Mandatory ISD Mechanism for Input Tax Credit from April 1, 2025

• 24 March 25

Mandatory ISD Mechanism for Input Tax Credit from April 1, 2025

Starting April 1, 2025, businesses registered under Goods and Services Tax (GST) must comply with a new rule mandating the use of the Input Service Distributor (ISD) mechanism for the allocation of common Input Tax Credit (ITC) across multiple GST registrations under the same Permanent Account Number (PAN). Failure to comply with this regulation may result in denial of ITC claims and a minimum penalty of ₹10,000.

This regulatory change aims to bring uniformity, reduce tax evasion, and ensure that ITC is properly distributed among different business units under the same corporate entity.

What is the ISD Mechanism?

The Input Service Distributor (ISD) mechanism is a framework under GST that allows businesses to distribute ITC from common input services (such as advertising, IT services, legal consultancy, etc.) to different GST-registered branches of the same company.

Example:
A company with GST registrations in Mumbai, Delhi, and Bangalore incurs a common expense for digital marketing services. Under the new rule, ITC from this service must be distributed via ISD rather than being claimed directly by individual branches.

Key Changes Under the New Rule

• Mandatory ISD registration for businesses using common input services across multiple GST registrations.
• ITC can only be distributed through the ISD mechanism, eliminating direct cross-claims between branches.
• Non-compliance will result in ITC disallowance, impacting cash flow and increasing tax liability.
• Minimum penalty of ₹10,000 for failure to adhere to the new ISD rule.

Impact on Businesses

• Large corporations and multi-state businesses will need to ensure proper ISD registration and compliance to avoid financial penalties.
• SMEs with multiple GST registrations must adopt ISD-based ITC allocation for shared expenses like software subscriptions, marketing, and consultancy fees.
• Improper ITC claims will lead to tax disputes, requiring businesses to maintain detailed documentation for seamless ITC distribution.

Steps Businesses Need to Take

1. Assess common input services that require ITC distribution under ISD.
2. Register for ISD under GST if applicable.
3. Establish a systematic approach for ITC allocation and documentation.
4. Train accounting and finance teams on ISD compliance.
5. Conduct periodic audits to ensure compliance and avoid penalties.

The April 1, 2025 rule mandating the ISD mechanism for ITC distribution is a significant shift in GST compliance. Businesses must proactively adapt to this change by ensuring ISD registration, proper ITC documentation, and a structured ITC allocation process. Early adoption will help businesses avoid ITC denials, penalties, and potential cash flow disruptions.