Mandatory ISD Registration for Common Input Services from April 1, 2025
Issue
Whether a taxpayer (Head Office) can continue to receive invoices for common input services under its regular GST registration and then transfer the credit to its Input Service Distributor (ISD) registration for distribution, or if mandatory ISD registration and direct routing of invoices is required under the amended GST law effective from April 1, 2025.
Facts
Applicant: MRF Ltd., a manufacturer with a Head Office (HO) in Tamil Nadu and units in multiple states.
Current Practice: The HO receives invoices for common input services (like auditing, software, advertisement) in its regular GST registration. It then distributes this credit to other states, often using the cross-charge mechanism or by transferring credit to its ISD registration (citing Rule 54(1A) or Circular No. 199/11/2023-GST).
New Legal Framework: The Finance Act, 2024 amended Section 2(61) and Section 20 of the CGST Act to make the ISD mechanism mandatory. Notification No. 16/2024-Central Tax notified April 1, 2025, as the effective date for these amendments.
The Query: The applicant sought a ruling on whether they could continue their existing practice of routing common credits through their regular registration after the new law comes into effect.
Decision
The Tamil Nadu Authority for Advance Ruling (AAR) ruled against the applicant.
Mandatory ISD: The Authority held that from April 1, 2025, the ISD mechanism is mandatory and not optional. Any office that receives tax invoices for input services on behalf of distinct persons (branches in other states) must register as an ISD.
Direct Routing Required: The applicant must ensure that vendors issue invoices directly to the ISD registration for all common services.
No Transfer Mechanism: The practice of receiving invoices in a regular GSTIN and then “shifting” or “transferring” the credit to the ISD ledger is not permissible under the amended law. The AAR noted that such a procedure is inconsistent with the mandatory language of the amended Section 20.
Past Circulars Invalidated: Prior circulars (like Circular 199) that allowed a choice between ISD and cross-charge for third-party services are no longer valid for periods starting April 1, 2025, as the statutory amendment overrides them.
Key Takeaways
Strict Compliance Deadline: Businesses must restructure vendor communications before April 1, 2025. Vendors of common services must be instructed to bill the ISD GSTIN directly.
End of “Cross-Charge” for Third-Party Services: The option to use “cross-charge” for distributing third-party common service credits is effectively removed. Cross-charge will likely remain relevant only for internally generated services (e.g., HO support staff).
Risk of Credit Loss: If a common service invoice is raised to a regular GSTIN after April 1, 2025, the ITC may become ineligible for distribution, leading to “dead” credit accumulating at the HO.
System Overhaul: ERP systems must be updated to validate that common service purchase orders and invoices carry the ISD GSTIN.