our system now fetches and syncs 2A data alongside IMS data, allowing deeper validation and more precise reconciliation at the tax rate level—a breakthrough in ensuring compliance and financial accuracy.

New Fields in IMS Reconciliation Results

• With this update, you now have access to additional critical details:
• GSTR1/1A Filing Date – Track invoice inclusion in GSTR-2B and detect late supplier filings.
• CFS 3B Status – Assess vendor compliance with GSTR-1 and GSTR-3B filing insights.
• RCM Details – Ensures RCM details in purchase data match with IMS + 2A data &identifies discrepancies.
• Amendment Flags: Clearly indicates what changes were made in amended invoices and enables accurate reconciliation by providing direct insights into supplier modifications.
• Return Period Details – Cross-check original vs. amended return periods. Helps track past actions on original invoices and align them with current decisions.
• Supplier Cancellation Date – Know when suppliers’ GSTINs were canceled. Ensures timely decisions regarding IMS data for discontinued suppliers.
• IRN Generation Details – Verify that E-invoice details remain unchanged. Confirms that suppliers have not altered E-invoice details, ensuring data integrity.