The Indian government has introduced significant changes to the Goods and Services Tax (GST) regulations. Starting from April 1, 2025, a new Input Service Distributor (ISD) system will be implemented. This system aims to streamline tax collection on shared services provided within a state, ensuring fair distribution of tax revenue among different states. According to experts, this update is crucial to maintaining proper tax revenue allocation across the country.

What is the ISD Mechanism?

As per the Finance Act 2024 (No. 1), amendments have been made to the CGST Act to introduce the ISD mechanism. This system allows businesses operating in multiple states to centralize invoices for common input services (both domestic and imported) at a single branch or headquarters. It ensures fair distribution of input tax credit (ITC) among different branches utilizing these shared services.

Understanding Input Tax Credit (ITC)

Input Tax Credit (ITC) refers to the tax paid on business-related purchases, which can be deducted from the output tax liability. In simpler terms, it allows businesses to offset the GST paid on goods or services used for business purposes against the GST collected on sales. This system helps reduce the overall tax burden on businesses.

How Does the New ISD System Impact Businesses?

Previously, businesses had the option to allocate common ITC across multiple GST registrations using either the ISD mechanism or the cross-charge method. However, under the new rules:

• ITC will not be granted to recipient locations if the ISD mechanism is not used.

• Incorrect ITC distribution may lead to recovery of tax, including interest, from recipient locations by tax authorities.

• Businesses failing to comply with the new ISD mechanism may face penalties. The penalty will be either the ITC amount wrongly distributed or ₹10,000, whichever is higher.

With these updated GST rules, businesses must ensure proper compliance with the new ISD mechanism to avoid financial losses and legal complications. It is advised that companies consult tax professionals and update their systems to align with these latest changes before the new financial year begins.