GST Input Service Distributor Registration Now Mandatory for Multi-State Businesses

From April 1, 2026, obtaining Input Service Distributor (ISD) registration under the GST framework has become mandatory for businesses that receive common input services at a centralised location and distribute the related input tax credit (ITC) to their branches or units registered in different states. The change, introduced through the Finance Act 2024 amendments to Section 20 of the CGST Act and notified for effect from April 2026, replaces the earlier optional ISD mechanism with a compulsory requirement. Businesses that have been distributing ITC through cross-charge invoices instead of the ISD mechanism will need to transition to the prescribed ISD route.

What Is an Input Service Distributor

An Input Service Distributor is an office of a supplier of goods or services that receives tax invoices for input services and distributes the credit of CGST, SGST, IGST, or UTGST paid on those services to the supplier's other registrations in different states or union territories. The ISD mechanism is relevant where a company has a head office or corporate office that centrally procures services (such as audit, legal, IT, marketing, or consulting services) and the benefit of those services extends to multiple branches or units. Under GST, each state registration is treated as a distinct person for tax purposes. The ISD mechanism provides the prescribed method for allocating input tax credit from centrally procured services to the individual state registrations in proportion to the turnover of each.

From Optional to Mandatory: What Changed

Prior to this change, businesses had two options for distributing credit on common input services: the ISD mechanism or cross-charge invoices. Many businesses, particularly those with simpler multi-state structures, preferred cross-charge invoices because they did not require a separate ISD registration and could be raised as standard taxable supplies between distinct persons. The amendment makes the ISD route compulsory for distribution of credit on common input services. This means businesses must obtain a separate ISD registration under GST for the office that receives the common invoices, file ISD returns (GSTR-6) monthly, and distribute credit using the prescribed ISD invoice format. The cross-charge method will no longer be a valid alternative for distributing credit attributable to common input services received at a centralised location.

Distribution Formula and Compliance

The ISD must distribute credit in accordance with the formula prescribed under Rule 39 of the CGST Rules. Credit attributable to a specific recipient must be distributed only to that recipient. Credit not attributable to a specific recipient must be distributed in proportion to the turnover of each recipient in the preceding financial year relative to the aggregate turnover of all recipients. The ISD must issue ISD invoices (or ISD credit notes, where credit needs to be reduced) for each distribution. These invoices must contain prescribed particulars including the ISD registration number, the recipient's GSTIN, and the amount of credit distributed. The recipient claims the distributed credit in their GSTR-2B based on the ISD's GSTR-6 filing.

Practical Takeaways

Businesses with multi-state GST registrations that receive common input services at a centralised location must obtain ISD registration immediately if they have not already done so. Finance and tax teams should identify all common input services currently being distributed through cross-charge invoices and transition them to the ISD mechanism. The head office or corporate office receiving the common invoices should be registered as the ISD. Vendor management should ensure that invoices for common services are addressed to the ISD registration. Tax technology systems and ERP configurations should be updated to generate ISD invoices and file GSTR-6. Companies that have been using cross-charge invoices should consult with tax advisors on the transition methodology, particularly for any credit that was distributed through cross-charges in the period before the mandatory ISD requirement took effect.