/ GST Registration

Overview on Input Service Distributor & ITC under GST

ISD

Mandatory shift to Input Service Distributor mechanism for common input services from April 1, 2025

This mandatory shift to the Input Service Distributor mechanism for common input services from April 1, 2025, will have significant compliance and operational impacts. Key Changes Under the Finance Act, 2024 & Notification 16/2024

  • No More Cross Charge for Common Input Services from Third Parties: Businesses can no longer use the cross-charge mechanism for distributing ITC on externally procured input services.
  • Input Service Distributor Registration is Now Mandatory: Companies must register for a separate Input Service Distributor (ISD) GSTIN if they procure services centrally and distribute ITC.
  • GSTR-6 Compliance: ISDs must file GSTR-6 to distribute ITC properly.
  • Turnover-Based ITC Distribution: ITC must be distributed among units based on their turnover proportion.
  • Invoices Must Be in Input Service Distributor’s GSTIN: Only invoices addressed to the ISD GSTIN will be eligible for ITC distribution.

Who needs Input Service Distributor registration?

  • Any office of a supplier that receives invoices for input services (including RCM services) on behalf of multiple branches.
  • This applies to head offices, corporate offices, or any centralized unit that procures services for other GSTINs.
  • It is now mandatory from April 1, 2025—not optional.

Where to Register?

  • Input Service Distributor Registration must be taken in the state where the common input services are received.
  • The Input Service Distributor location may or may not already be registered under GST for outward supplies.
  • Multiple Input Service Distributor registrations can be taken if common services are received in different offices across multiple states.

What Input Services Are covered?

  • Only input services (not goods or capital goods) can be distributed via Input Service service distributor. Examples of common services that require Input Service Distributor registration:
    🔹 Consulting, legal, and professional services
    🔹 Software subscriptions
    🔹 Common rent, admin expenses
    🔹 Insurance, security, HR services
    🔹 Reverse Charge Mechanism Services
  • With the mandatory Input Service Distributor Registration deadline approaching, businesses must act now to:
    • Analyze business structures
    • Register for Input Service Distributor where applicable
    • Update processes for ITC distribution
    • Ensure compliance with Input Service Distributor invoicing & GSTR-6 filing

What Stays Unchanged from mandatory shift to the ISD mechanism for common input services?

  • Internally generated services can still be distributed via Cross Charge (based on Open Market Value).
  • Goods Distribution: The ISD mechanism does not apply to goods; transfers must continue using e-way bills & delivery notes.

Why this change from mandatory shift to the ISD mechanism for common input services?

  • Enhanced ITC Tracking & Compliance: Helps prevent misuse of ITC and ensures proper reconciliation.
  • Clarity on Tax Treatment: Reduces disputes on whether to use ISD or Cross Charge.
  • Better Transparency: Authorities can now track ITC distribution efficiently via GSTR-6.

What Should Businesses Do Now?

  • Assess Impact: Identify centrally procured input services requiring ISD registration.
  • Obtain ISD GST Registration—Ensure ISD compliance before April 1, 2025.
  • Update Vendor Communication: Instruct suppliers to invoice under ISD GSTIN.
  • Modify IT & ERP Systems: Implement separate ISD invoicing & ITC distribution workflows.
  • This is a major GST compliance shift that businesses need to act on well before the April 2025 deadline.

Essential conditions along with checklist for claiming Input Tax Credit

Who Can Claim Input Tax Credit?

According to Section 16(1) of the CGST Act, the conditions for claiming Input Tax Credit Only Registered Taxpayers can claim Input Tax Credit, except composition taxpayers u/s 10 of the CGST Act. And ITC must be used for business purposes—goods/services should be used in the course or furtherance of business. And Eligible Input Tax Credit is credited to the Electronic Credit Ledger upon satisfying all conditions.

