Input Service Distributor (ISD) in GST: Full Working Guide

When you work with companies that have multiple branches, offices, warehouses, or units in different states, the biggest headache is:

How do we distribute ITC for common services received centrally?

For example, imagine a company with:

• Head Office in Mumbai
• Branches in Delhi, Bangalore, Chennai, Kolkata

Now suppose the company gets:

• a single advertising invoice
• a single security service invoice
• a single audit invoice
• software subscription invoice

But the service benefits all units, not just Mumbai.

So who should take the ITC?

That’s exactly where ISD – Input Service Distributor comes in.

ISD solves the problem by letting one location collect ITC and then distribute the ITC fairly to all branches.

Let’s break it down in simple language.

1. What Is an Input Service Distributor (ISD)?

A lot of people complicate this, but here is the simplest definition:

It only distributes ITC of services, not goods.

So it’s like a “central ITC distribution office”.

You can think of ISD as a postman:

• Head Office receives service invoices
• ISD collects ITC
• ISD then distributes ITC to branches that actually use the service

2. Why ISD Exists in GST?

Earlier in service tax laws, companies had a concept of ISD because services were taxed centrally. GST continued the concept because it’s still needed.

Here’s the problem ISD solves:

Scenario

One invoice comes for all branches.

Example: Advertising campaign for all India – billed to Head Office.

Now the benefit goes to:

• Delhi branch
• Bangalore branch
• Chennai branch
• Mumbai branch

So ITC has to be distributed.

But GST normally doesn’t allow:

• same PAN transferring ITC freely across states
• because each state has a separate GST registration

So ISD is the legal way to distribute the credit properly.

3. ISD Can Distribute Only Input Services — Important Rule

Many people don’t know this.

• ISD cannot distribute ITC on goods.
• ISD cannot distribute ITC on capital goods.
• ISD only handles ITC on input services.

Goods and capital goods must follow normal ITC rules, not ISD.

This is very important.

4. Who Can Become an ISD?

Only a Head Office or main office of a company can register as ISD.

Some examples of typical ISD entities:

• Corporate head office
• Regional head office
• Main admin office
• Central procurement office

Branches or factories don’t need ISD unless they are distributing centrally received service ITC.

5. Conditions for ISD Under GST

ISD must:

• Have a separate GST registration
• Issue ISD invoices
• File ISD returns (GSTR-6)
• Distribute ITC only to units having the same PAN
• Distribute only eligible ITC (not blocked credits)
• Distribute in proportion to turnover if service used commonly
• Distribute separately for CGST, SGST, IGST

6. Which Services Are Distributed Through ISD?

Any service that is received centrally but used by multiple units, such as:

• audit fees
• advertising
• HR services
• software subscriptions
• cloud services
• cleaning & security services
• legal consultancy
• professional services
• annual maintenance services (AMC)
• admin services

These are typical invoices that go to ISD.

7. Examples of ISD Explained in Simple Language

Let’s say:

• Head Office in Mumbai receives a Google Ads invoice of ₹10,00,000 + GST
• The advertisement benefits all branches

So ITC of ₹1,80,000 comes to Head Office.

But Head Office cannot keep the full ITC because:

• The ads were for all branches
• Branches need to claim ITC too

So Head Office, acting as ISD, will distribute this:

• Delhi Branch → %
• Bangalore Branch → %
• Chennai Branch → %

Depending on their turnover proportion OR benefit received.

8. Turnover-Based Distribution Rule (Very Important)

When a service benefits multiple branches, ITC must be distributed based on turnover ratio of the branches during the relevant period.

For example:

So a common ITC of ₹1,80,000 will be distributed as:

• Mumbai → ₹72,000
• Delhi → ₹54,000
• Bangalore → ₹36,000
• Chennai → ₹18,000

This is the official formula used.

9. Separate Distribution for CGST, SGST, IGST

This part confuses many people, so let’s simplify.

