17-Mar-2025 ISD Mechanism and Cross Charge

ISD (Input Service Distributor) and Cross Charge, though these terms have been used inter-changeably by many, they are two different concepts with different purpose to solve. Provisions of ISD are existing in GST law but they have become mandatory from 1st April 2025. Hence now it is imperative to analyse the implications and applicability of both ISD and cross-charge in each case. We present a simple interpretation of the concepts hereinbelow along with important points for consideration:

                                                        ISD

1.  
2. 1. To understand the meaning of ISD lets break down the definition into parts:

a. office of the supplier of goods/ services 

b. which receives tax invoices towards receipt of input services including invoices in respect of RCM services liable to tax  under section 9(3) or 9(4), 

c. for or on behalf of distinct persons referred to in section 25 (having same PAN but different GSTIN)

d. and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20;

1. 2. A business entity may have multiple business locations and may hold multiple registrations under GST, necessitating the proper allocation of ITC (Input tax credit) claimed by the centralized or head office among various business locations. There is also a possibility that it may be required to distribute input tax credit from other business locations to HO/branches.

1. 3. Generally the head office avails various input services which are used by itself as well as other locations. Since the common expenditure is meant for the business of all units, it is but natural that the credit of input services in respect of such common invoices should be apportioned between all the consuming units. 

1. 4. ISD mechanism enables such proportionate distribution of services amongst all the consuming units. 

1. 5. An office/business location can become an ISD only if it receives tax invoices for or on behalf of distinct persons ie. consumption of supply is by distinct persons and not by the one who receives the tax invoices for such supply of services. Distinct persons may include the office / business locations of the taxpayer such as : 

• a. Factories
• b. Branches/ Divisions
• c. Warehouses/ Depos 
• d. Service outlets
• e. Retail outlets

1. 6. Example:

Company ‘ABC’ has an office in the State of Maharashtra and a factory in the States of Gujarat and Rajasthan. Company ABC procures the software licencing services from the third-party service provider and the software is separately installed at all 3 locations. The service provider issues a single consolidated invoice for all the three licences supplied at the office address (i.e. Maharashtra). In such case, from 01/04/2025, since the inward supplies have not been entirely received at the office but have also been directly received at the factories, the ITC in respect of such inward supplies will have to be routed to all the three regular registrations by obtaining ISD registration at the office in Maharashtra, which can then issue ISD invoice to the other two locations.

1. 7. ISD registrations can only distribute ITC related to services and not credit of input goods or capital goods. Some examples of services include:

• a. Security Services 
• b. Software services
• c. Communication services      
• d. Courier services      
• e. Housekeeping services 

1. 8. ISD cannot be a supplier of goods/ services, it can only be a recipient of services for sole purpose of distribution of their ITC among distinct persons (under same PAN).

1. 9. There is no threshold limit for registration of ISD. It has to obtain a separate registration which is different from normal GST registration. The procedures are similar to that of normal registration.

1. 10. It may be noted that ISD provisions are not applicable between holding, subsidiary or group companies. 

1. 11. ISD registration can be taken by a distinct person having the same PAN, even if such distinct person does not have a separate regular GST registration number and maybe located in same or different state.

1. 12. ISD can avail ITC based on invoices or debit notes issued by supplier and reflecting in Form GSTR 6A. 

1. 13. For distributing credit through ISD , the entity distributing ISD shall have to issue ISD invoice (as per section 54(1) of CGST Rules). The rules also prescribe the provisions for issuing ISD Debit notes / credit notes and amendments thereto. 

1. 14. ISD return to be filed in Form GSTR 6 on or before 13th of the following month. ITC to be distributed in the same month when it is availed. ITC distributed shall not be exceeding the amount of ITC available for distribution. 

1. 15. ISD to identify the blocked credits and ineligible credit and separately distribute eligible ITC and ineligible ITC.

1. 16. ISD can also distribute ITC on RCM payments. In such case the Self generated invoices for RCM in case of inward supplies from unregistered persons as well as ISD invoices, both will have to be distributed by the entity distributing ITC through ISD. It may kindly be noted that intra-state RCM is notified as effective from 01-04-2025 but inter-state RCM effective date is not yet notified.

1. 17. Distribution of ITC shall be as under: 

Ca = (T / To) x C

Where,

Ca - Credit attributable to each recipient 

T - Turnover of the concerned recipient of service

To - Total turnover of all the recipients to whom the input service is attributable

C - Amount of credit to be distributed

1. 18. Manner of distribution of ITC is as follows:

                                              Cross Charge

1. 1. Cross-charge is a concept where the GST registration of Corporate Office/HO/ any other office raises invoices on the other offices, being distinct persons (having same PAN with separate GST registration numbers), towards the services provided to such offices (referred to as Branch Offices(BO).

1. 2. Cross charge is a charge of tax on deemed supply made by HO/centralized office to its distinct entities. Deemed supply under Schedule 1 provides that supply of goods/ services among distinct person is liable to GST even if made without consideration.

1. 3. It means charge levied on distinct person by a distinct person. Thus, based on the provisions as stated above, any supplies between different GST registrations of the same entity, even without consideration shall be termed as a supply and shall attract GST.

1. 4. It is for internally generated services and essentially for charging cost of services which are used by all the branches, divisions, outlets, etc having different GST numbers. 

1. 5. Some examples of services which can be cross charged are;

• a. IT, HR & admin support
• b. Payroll processing
• c. Branding services
• d. Employee cost (Optional)

1. 6. The value of services for cross charge, at first instance, shall be the invoice value or if the invoice value is not available, then open market value.   In cases where full input tax credit is available to the recipient of the cross charge services, the value as charged in the cross charge invoice shall be deemed to be the open market value.

1. 7. If the HO has not issued a tax invoice to the BO in respect of any particular services being rendered by HO to the said BO, the value of such services may be deemed to be declared as Nil by HO to BO, and may be deemed as open market value.

1. 8. In respect of internally generated services provided by the HO to BOs, the cost of salary of employees of the HO, involved in providing the said services to the BOs, is not mandatorily required to be included while computing the taxable value of the supply of such services, even in cases where full input tax credit is not available to the concerned BO.

1. 9. There is no separate return to be filed. The centralised location can issue tax invoice and the recipients can avail ITC basis reflection in GSTR 2B. 

                                 Distinction between ISD and cross charge

1. 1. ITC pertaining to the common input services received by the branches but invoices issued in the name of HO: In such cases the invoices in name of HO are required to be routed through ISD mechanism.

1. 2. Internally generated services are covered under cross charge. 

1. 3. ISD mechanism is also required for distribution of credit pertaining to services received by HO, but the invoices are raised on other distinct entities. 

1. 4. On the other hand, the cross charge is to be used for the charging for the cost of support services provided by HO to other locations while consuming various goods & services for providing such support services.

                                            Action forward

1. 1. It is pertinent to identify the transactions under cross charge and ISD.  

1. 2. Both cross charges and ISD can be simultaneously applicable to an entity on different type of transactions/activities. This needs to be meticulously identified by the taxpayer entity.

1. 3. Obtain ISD registration at the earliest. Once ISD number is received, the vendors need to be intimated that invoice be raised on ISD number and not the normal GST number. 

1. 4. RCM paid on Input services also needs to distributed through ISD as may be applicable.

1. 5. Accounting and GST software need to be aligned for the change. 

1. 6. Monthly GST return compliance and accounting of ISD entries. 

You can feel free to contact us for detailed analysis for any case specific query or any assistance related to ISD registration and filing of ISD returns at pranav@apdoshi.com