Conditions for Availing Input Tax Credit (Section 16(2)):

Above is the basic foundation of Input Tax Credit eligibility. However, to actually avail Input Tax Credit, taxpayers must also fulfill additional conditions under Section 16(2) (e.g., tax invoice, receipt of goods, supplier tax payment, return filing, etc.). GST taxpayers must fulfill the following Conditions to claim ITC

  • Possession of Valid Documents (Rule 36) like Tax Invoice, Self-Invoice (for RCM transactions), Debit Note, Bill of Entry (for imports), ISD Invoice (for ITC distribution)
  • Invoice Must Contain GSTIN of supplier & recipient, Tax amount, Goods/services description, Total value, Place of supply (for interstate transactions),
  • Supplier Compliance like Invoice must be reported in GSTR-1 or IFF, & Input Tax Credit should be auto-populated in recipient’s GSTR-2B
  • Receipt of Goods or Services : Input Tax Credit can be claimed only after receiving goods/services and If goods are received in installments/lots, ITC is available only after the last lot is received
  • Payment of Tax to the Government: Suppliers must deposit tax with the government in case supplier defaults, ITC must be reversed with interest (Section 41), Input Tax Credit can be reclaimed when tax is paid,
  • Filing of Returns (Section 39): GST Taxpayer must file GSTR-3B to claim Input Tax Credit,
  • Time Limit to Claim Input Tax Credit (Section 16(4)) : ITC must be claimed by the earlier of 30th November of the following financial year or Date of filing GSTR-9 (Annual Return)
  • ITC Restrictions & Reversals: Input Tax Credit is NOT allowed for tax paid due to Fraud, Willful misstatement, Suppression of facts (Rule 36(3))
  • Payment to Supplier Within 180 Days: If payment (including tax) is not made within 180 days, Input Tax Credit must be reversed with interest. Input Tax Credit can be reclaimed after payment
  • No Dual Benefits (Section 16(3)) : Input Tax Credit cannot be claimed if depreciation is claimed on the GST component of capital goods under Income Tax.

ITC Compliance Checklist under GST

Condition Requirement
Eligibility Must be a registered person using goods/services for business purposes.
Documents Required Possession of Tax Invoice, Debit Note, Bill of Entry, ISD Invoice.
Supplier Compliance Supplier must report invoices in GSTR-1, and ITC should reflect in GSTR-2B.
Receipt of Goods/Services ITC can be claimed only after Goods/services are physically received or on behalf of the recipient.
Tax Payment by Supplier Supplier must have paid tax to the government for ITC eligibility.
Timely Filing of Returns Recipient must file GSTR-3B for the period in which ITC is claimed.
Payment to Supplier Invoice must be paid within 180 days, or ITC needs to be reversed with interest.
Time Limit for ITC Claim ITC can be claimed by 30th November or before filing GSTR-9, whichever is earlier.
No Dual Benefit Cannot claim both ITC and depreciation on the GST component of capital goods.

Following Steps Ensure Supplier’s GST Compliance Genuine GST invoices Verification

By following below steps, GST Taxpayer can detect any inconsistencies or potential fraud in GST invoicing and filing patterns

Check GST Return History & Filing Pattern

  • Visit the GST Portal: https://www.gst.gov.in

  • Navigate to Search Taxpayer > Search by GSTIN/UIN

  • Enter the supplier’s GSTIN and verify their GST return filing status.

  • Check their filing pattern—whether they file regularly (monthly/quarterly) and if any returns are missing or delayed.

Verify the Authenticity of the GST Invoice

A valid GST invoice should contain the following details:

  • Supplier Details: Name, Address, GSTIN

  • Buyer Details: Your company name, address, GSTIN

  • Invoice Details: Invoice Number, Date of Issue

  • Goods/Services Description: HSN/SAC codes, quantity, unit price, total value

  • Tax Breakup: CGST, SGST, IGST clearly mentioned

  • Tax Rate & Amount: Correct GST rate applied based on the CBIC rate chart

Cross-Check Supplier Invoice GST Rate on CBIC Portal

GST taxpayer must ensure supplier compliance (tax payment and GSTR-1 filing) and also verify ITC appears in GSTR-2B before claiming. GST Taxpayer Reconcile invoices & payments to avoid Input Tax Credit reversal, and we needed to Claim ITC within the prescribed time limits. GST Taxpayers must regular reconciliation of GSTR-2B with purchase invoices, which is crucial. GST Taxpayers ensure suppliers are compliant to avoid ITC mismatches and reversals and also maintain proper documentation to substantiate Input Tax Credit claims during audits.

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