📢 Mandatory ISD Under GST 2.0: What Every Multi-GSTIN Business Must Know

Bhagya Lakshmi
Nov 27
3 min read

🔍 Introduction

With the rollout of GST 2.0 in September 2025, the Indian indirect tax landscape witnessed its biggest structural overhaul since 2017. Among the many changes, one that directly impacts businesses with multiple GST registrations is the mandatory use of the Input Service Distributor (ISD) mechanism — effective retrospectively from April 1, 2025, with enforcement starting January 1, 2026.

This blog unpacks everything businesses need to know about this crucial compliance

update.

📘 What Is an Input Service Distributor (ISD)?

An Input Service Distributor (ISD) is a concept under GST where a registered office (typically the Head Office) receives invoices for input services and then distributes the eligible Input Tax Credit (ITC) to other GST-registered units (branches) under the same PAN.

Key points:

ISD is applicable only for input services, not goods or capital goods.
ISD must be separately registered under GST using Form GST REG-01.
Credit must be distributed proportionately using ISD invoices, and reported monthly in GSTR-6.

🚨 What Has Changed Under GST 2.0?

Until now, companies could choose between:

Cross-charging (i.e., one branch billing another for its share of common service costs), or
Using ISD

However, under GST 2.0, the ISD mechanism has been made mandatory where:

A business has more than one GST registration under the same PAN, andThe input service benefits multiple GSTINs

In simple terms: if a common service benefits more than one location, ISD must be used to distribute the ITC.

🗓️ Effective Date and Transition Timeline

Event	Date
GST 2.0 Announced	September 22, 2025
ISD Rule Effective	April 1, 2025 (retrospectively)
Grace Period for Setup	Until December 31, 2025
Mandatory Compliance Begins	January 1, 2026

During the grace period, authorities have clarified that no penalty or ITC disallowance will apply for non-use of ISD if proper compliance is ensured by January 2026.

🧾 Example: How ISD Works in Practice

ABC Ltd. has:

HO in Delhi
Branches in Mumbai and Chennai (all with separate GSTINs)

ABC Ltd. receives an invoice for ₹1,00,000 + ₹18,000 GST from a software vendor for a centralized ERP system used across all locations.

🔁 What ABC must now do:

Register the Delhi HO as an ISD
Receive the invoice under the ISD GSTIN
Distribute ₹6,000 ITC each to Delhi, Mumbai, and Chennai (based on usage ratio)
Issue ISD invoices to Mumbai and Chennai units
Report the distribution in GSTR-6

✅ What You Can and Cannot Do

Action	Is it Allowed?
HO claims entire ITC for shared services	❌ Not allowed
Cross-charging to branches instead of ISD	❌ Not allowed post-April 2025
ISD used to distribute ITC for shared services	✅ Mandatory
ISD used for goods or capital goods	❌ Not permitted
Services used only by HO claimed by HO	✅ Allowed

⚠️ Consequences of Non-Compliance

If a company continues to use old practices (like full ITC claim by HO or cross-charging), it may face:

Disallowance of ITC
Interest @18% p.a. on excess credit claimed
Penalties under Section 122 of CGST Act
Audit objections and demand notices

🧠 Frequently Asked Questions

Q1. Can I delay ISD registration till December 2025?

✅ Yes, but ensure all compliance is in place from January 1, 2026 onward.

Q2. What if the invoice is in HO’s name but service is for one branch?

✅ If the benefit is exclusive to one unit, that unit can claim ITC directly (subject to invoice endorsement rules).

Q3. Do we need a separate ISD for each branch?

❌ No. One ISD per PAN is sufficient. Typically, the HO is designated as ISD.

📋 Action Plan for Businesses

🔹 Immediately:

Identify all input services used across locations
Register HO as ISD using Form GST REG-01
Inform vendors to bill the ISD GSTIN

🔹 From January 2026:

Route all shared service invoices to ISD
Distribute ITC using ISD invoices
File monthly GSTR-6 return

📝 Conclusion

The mandatory ISD mechanism is a key part of GST 2.0’s drive toward simplification and standardization. While it requires initial restructuring of workflows and registrations, it ensures accurate credit allocation, audit readiness, and compliance alignment.

For multi-GSTIN businesses, now is the time to: