Tax Laws and Practice · Input Tax Credit and Computation of GST Liability

Input Service Distributor, Credit Transfers and Reversals under GST

Updated 11 October 2026 · Fact-checked

An Input Service Distributor (ISD) is an office that receives invoices for input services on behalf of distinct persons and passes the credit to them by a prescribed document. Other special cases are stock credit on registration or on leaving composition, transfer on change in constitution, and reversal when suppliers are not paid within 180 days. Identify the case, apply the section, then compute.

Understand Special Cases: Input Service Distributor, Transfers and Reversals

Normal input tax credit (ITC) is simple: you buy, you take credit, you use it against output tax. Special cases arise when the person who gets the invoice is not the person who uses the service, or when the taxpayer's status changes.

Input Service Distributor (section 20). A head office often receives invoices for services such as audit, advertising or software that benefit its branches in many States. Branches with the same PAN are distinct persons (section 25). The office that receives these invoices for or on behalf of distinct persons must register as an ISD (clause (viii) of section 24) and distribute the credit. This covers invoices for input services, including services on which tax is paid under reverse charge. The ISD distributes the central tax or integrated tax charged on those invoices. It does this by issuing a document showing the credit amount, in the manner, time and subject to the conditions prescribed. Central tax credit can go out as central tax or integrated tax, and integrated tax credit as integrated tax or central tax.

Excess distribution (section 21). If the ISD distributes credit in breach of section 20, the excess is recovered from the recipients with interest. Section 73, 74 or 74A applies as the case may be.

Credit in special circumstances (section 18). You can take credit on stock held on the day before you become liable to tax. This applies if you register within thirty days of becoming liable, or register voluntarily under section 25(3). In that case the day before the grant of registration counts. The same applies when you leave composition (section 10) or when an exempt supply becomes taxable. Capital goods are also included in the last two cases, with credit reduced by prescribed percentage points. You lose the right to take credit if the supply invoice is more than one year old. On a sale, merger, demerger, amalgamation, lease or transfer of business with provision for transfer of liabilities, unutilised credit in the electronic credit ledger can move to the new business.

Reversals. If you opt for composition or your supplies become wholly exempt, you pay back the credit on stock and capital goods (reduced by prescribed percentage points). Any balance in the credit ledger lapses. If you sell capital goods on which you took credit, you pay the higher of two amounts. These are the credit taken (reduced by prescribed percentage points) and the tax on the transaction value. Separately, if you do not pay a supplier within 180 days of the invoice date, you must reverse the credit with interest. You can claim it again once you pay.

Key rules to remember

ISD registration: Office receiving input service invoices for distinct persons → must register as ISD (section 20(1), section 24(viii)); Applies to input services only, including reverse charge services. It does not apply to goods invoices.
Mode of distribution: Central tax → central tax or integrated tax; Integrated tax → integrated tax or central tax; by a document stating the credit amount; Time, manner and conditions are as prescribed (section 20(3)).
Share of a common credit (as prescribed in the rules): Recipient's share = Common credit × (Recipient's turnover ÷ Total turnover of all recipients); Credit attributable to one recipient goes only to that recipient. Use the turnover basis given in the question.
Excess distribution: Excess credit + interest recovered from recipients under section 73, 74 or 74A (section 21); Recovery is from the recipients, not the ISD.
Stock credit on registration or leaving composition: Credit on inputs + inputs in semi-finished and finished goods held on the day before the date liable to tax (plus capital goods for leaving composition); Section 18(1). Capital goods credit is reduced by prescribed percentage points. Reduction is 5 percentage points per quarter or part of a quarter from the invoice date.
Time limit: No credit under section 18(1) if more than one year has passed from the date of the tax invoice; Section 18(2).
Payment on opting for composition or exemption: Pay credit on stock and capital goods (reduced by prescribed percentage points); balance in ledger lapses; Section 18(4). Paid by debit to the credit or cash ledger.
Supply of capital goods on which credit was taken: Pay the higher of: (credit taken − prescribed percentage points) or (tax on transaction value under section 15); Section 18(6).
Non-payment to supplier: Not paid within 180 days from the invoice date → reverse the credit with interest; re-avail on payment; Does not apply where tax is paid under reverse charge.

