Input Tax Credits may only be claimed via ISD
From 1 April 2025, the Indian government has made it mandatory for businesses to use the Input Service Distributor (ISD) mechanism to claim Input Tax Credit (ITC) under the Goods and Services Tax (GST) system. This replaces the previous flexibility where businesses could choose between the ISD mechanism and cross-charge method for distributing common ITC.
Key Changes:
- ISD Mandatory for ITC Distribution: Businesses with multiple GST registrations under the same PAN must allocate ITC exclusively via the ISD mechanism.
- Affected Services: Includes audit, software licensing, manpower supply, security, banking, consultancy, and litigation services consumed across multiple locations.
Reason for the New Rule:
- Ensures correct ITC allocation to the locations where services are consumed.
- Prevents ITC accumulation at a single location, which could lead to tax inefficiencies.
Challenges for GST Taxpayers:
- Separate ISD Registration: Businesses must obtain a distinct ISD registration despite having regular GST registration.
- Proper Bifurcation of Expenses: Taxpayers must distinguish between services that should be allocated via ISD and those subject to cross-charge.
- Invoice Restructuring: Businesses need to review and modify invoice receipt practices to ensure proper ITC distribution.
- Vendor Communication: Companies must update vendors with ISD GSTIN details to receive invoices at the correct registration.
- IT System Updates: Organizations must adjust their IT systems to incorporate ISD-specific ITC ledgers, invoice processing, and reporting capabilities.
- Team Training: Procurement, accounts, and tax teams must be trained to understand the new ITC distribution rules.
- Additional Compliance Burden: Businesses need to file separate monthly GSTR-6 returns, reconcile transactions, and ensure accurate ITC reporting in GSTR-3B.
Consequences of Non-Compliance:
- Denial of ITC: If businesses distribute ITC via cross-charge instead of ISD, the tax authorities may reject the ITC claim.
- Recovery & Interest: Excess or incorrect ITC allocation by ISD will be recovered along with interest.
- Penalties: A minimum penalty of Rs. 10,000 or the amount of irregular ITC distributed will be imposed.
This rule significantly impacts businesses by mandating strict compliance with ISD registration, ITC allocation, and reporting, requiring process overhauls in taxation, procurement, and IT systems.
