ISD Mechanism
Section 20 of the CGST Act deals with the distribution of Input Tax Credit (ITC) by an Input Service Distributor (ISD). This mechanism is crucial for companies with multiple GST registrations (distinct persons) under the same PAN, typically in different states or branches, enabling them to centrally receive and allocate ITC on input services.
Legal Provision Summarised
| Sub-Section | Key Provision |
| (1) | Offices receiving input service invoices (including RCM invoices) for or on behalf of distinct persons (Sec 25) must register as ISD (Sec 24(viii)) and distribute credit. |
| (2) | ISD shall distribute CGST/IGST ITC (including RCM) received or paid by distinct persons in the same State as the ISD. Distribution to be done as prescribed, within time limits, and subject to conditions/restrictions. |
| (3) | Credit of CGST to be distributed as CGST or IGST, and IGST to be distributed as IGST or CGST, depending on the location of the recipient. Distribution to be via prescribed document (ISD Invoice). |
Who is an Input Service Distributor (ISD)?
Defined under Section 2(61) of the CGST Act, 2017:
An ISD is an office of the supplier (e.g. Head Office) that:
- Receives tax invoices for input services only
- Issues documents for distributing ITC of CGST, IGST or UTGST/SGST to other units (distinct persons)
👉 ISD cannot distribute credit of goods or capital goods.
Distinct Persons – Section 25 Context
Under Section 25(4) & (5):
- Establishments of a person with different GST registrations in different states/UTs are treated as distinct persons.
- ISD mechanism enables fair and transparent credit allocation among these units.
Applicability of ISD – Mandatory or Optional?
| Scenario | ISD Registration |
| Head office receives input service invoice for all branches | Mandatory |
| Branches receive their own input services and take credit | ISD not required |
| Company wants centralized control over ITC | ISD beneficial |
| Invoice includes RCM services received on behalf of others | ISD registration required if credit is to be distributed |
Distribution Rules – Rule 39 of CGST Rules
Section 20 is operationalised through Rule 39, which prescribes the manner and mechanism of ITC distribution.
✅ Key Provisions of Rule 39:
| Aspect | Description |
| Credit Type | Only input services; no goods or capital goods |
| Distribution Ratio | Proportionate to the turnover of recipient units during the relevant period |
| Eligible Credit | CGST, IGST, UTGST (not SGST inter-state) |
| Document | ISD Invoice containing prescribed particulars |
| Returns | Monthly return in GSTR-6 |
| Time Limit | Distribute credit in the same tax period as received, or within a prescribed time |
| Restriction | No credit to units with nil turnover, unless service used exclusively by them |
Example to Understand ISD Distribution
🔹 Case Study: ABC Ltd.
- Head Office (ISD): Mumbai (Maharashtra)
- Branches: Delhi, Kolkata, Bengaluru
- Receives invoice for common HR consultancy services used by all 4 locations.
- Turnover:
- Mumbai: ₹50 lakhs
- Delhi: ₹30 lakhs
- Kolkata: ₹20 lakhs
- Bengaluru: ₹0 (new branch)
- ITC Received: ₹1,00,000 CGST
🧾 Distribution Calculation:
| Location | Turnover % | ITC Allocation |
| Mumbai | 50% | ₹50,000 |
| Delhi | 30% | ₹30,000 |
| Kolkata | 20% | ₹20,000 |
| Bengaluru | 0% | ₹0 (unless exclusively used by this branch) |
Technical Steps for ISD Credit Distribution
- Receive Invoice (input service)
- Match Vendor Invoice (ensure compliance with Rule 36)
- Book Credit in ISD Ledger
- Allocate Credit based on turnover ratio under Rule 39
- Issue ISD Invoice to respective branches (distinct GSTINs)
- Record entries in GSTR-6
- Maintain records for audit
Common Mistakes & Risks
| Mistake | Risk |
| Distributing SGST across states | Ineligible ITC – recovery with interest |
| Distributing ITC on goods/capital goods | Violation of Section 20 |
| Not issuing ISD invoice | Invalid distribution – can lead to disallowance |
| Not registering as ISD despite eligibility | Non-compliance under Section 24 |
| Late filing of GSTR-6 | Late fee and interest |
Special Situations
| Situation | Treatment |
| RCM services received by branch and credit to be used by other units | Must be routed through ISD if invoice is in ISD’s name |
| Branch pays for service but ITC to be used centrally | Either credit not allowed or routed via ISD |
| Head Office receiving invoices for export units | Credit can be distributed via ISD mechanism |
GSTR-6 – ISD Return
| Field | Details |
| Frequency | Monthly |
| Due Date | 13th of following month |
| Contents | ISD credit received, ISD invoices issued, debit/credit notes, recipient-wise distribution |
Conclusion
Section 20 ensures equitable, transparent, and legally compliant distribution of input tax credit for services received centrally but consumed across multiple GST registrations (distinct persons).
With the amendments of 2024 and 2025, the section is now more inclusive of RCM-related credits and credits paid by distinct persons in the same state, allowing more operational flexibility, while ensuring strict conditions and documentation compliance.