How to solve Special Cases: Input Service Distributor, Transfers and Reversals questions

Work through the facts in a fixed order. This keeps the answer in ICSI style: provision, analysis, conclusion.

1Identify the case: ISD distribution, new registration, leaving composition, exempt becoming taxable, change in constitution, opting for composition, sale of capital goods, or non-payment to a supplier.
2Name the provision. Cite section 20 or 21 for ISD, and section 18 for the other cases. State the rule in your own words.
3Check the conditions: is it an input service, are the recipients distinct persons, was registration applied for within 30 days, is the invoice within one year, and is the stock held on the day before the relevant date?
4List the credit amounts separately: inputs, semi-finished and finished goods, and capital goods.
5Apply the prescribed reduction to capital goods (5 percentage points per quarter or part from the invoice date), or the turnover ratio for ISD shares.
6For reversals, add interest if the question asks for it and note when credit can be re-availed.
7Finish with a clear conclusion that states the amount and whether credit is allowed, reversed or lapses.

Quickest way: Four-question scan

When to use it: Use it when a short problem gives many facts and you must decide quickly what applies.

Who got the invoice and who benefits? If it is a different distinct person and the item is a service, think ISD.
Did the status change (registered, left composition, exempt became taxable, business transferred)? If so, think section 18.
Is it capital goods? If yes, write the quarter reduction at once: 5% × quarters or part of a quarter.
Is a supplier unpaid beyond 180 days? If so, reverse the credit with interest and note the right to re-avail on payment.

Common mistakes in Special Cases: Input Service Distributor, Transfers and Reversals

Saying an ISD can distribute credit on goods invoices.
Students remember 'credit distribution' but not the limit to input services.
Fix: Write that section 20 covers invoices for input services only, including reverse charge services.
Counting the date of registration, rather than the day before it, for stock credit.
Students read 'date' loosely.
Fix: Stock is taken on the day immediately preceding the date from which you become liable, or the day before the grant for voluntary registration under section 25(3).
Allowing full credit on capital goods when leaving composition.
Students forget the prescribed reduction.
Fix: Reduce capital goods credit by 5 percentage points for each quarter or part of a quarter from the invoice date.
Treating the 180-day reversal as permanent loss of credit.
Students stop at 'reverse the credit'.
Fix: State that the credit is reversed with interest and can be taken again once payment is made to the supplier.
Forgetting that credit on an invoice over one year old cannot be taken under section 18(1).
The time limit sits in sub-section (2), away from the main rule.
Fix: Check the invoice date for every item before computing.
Believing the ISD itself pays the excess credit it distributed wrongly.
Students link the error to the person who made it.
Fix: Under section 21 the excess is recovered from the recipients with interest, using section 73, 74 or 74A.

Worked examples

Example 1

Alpha Services Ltd has its head office in Delhi. It is registered as an ISD. It receives an invoice for common advertising services with integrated tax of ₹1,00,000 for the benefit of two branches: A in Maharashtra (turnover in the relevant period ₹4,00,00,000) and B in Karnataka (turnover ₹6,00,00,000). Using the turnover-ratio rule, find the credit distributed to each branch.

Show the solution

Provision: under section 20, an office receiving input service invoices for distinct persons must register as an ISD and distribute the credit by a document, in the prescribed manner.
Facts: the advertising is a common input service for both branches, so the credit is distributed in the ratio of turnover.
Total turnover = ₹4,00,00,000 + ₹6,00,00,000 = ₹10,00,00,000.
Branch A share = ₹1,00,000 × 4 ÷ 10 = ₹40,000.
Branch B share = ₹1,00,000 × 6 ÷ 10 = ₹60,000.
Check: ₹40,000 + ₹60,000 = ₹1,00,000, so no excess is distributed (section 21 is not triggered).

