Indirect Tax Laws · Input Tax Credit

Input Service Distributor Mechanism under GST (Section 20 and Rule 39)

Updated 5 October 2026 · Fact-checked

An **Input Service Distributor (ISD)** is an office that receives tax invoices for input services and passes the credit to units with the same PAN. To solve a question, separate eligible credit, find the units the service relates to, share it by their turnover, convert tax heads by State, and issue an ISD invoice.

Understand Input Service Distributor Mechanism

A company often has one office that buys services for many units. Examples are an audit fee, an advertising campaign or a software licence. The invoice is in the name of that office, but the benefit goes to branches in different States. Each branch has its own GSTIN. Without a mechanism, the credit would sit with the office that cannot use it.

The ISD mechanism solves this. The office registers as an Input Service Distributor, collects the credit on input services and distributes it to the recipient units. Recipients must have the same PAN as the ISD. The ISD does not make a supply. It only moves credit, using a document called an ISD invoice. The recipient takes credit on that document.

Three points define the scope. First, only credit on input services can be distributed, not on goods or capital goods. Second, the recipients must be registered persons with the same PAN. Third, the credit distributed cannot exceed the credit available with the ISD. From 1 April 2025, the ISD route is compulsory for distributing ITC on input services received from outside suppliers that are common to units with the same PAN. It does not apply to a unit's own supplies to other units, which go through cross charge.

The distribution is done by a set formula. Credit relating to one unit goes only to that unit. Credit relating to several units is shared in proportion to their turnover in the relevant period. The tax head then changes by location. A recipient in the ISD's own State gets CGST and SGST credit as CGST and SGST. A recipient in another State gets it as IGST. IGST credit goes as IGST to every recipient, whether in the ISD's State or in another State.

Do not confuse this with cross charge. Cross charge is an actual supply of services between distinct persons, with GST on a value, a tax invoice and ITC for the recipient. ISD is only a credit transfer with no tax payable on the distribution. Use ISD for common input services received from outside suppliers. Use cross charge for supplies made by one unit to another, such as the cost of the unit's own staff or resources.

Key rules to remember

Share of credit for a recipient: Credit to recipient = Credit to be distributed × (Recipient's turnover in the relevant period ÷ Aggregate turnover of all recipients to whom the service is attributable); Use this when the service relates to more than one unit. Turnover means the recipient's turnover in the relevant period.
Credit attributable to one recipient: Credit relating to a single recipient is distributed only to that recipient; No pro rata sharing. Units that do not benefit get nothing.
Relevant period: Preceding financial year if all recipients had turnover in it; otherwise the last quarter for which turnover details of all recipients are available before the month of distribution; This is separate from the credit-attribution rule, which decides which units the service relates to. Use the last quarter only where some recipients had no turnover in the preceding financial year.
Ceiling on distribution: Credit distributed ≤ Credit available for distribution; Credit is distributed in the same month in which it is available for distribution, and it is reported in GSTR-6.
Conversion of tax heads: Recipient in the same State as the ISD: CGST → CGST, SGST → SGST. Recipient in another State: CGST and SGST → IGST. IGST → IGST for every recipient; The State is compared with that of the ISD, not with that of the supplier. IGST credit is distributed as IGST to every recipient, whether in the ISD's State or in another State.
ISD invoice contents: ISD name, address, GSTIN; serial number (consecutive and unique for a financial year, up to 16 characters) and date; recipient name, address, GSTIN; amount of credit distributed; signature; For reduction of credit, the ISD issues an ISD credit note with the same details.
Credit notes and debit notes: Any change in credit after distribution is shared in the same ratio as the original distribution; For a credit note, the ISD issues an ISD credit note. For a debit note, additional credit is distributed in the month it is reported.
Return: GSTR-6 by the 13th of the following month; The ISD files one return for each month.

How to solve Input Service Distributor Mechanism questions

Use this order for any ISD question. It also gives you the structure of the written answer.

