ISD Becomes Mandatory: "May" to "Shall" from 1 April 2025

ISD Becomes Mandatory explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

For seven years, businesses had a genuine choice about how to move credit from a head office to its branches. That choice ended on 1 April 2025, and it ended by the substitution of a single word.

Section 20 was substituted by the Finance Act, 2024, notified through Notification No. 16/2024-Central Tax dated 06.08.2024, with effect from 1 April 2025. The Handbook identifies the key change as "the shift in language from 'may distribute the credit' to 'shall distribute the credit', thereby making it compulsory for businesses to obtain ISD registration and use the ISD mechanism for the distribution of ITC of common input services received at the central office but consumed by other locations." Before that, Circular No. 199/11/2023-GST dated 17.07.2023 had confirmed the ISD mechanism was not mandatory.

What the position was before

Till 2023, as the Handbook records, "businesses had flexibility to distribute common ITC either through the ISD mechanism or via cross-charging. This allowed entities to choose the method that best suited their operational needs."

The 50th GST Council meeting recognised the resulting ambiguity and recommended three things at once:

• clarify by circular that the ISD mechanism is not mandatory for distributing ITC of common input services procured from third parties to distinct persons under the law as it then stood;
• clarify issues on the taxability of internally generated services between distinct persons; and
• amend the law to make the ISD mechanism mandatory prospectively for such distribution.

Circular No. 199/11/2023-GST dated 17.07.2023 did the first two. The Finance Act, 2024 did the third.

The purpose of the change, in the Handbook's words: "In order to bring uniformity and eliminate the inconsistent application of credit distribution methods." And its effect: "This amendment marks a significant shift in policy by removing the earlier flexibility and bringing consistency in credit distribution through a single mandated route—ISD… This change has streamlined flow of credit and will reduce disputes relating to cross-charge vs ISD and promote transparency in transactions within large organizations."

What section 20 now says

Section 20(1) — any office of the supplier which receives tax invoices towards receipt of input services, including invoices for services liable to tax under section 9(3) or 9(4) of the CGST Act or under section 5(3) or 5(4) of the IGST Act, for or on behalf of distinct persons referred to in section 25, shall be required to be registered as an Input Service Distributor under clause (viii) of section 24 and shall distribute the input tax credit in respect of such invoices.

Section 20(2) — the ISD shall distribute the credit of central tax or integrated tax charged on invoices received by it, including the credit of central or integrated tax in respect of services subject to levy under section 9(3)/9(4) or section 5(3)/5(4) paid by a distinct person registered in the same State as the ISD, in such manner, within such time and subject to such restrictions and conditions as may be prescribed.

Section 20(3) — credit of central tax shall be distributed as central tax or integrated tax, and integrated tax as integrated tax or central tax, by issue of a document containing the amount of ITC.

Two "shall"s and a registration requirement — and the registration requirement is written into the charging provision itself, not left to section 24 alone.

The three obligations that follow

The Handbook sets them out:

• Obtain an ISD registration;
• Comply with the conditions and procedures in section 20 and rule 39; and
• Ensure timely and proportionate distribution of ITC based on consumption.

The reverse-charge amendments, in two stages

The definition and the section were widened twice, and the two stages are easy to conflate.

Stage one — intra-State RCM. "There is an ambiguity regarding whether ITC relating to services taxable under reverse charge be distributed by ISD or not. In order to remove this ambiguity, the definition of ISD has been substituted by the Finance Act, 2024 to explicitly provide for the distribution of reverse charge invoices. However, it has only included the services taxable under sections 9(3) or 9(4) of the CGST Act, 2017 i.e. intra-State supplies on which tax is payable under reverse charge mechanism. This has been notified from 06.08.2024."

Stage two — inter-State RCM. "Further, the Finance Act, 2025 w.e.f. 01.04.2025, amended section 2(61) to explicitly provide the distribution of ITC in respect of inter-State supplies on which tax is payable under reverse charge mechanism. The amendment is notified through Notification No. 16/2025-CT dated 17.09.2025."

And the rule followed. Notification No. 13/2025-Central Tax dated 17.09.2025 amended rule 39(1A) with effect from 01.04.2025 to refer to sections 5(3) and 5(4) of the IGST Act.

Rule 39 itself was substituted by Notification No. 12/2024-Central Tax dated 10.07.2024, made applicable w.e.f. 01.04.2025 through Notification No. 09/2025-Central Tax dated 11.02.2025 — so the substituted section, the substituted rule and the mandatory registration all take effect on the same date.

The penalty for not registering

The Handbook answers the obvious question — what if a business simply forgoes the common credit rather than registering?

"Even if a multilocational organisation is ready to forgo the ITC which is common without distribution to branches, it will have to take the registration as ISD, because there is a penalty of ₹10,000 and amount of ITC availed of or passed on or distributed not in accordance with section 20, whichever is higher. There is also a penalty for not registering the organisation when it is compulsory to register under clause (viii) of section 24."

So forgoing the credit is not a compliance strategy. The registration obligation is independent of whether the credit is claimed.

When ISD registration is genuinely not needed

The Handbook gives the one clean answer: "If all branches receive separate invoices for services utilized, and there are no common services for which a single invoice is raised by supplier, ISD registration is not necessary."

That is the practical planning point. An entity that gets its vendors to bill each branch directly — for the services each branch actually consumes — has no common credit to distribute, and no ISD obligation. The obligation arises from the billing pattern, not from the number of registrations.

And multiple ISD registrations are permitted. "Yes, there is no prohibition for taking ISD registration in state where there is common ITC to be distributed."

Key takeaways

• Section 20 substituted by the Finance Act, 2024, notified by Notification No. 16/2024-CT, w.e.f. 01.04.2025 — "may" became "shall".
• Before that, Circular No. 199/11/2023-GST confirmed the ISD route was optional.
• Section 20(1) now requires ISD registration under section 24(viii) as part of the substantive provision.
• Finance Act, 2024 brought intra-State RCM credit into the ISD definition from 06.08.2024; Finance Act, 2025, notified by Notification No. 16/2025-CT dated 17.09.2025, added inter-State RCM from 01.04.2025.
• Rule 39 was substituted by Notification No. 12/2024-CT and made effective 01.04.2025 by Notification No. 09/2025-CT.
• Forgoing the credit does not avoid registration — there is a penalty for both non-distribution and non-registration.
• No ISD is needed where every branch receives its own invoice and there are no common services.

Read next

• Section 2(61): What an ISD Is, and the Four Things It Cannot Do
• Cross Charge Versus ISD: What Circular 199/11/2023 Settled
• ISD Registration in REG-01 and the Same-State Condition

Disclaimer: Positions stated as on 5 September 2026, based on sections 2(61), 20 and 24(viii) of the CGST Act, 2017 as substituted by the Finance Act, 2024 and amended by the Finance Act, 2025, rule 39 of the CGST Rules, 2017, Notification Nos. 16/2024, 12/2024, 09/2025, 13/2025 and 16/2025-Central Tax, and Circular No. 199/11/2023-GST, as reproduced in the ICAI Handbook on Input Service Distributor under GST (2nd edition, September 2025).