Answer: Branch A gets ₹40,000 and Branch B gets ₹60,000 of integrated tax credit, by an ISD document. The total equals the credit available, so there is no excess distribution.

Example 2

Ravi Traders, a composition dealer, ceases to pay tax under section 10 and becomes liable to pay tax under section 9 from 1 October. On 30 September it holds inputs with tax of ₹40,000 and semi-finished and finished goods with input tax of ₹10,000. It also holds machinery bought 7 months earlier, on which the tax charged was ₹90,000. All invoices are less than one year old. Compute the credit available, taking the prescribed reduction for capital goods as 5 percentage points per quarter or part of a quarter.

Show the solution

Provision: under section 18(1)(c), a person ceasing to pay tax under section 10 can take credit on inputs, semi-finished and finished goods, and capital goods held on the day immediately preceding the date of liability under section 9. This is subject to prescribed conditions.
Credit on inputs = ₹40,000.
Credit on semi-finished and finished goods = ₹10,000.
Capital goods: 7 months is two full quarters plus a part quarter, so 3 quarters. Reduction = 3 × 5 = 15 percentage points.
Credit on capital goods = ₹90,000 × (100 − 15)% = ₹90,000 × 85% = ₹76,500.
Total credit = ₹40,000 + ₹10,000 + ₹76,500 = ₹1,26,500.
Condition check: section 18(2) bars credit on invoices older than one year, and all invoices here are within the limit.

Answer: Ravi Traders can take credit of ₹1,26,500 on 1 October, subject to the prescribed conditions.

Exam tips

Write the section number with the rule. Section 20 is distribution, section 21 is recovery of excess, and section 18 is credit in special circumstances.
In numerical questions show each component separately: inputs, semi-finished and finished goods, and capital goods. This earns step marks even if one figure is wrong.
Check the date logic in every question: the day before liability, the 30-day registration window, the one-year invoice limit and the 180-day payment limit.
For a theory answer, use the three-part pattern: the provision, the facts or analysis, and a clear conclusion.
When a rate or percentage is prescribed in the rules and the question does not give it, say that it is as prescribed and state the figure you are using.

Practice questions from Input Tax Credit and Computation of GST Liability

Special Cases: Input Service Distributor, Transfers and Reversals in other exams

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

Special Cases: Input Service Distributor, Transfers and Reversals: frequently asked questions

What is an Input Service Distributor under GST?

It is an office of a supplier that receives tax invoices for input services on behalf of distinct persons, usually its branches. It must register as an ISD and distribute the credit to them by a prescribed document. This is covered in section 20 of the CGST Act, 2017.

How is credit distributed by an Input Service Distributor?

The ISD issues a document showing the amount of credit. Central tax can be distributed as central tax or integrated tax, and integrated tax as integrated tax or central tax. The time, manner and conditions are as prescribed, and a common credit is usually shared on the turnover ratio of the recipients.

Is ITC reversed if payment is not made within 180 days?

Yes. If you do not pay the supplier within 180 days from the invoice date, you must reverse the credit with interest. You can take the credit again once you pay. The rule does not apply where tax is paid under reverse charge.

Can I take ITC on stock when I switch from composition scheme?

Yes. Under section 18(1)(c) you can take credit on inputs, semi-finished and finished goods, and capital goods held on the day before you become liable under section 9. Capital goods credit is reduced by the prescribed percentage points, and the invoices must be within one year.

What happens to credit when a business is transferred?

Where the constitution changes through sale, merger, demerger, amalgamation, lease or transfer of business with provision for transfer of liabilities, the unutilised credit in the electronic credit ledger can be transferred to the new business. This is allowed under section 18(3), in the prescribed manner.