If ISD and branch are in the same state

• CGST → CGST
• SGST → SGST
• IGST → IGST

If ISD and branch are in different states

• CGST → IGST
• SGST → IGST
• IGST → IGST

GST law ensures no wrong credit goes to wrong state.

10. Types of ISD Documents

ISD issues two special documents:

✔ ISD Invoice

Used for distributing ITC.

Must contain:

• ISD GSTN
• Branch GSTN
• ITC type (CGST, SGST, IGST)
• Amount
• Distribution formula

✔ ISD Credit Note

Used to reverse ITC already distributed wrongly.

11. ITC That ISD Cannot Distribute

ISD cannot distribute:

• Blocked ITC under Section 17(5) - (food, motor vehicles, personal consumption, construction, etc.)
• Ineligible ITC - (services used for exempt supplies, non-business use)
• ITC on goods or capital goods (strictly disallowed)

12. When ISD Must Reverse ITC

ISD must reverse ITC if:

• Supplier issues credit note
• Wrong ITC was distributed
• Service was not actually used by that branch
• Distribution was done twice
• Ineligible ITC was included by mistake

Reversal is done through ISD Credit Note.

13. What If ISD Doesn’t Distribute ITC?

Many companies forget to distribute ITC for years.

GST officers may then issue notices saying:

• ITC availed by ISD but not distributed
• ITC lying unutilized incorrectly
• Misuse of central ITC

ISD is not optional if company receives shared services centrally.

14. Filing Returns – GSTR-6 (Mandatory)

ISD must file GSTR-6 every month.

This return contains:

• ITC received
• ITC distributed
• ITC reversed
• ISD invoice details
• ISD credit notes

Branches receive ITC only after GSTR-6 is filed.

15. Example of Full ISD Flow (Very Practical Example)

Let’s create a simple flow.

Step 1

• Head Office receives service invoice:
• Audit fees = ₹5,00,000 + GST ₹90,000

Step 2

ISD records ITC of ₹90,000.

Step 3

Branches have this turnover:

Step 4

ISD distributes:

• Mumbai → ₹45,000
• Delhi → ₹27,000
• Bangalore → ₹18,000

Step 5

ISD issues ISD invoices.

Step 6

Branches claim ITC in GSTR-3B.

16. Example: ISD and Branch in Different States

• ISD: Maharashtra
• Branch: Karnataka
• CGST = ₹30,000
• SGST = ₹30,000

Distribution:

• CGST → IGST ₹30,000
• SGST → IGST ₹30,000

This is a very important rule.

17. Example: ITC Distributed Wrongly

• Suppose ISD distributed ₹50,000 to Delhi by mistake.
• Actual share should have been ₹40,000.

Then:

• ISD issues ISD credit note to Delhi for ₹10,000
• ISD re-distributes difference to correct branch

Branches then adjust ITC in their returns.

18. Pros & Cons of ISD System

✔ Pros

• Clear method for distributing ITC
• Prevents disputes between branches
• Helps centralize invoices
• Ensures correct state-wise ITC allocation

❌ Cons

• Requires separate registration
• Needs monthly return filing
• Errors can create notices
• Many companies still misunderstand ISD rules

19. Most Common Mistakes in ISD

• Distributing ITC on goods (not allowed)
• Not filing GSTR-6
• Distributing blocked ITC
• Forgetting turnover-based distribution rule
• Branches claiming ITC without ISD invoice
• Using normal tax invoice instead of ISD invoice

These issues often lead to department queries.

20. Final Summary

Here’s ISD in one line:

And:

• ISD only distributes service ITC
• Distribution is based on turnover
• ISD must file GSTR-6
• Separate registration required
• Wrong distribution requires ISD credit note
• Correct state-wise ITC mapping is compulsory

If you understand this much, ISD becomes super easy.

Also Read: ITC for Job Work – Rules, Conditions & Simple Examples