1Check that the entity is an ISD. It should be an office receiving invoices for input services, registered as an ISD, and distributing to units with the same PAN.
2Take only eligible credit on input services. Leave out goods and capital goods. Credit that is blocked or ineligible cannot be passed on as eligible credit.
3Find the attribution. If the service relates to one unit, give the whole credit to it. If it relates to some units, use only those units. If it relates to all, use all.
4Fix the relevant period and the turnover of each recipient. Use the preceding financial year when all recipients had turnover in it. Otherwise use the last quarter for which turnover details of all recipients are available before the month of distribution. Keep this separate from attribution, which decides which units the service relates to.
5Apply the formula for each tax head separately: credit × recipient turnover ÷ total turnover of the units in the base.
6Convert the tax heads by State. CGST and SGST go as CGST and SGST to a recipient in the ISD's State and as IGST to other States. IGST goes as IGST to every recipient, in the ISD's State or elsewhere.
7Issue an ISD invoice for each recipient. Distribute the credit in the same month in which it is available for distribution. Report it in GSTR-6 by the 13th of the next month.
8For later changes, such as credit notes, adjust in the same ratio with ISD credit notes. Section 21 provides that credit distributed in excess or to the wrong recipient is recovered from the recipient, with interest, under Section 73 or 74 (Section 74A for FY 2024-25 onwards).

Quickest way: Turnover share table

When to use it: Use it for any numerical question with several units and one or more invoices.

Write one row for each unit that benefits. Skip the others.
Add the turnover of those units to get the denominator.
Work out each unit's percentage once, for example 30%, 40%, 30%.
Multiply each percentage by CGST, SGST and IGST separately.
Check the State. Same State as ISD keeps CGST and SGST; other States get all as IGST.
Add the distributed amounts and check that the total equals the credit available.

Common mistakes in Input Service Distributor Mechanism

Distributing credit on goods or capital goods through the ISD.
Students think any common purchase can be spread to units.
Fix: ISD handles only credit on input services. Credit on goods stays with the registered person who receives the goods.
Sharing credit across all units when the service relates to only some of them.
Students use total company turnover without reading the attribution.
Fix: Underline which units the service relates to. Include only those units in the turnover base.
Passing CGST and SGST as the same heads to a unit in another State.
Students forget that CGST and SGST cannot be used in other States.
Fix: Compare each recipient's State with the ISD's State. Other States receive IGST.
Treating ISD and cross charge as the same.
Both move cost from head office to branches.
Fix: ISD distributes credit and no tax is paid. Cross charge is a taxable supply between distinct persons with a tax invoice.
Applying a credit note to the turnover of the current period.
Students recalculate the shares from scratch.
Fix: Apportion the credit note in the same ratio as the original distribution.
Ignoring the time and return requirements.
Students focus on the arithmetic and forget the compliance steps.
Fix: State that distribution is in the same month, supported by an ISD invoice, reported in GSTR-6 by the 13th of the next month.

Worked examples

Example 1

Gamma Ltd has its head office in Maharashtra, registered as an ISD. It receives an invoice for common advertising services for all units: value ₹10,00,000, CGST ₹90,000 and SGST ₹90,000. Recipient units, all with the same PAN: Unit A (Maharashtra), turnover in the relevant period ₹3 crore; Unit B (Gujarat), ₹4 crore; Unit C (Karnataka), ₹3 crore. The credit is eligible. Compute the credit distributed to each unit.

Show the solution

The service is an input service used by all three units, so all three are in the base. Total turnover = ₹3 crore + ₹4 crore + ₹3 crore = ₹10 crore.
The shares are A 30%, B 40%, C 30%.
Unit A is in Maharashtra, the ISD's State. CGST = 90,000 × 30% = ₹27,000 and SGST = 90,000 × 30% = ₹27,000.
Unit B is in another State. Its share of CGST is 90,000 × 40% = ₹36,000 and of SGST is ₹36,000. Both go as IGST: ₹72,000.
Unit C is in another State. Its share of CGST is 90,000 × 30% = ₹27,000 and of SGST is ₹27,000. Both go as IGST: ₹54,000.
Check: 27,000 + 27,000 + 72,000 + 54,000 = ₹1,80,000, which equals CGST ₹90,000 + SGST ₹90,000.
The ISD issues an ISD invoice to each unit in the same month and reports it in GSTR-6.

Answer: Unit A: CGST ₹27,000 and SGST ₹27,000. Unit B: IGST ₹72,000. Unit C: IGST ₹54,000. Total ₹1,80,000.

Example 2

Using the same group, the ISD (Maharashtra) receives a service invoice from a Delhi supplier with IGST of ₹1,80,000. The service relates only to Unit B (Gujarat, turnover ₹6 crore) and Unit C (Karnataka, turnover ₹3 crore). Unit A (Maharashtra, turnover ₹3 crore) does not use it. Later the supplier issues a credit note carrying IGST of ₹18,000. Find the distribution and the effect of the credit note.

Show the solution

The service relates to B and C only. A is excluded from the base even though it has turnover. A gets nothing because the service does not relate to it, not because of its State.
Base turnover = ₹6 crore + ₹3 crore = ₹9 crore. B's share = 6/9 = two-thirds. C's share = 3/9 = one-third.
IGST credit is distributed as IGST to every recipient, whether in the ISD's State or in another State. B = 1,80,000 × 2/3 = ₹1,20,000. C = 1,80,000 × 1/3 = ₹60,000. Total ₹1,80,000.
The credit note of ₹18,000 reduces the credit. It is shared in the same ratio as the original distribution, not recalculated on fresh turnover.
B's reduction = 18,000 × 2/3 = ₹12,000. C's reduction = 18,000 × 1/3 = ₹6,000.
The ISD issues ISD credit notes of ₹12,000 to B and ₹6,000 to C, in the month the credit note is reported. The units reduce their credit accordingly.
Net credit after the credit note: B ₹1,08,000 and C ₹54,000. Total ₹1,62,000, which equals ₹1,80,000 less ₹18,000.

Answer: B receives IGST ₹1,20,000 and C ₹60,000. After the credit note, B's credit falls by ₹12,000 to ₹1,08,000 and C's by ₹6,000 to ₹54,000. Unit A gets nothing because the service does not relate to it.

Exam tips

For numerical questions, read the attribution first. The test is usually whether you include only the right units.
Always show the tax head conversion by State. Marks are given for CGST/SGST becoming IGST for other States.
In theory answers on ISD vs cross charge, use a short contrast: credit transfer versus taxable supply, no tax payable versus GST on value, and credit-only versus a full tax invoice.
Write the compliance items in one line: ISD registration, ISD invoice, distribution in the same month, GSTR-6 by the 13th.
In case-scenario MCQs, check for traps such as credit on goods, units with a different PAN, or the credit exceeding the amount available.

Practice questions from Input Tax Credit

Input Service Distributor Mechanism in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Input Service Distributor Mechanism: frequently asked questions

What is an Input Service Distributor in GST?

It is an office of a supplier that receives tax invoices for input services and distributes the credit to its units with the same PAN. It does this by issuing an ISD invoice, not by making a supply. It needs a separate ISD registration and files GSTR-6.

How does an ISD distribute credit under Rule 39?

It takes the eligible credit on input services and gives credit attributable to one unit only to that unit. Credit for several units is shared in proportion to their turnover in the relevant period. CGST and SGST go as the same heads to units in the ISD's State and as IGST to other States.

What is the difference between ISD and cross charge?

ISD only passes on credit of input services bought from outside suppliers, and no tax is charged on the distribution. Cross charge is a supply between distinct persons, taxed on value with a tax invoice, and the recipient takes ITC. Choose cross charge when one unit provides its own services to another.

What happens if the ISD distributes credit wrongly?

Credit distributed in excess or to the wrong recipient is wrongly distributed credit. Section 21 provides that the excess or wrongly distributed credit is recovered from the recipient, with interest, under Section 73 or 74 (Section 74A for FY 2024-25 onwards). Later changes in genuine credit, such as supplier credit notes, are handled by ISD credit notes in the original ratio.