Key takeaways
- ISD distributes third-party input-service credit; cross charge taxes an actual inter-registration supply.
- From 1 April 2025, specified common-service credit received by a head office for distinct persons follows the mandatory ISD framework.
- Employee location alone does not answer whether one registration supplied another.
- Cross-charge valuation must follow Rule 28 and current related guidance.
- One invoice population should not be both distributed and cross-charged without a distinct legal basis.
What legal event does ISD address?
An ISD receives invoices for input services for or on behalf of distinct persons and distributes the credit through prescribed documents and GSTR-6. It does not supply the underlying service again. The mechanism preserves the character and tax head under section 20 and Rule 39.
From 1 April 2025, the amended framework requires the covered head-office input-service population, including specified RCM services, to move through ISD. Maintain a vendor-invoice rule that identifies the benefiting registrations before credit is distributed.
What legal event does cross charge address?
Registrations of the same legal entity in different States or business verticals are distinct persons. A supply between them can be taxable even without conventional consideration under Schedule I. Cross charge documents that supply with a tax invoice and value under section 15/Rule 28.
Examples can include a central technology team providing a service to branches or a registration transferring goods to another registration. The existence and scope of the supply must be evidenced; merely incurring a common vendor cost is not by itself a cross-charge service.
What does the decision table look like?
| Fact pattern | Primary route |
|---|---|
| External audit invoice benefits three GSTINs | ISD distribution |
| HO team provides a documented management service to branches | Cross charge, subject to valuation guidance |
| External software invoice only benefits one branch | ISD credit directly to that recipient |
| Stock transferred between State GSTINs | Taxable distinct-person supply, not ISD |
| Capital-goods invoice at HO for another unit | Not an ISD input-service distribution; analyse procurement/invoicing |
How does Circular 199 affect valuation?
Circular 199 clarifies Rule 28 treatment for services between distinct persons, particularly where the recipient is eligible for full ITC. It also addresses whether employee cost must be included when the head office has not issued an invoice. Read the exact paragraph and full-ITC facts; do not reduce the circular to “cross charge optional” for every case.
How is ISD credit distributed?
Credit attributable to one recipient is distributed only to it. Credit attributable to more than one recipient is allocated among those recipients using the prescribed turnover ratio. Apply CGST/SGST/IGST distribution rules, exclude ineligible recipients correctly and ensure the total distributed does not exceed available credit.
What documentation should be retained?
For ISD: vendor invoice, beneficiary mapping, turnover source, distribution workbook, ISD invoice/credit note, GSTR-6 and recipient reconciliation. For cross charge: inter-unit agreement/service description, cost/value support, Rule 28 note, tax invoice, recipient ITC position and return reconciliation.
What mistakes create double or stranded tax?
Avoid cross-charging the same third-party cost and also distributing its credit, distributing goods credit via ISD, using the recipient’s turnover without source control, assuming every central employee creates a service, ignoring RCM invoice population, and treating full ITC as a substitute for issuing an invoice where a supply is established.
What should a multi-GSTIN group do?
Create one master catalogue of central costs and internal activities. Assign each line to ISD, cross charge, local credit, blocked credit or further analysis. Review new vendors and organisational changes monthly, then reconcile GSTR-6, GSTR-1, GSTR-3B and recipients’ statements.
Primary sources
Frequently asked questions
What is the simplest ISD versus cross-charge test?
Ask whether the item is third-party input-service credit to be allocated, or consideration/value for an actual supply by one GST registration to another. The first points to ISD; the second to cross charge.
Can goods credit be distributed through ISD?
ISD is designed for input services. Goods or capital-goods credit does not become distributable merely because it is centrally purchased.
Is ISD mandatory from 1 April 2025?
The amended section 20 framework and related commencement make ISD mandatory for the specified common input-service invoice population received for or on behalf of distinct persons.
Must employee cost always be included in cross charge?
Circular 199 gives important clarifications, including full-ITC situations and valuation. Apply the circular and Rule 28 to the actual service and recipient eligibility rather than using a universal payroll allocation.
Can one GSTIN distribute credit directly without ISD registration?
For the population covered by mandatory ISD, use the registered ISD mechanism and prescribed returns/documents. Direct ordinary invoicing is appropriate only where there is an actual taxable supply.
How is ISD credit allocated?
Credit attributable to one recipient goes to that recipient; common credit is distributed among eligible recipient registrations using the prescribed turnover ratio and tax-head rules.
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