Mandatory ISD Registration Under GST Begins April 1, 2025: What Businesses Need to Know

Posted by Written by Archana Rao Reading Time: 4 minutes

India is set to enforce a major revision in its GST regulations, making the Input Service Distributor (ISD) mechanism compulsory from April 1, 2025. This system is designed to ensure proper tax distribution on shared services availed at a single location, enabling state governments to collect the correct tax amounts.

India’s Goods and Services Tax (GST) framework is undergoing a crucial change with the introduction of mandatory ISD registration, effective from April 1, 2025. This new requirement applies to all businesses operating under multiple GST Identification Number (GSTINs) within the same Permanent Account Number (PAN), making ISD registration compulsory rather than optional. 

Objective 

The primary objective of this regulation is to improve the allocation of Input Tax Credit (ITC) across various branches or locations of a business in the country. By centralizing ITC distribution, the rule ensures enhanced transparency, uniform compliance, and efficient credit management within the country. This change is expected to prevent discrepancies in tax allocation and enhance accountability in the GST system. 

The mandatory ISD registration under GST applies to the following: 

  1. Businesses with multiple GSTINs under the same PAN 
  2. Entities receiving common input service invoices 
  3. Corporations with centralized service costs 
  4. Service-based organizations 

Implications for businesses under mandatory ISD compliance 

Organizations must adapt their tax management systems to align with the new requirements to ensure seamless ITC distribution and compliance. 

One of the key adjustments’ businesses need to make is obtaining ISD registration for any entity receiving common input service invoices. This will ensure that ITC is properly allocated and utilized without discrepancies. Additionally, companies must establish a systematic approach to distributing ITC proportionally among their branches based on their respective turnover. This will help maintain compliance while optimizing tax benefits. 

Another critical requirement under the new rule is the timely filing of ISD returns (form GSTR-6). Businesses must ensure that returns are submitted within the prescribed deadlines to avoid penalties and interest liabilities. Any delay or failure in filing could lead to restrictions on claiming ITC, increasing operational costs and financial burdens. 

Consequences of non-registration as an ISD 

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From April 1, eligible businesses failing to register as an ISD may face serious financial and operational challenges. Non-compliance with the mandatory ISD registration can result in penalties, interest liabilities, and disruptions in ITC distribution. Under Section 21 of the GST Act, any incorrect ITC claims may be subject to recovery along with interest charges. 

Additionally, businesses that do not comply with the ISD requirement are at high risk of GST audits and scrutiny by Indian tax authorities. Any inconsistencies in ITC distribution may trigger investigations, potentially leading to legal complications. Businesses may face a penalty of INR 10,000 (US$116.67) or the ITC amount (whichever is higher) for non-compliance. 

Unregistered ISD operations may cause the reversal of ITC claims, forcing businesses to pay taxes instead of utilizing available credits, which could negatively impact cash flow and working capital. 

Companies may also receive tax notices for wrongful ITC claims made at the head office, increasing financial liabilities and operational burdens. Without proper ISD registration, businesses may struggle with tax credit allocation across multiple locations, leading to inefficiencies, disputes among branches, and overall disruption in tax compliance. 

ISD registration process 

An ISD is a GST-registered entity responsible for collecting invoices for input services utilized across multiple branches and distributing the ITC accordingly. With the mandatory ISD registration coming, businesses must follow a structured process to comply with India’s GST framework. 

Steps to register as an ISD in India

  1. Access the GST portal: Businesses seeking ISD registration must visit the official GST registration portal: https://reg.gst.gov.in/registration/ 
  2. Filing GST REG-01: During registration, businesses must fill out the GST REG-01 form. In Serial No. 14, the applicant must select the ISD status, a crucial step to obtain ISD registration. 
  3. Verification and Temporary Reference Number (TRN): Enter the legal name of the business, PAN, state, and district as per official records. Then, provide a valid email address and mobile number for verification via OTP. Upon successful verification, a TRN is issued for further processing. 
  4. Completion of GST REG-01 application: Log in using the TRN and complete the registration by providing detailed business information, including the principal place of business, nature of premises, and details of promoters/partners. Upload necessary documents, such as business proof, bank details, and identity/address proofs of key personnel. 
  5. Approval by tax authorities: Once the application is submitted, the tax department reviews it for accuracy. If all details are correct, the GSTIN with ISD status is issued. 
  6. Obtaining ISD GSTIN: Businesses will receive a separate GSTIN for ISD purposes, distinct from regular GST registrations. 
  7. Commencement of ITC distribution: After obtaining ISD registration, businesses can start distributing ITC to their branches in compliance with GST regulations. 

Compliance requirements for ISD entities 

Under the ISD system, tax credit distribution must follow strict compliance guidelines. ISD entities are not permitted to distribute more ITC than the available credit for the relevant month. To ensure compliance, ISDs must file form GSTR-6 by the 13th of the following month, detailing ITC distribution. The recipient branches can then view the allocated credit in their auto-populated GSTR-6A forms, which they must subsequently claim in their monthly GSTR-3B returns. 

A key advantage of ISD registration is the exemption from filing the annual GSTR-9 return, simplifying the compliance burden for businesses. However, adherence to timely filing and accurate reporting remains crucial to avoid penalties and maintain smooth operations. 

Role of ISD in GST compliance 

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The ISD mechanism plays a crucial role in tax credit distribution, particularly for businesses with multiple branches. An ISD is responsible for distributing the ITC of Central GST (CGST), State GST (SGST), Integrated GST (IGST), or Union Territory GST (UTGST) among its branches based on their taxable turnover. This prevents the accumulation of unused tax credits and ensures efficient utilization. 

Best practices for ensuring ISD compliance 

To align with the mandatory ISD framework, businesses should implement effective compliance strategies. Conducting a comprehensive review of input service transactions ensures that only eligible services are included under ISD provisions. Upgrading Enterprise Resource Planning (ERP) and accounting systems to automate ITC tracking and distribution can minimize errors and improve efficiency. 

Training employees responsible for GST compliance is also essential to ensure they understand ISD-related rules and can implement them correctly. Timely filing of tax form GSTR-6 returns with accurate ITC distribution details is crucial to maintaining compliance. Additionally, conducting periodic internal audits helps identify discrepancies and address them before they attract regulatory scrutiny. 

(US$1 = INR 85.71) 

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