Businesses operating through GST registrations in more than one State often face the same question: when a head office receives or creates costs that benefit branches, should the credit be moved through the Input Service Distributor mechanism or should the head office raise a cross-charge invoice? The answer depends on what the cost actually represents.
The most important distinction is between third-party input services received for or on behalf of distinct persons and services supplied internally by one GST registration to another distinct-person registration. The legal framework changed materially from 1 April 2025, so older practices that treated ISD as optional for common third-party service credits should not be carried forward without checking the amended law.
What is an Input Service Distributor?
Section 2(61) of the CGST Act defines an Input Service Distributor as an office of a supplier that receives tax invoices for input services, including specified reverse-charge services, for or on behalf of distinct persons and is liable to distribute the related input tax credit under section 20. The current definition can be checked on the CBIC Tax Information Portal.
From 1 April 2025, amended section 20 expressly requires an office receiving such invoices for or on behalf of distinct persons to obtain ISD registration and distribute the credit. The current statutory text is available on the official section 20 page.
When should ISD be used?
Use the ISD mechanism when the head office receives a third-party invoice for an input service that belongs wholly or partly to one or more other GST registrations of the same legal entity. Typical examples include a national software subscription, group insurance service, central legal advisory, audit support or another service procured centrally but attributable to multiple branches.
Rule 39 sets out how that credit is distributed. Credit attributable to one recipient goes only to that recipient. Credit attributable to more than one recipient is distributed among the relevant recipients on the prescribed turnover basis, and credit attributable to all recipients is distributed across all relevant recipients on the prescribed turnover basis. Eligible and ineligible credit are distributed separately, and the distribution details are furnished in Form GSTR-6. The current rule is available on the CBIC Rule 39 page.
What is cross charge?
Cross charge deals with a different issue: a supply made by one GST registration of the same legal entity to another registration that is treated as a distinct person. Schedule I of the CGST Act treats supplies of goods or services between related persons or distinct persons, when made in the course or furtherance of business, as supplies even when no consideration is charged. The official Schedule I text is available on the CBIC Tax Information Portal.
In practical terms, cross charge becomes relevant when one registration is itself performing a service for another registration. Examples can include central management support, IT helpdesk activity, finance processing, HR support, procurement support or other internally generated services supplied by a head office to branch registrations.
ISD and cross charge are not substitutes
A useful decision rule is this:
- Third-party input service invoice received centrally for branches: analyse it under the ISD framework.
- Internally generated service supplied by head office to a branch: analyse whether a taxable distinct-person supply and cross charge arise.
- A single arrangement contains both elements: separate the external input-service credit from the head office's own internal service element instead of forcing everything into one bucket.
This distinction prevents a common mistake: taking a vendor invoice received by the head office and simply re-invoicing the same third-party service to branches as though the amended ISD requirement did not exist.
How Circular 199/11/2023-GST should be read today
CBIC Circular 199/11/2023-GST, dated 17 July 2023, explains head-office and branch-office issues involving common third-party input services and internally generated services. At the time of that circular, CBIC stated that ISD was not mandatory for common third-party input services and that head office could alternatively issue tax invoices to branches. The circular also dealt with valuation of internally generated services and employee-cost questions. The official circular is available here: Circular 199/11/2023-GST.
For periods from 1 April 2025 onward, the circular's earlier statement that ISD was optional for common third-party input-service credit must be read together with the later amended section 20, which now uses mandatory language. The circular remains useful for understanding the distinction between third-party input services and internally generated head-office services, but the current statutory text should control the post-amendment ISD analysis.
Practical example
Assume a company has GST registrations in Delhi, Maharashtra and Karnataka. The Delhi head office receives a software vendor invoice for a licence used by employees in all three locations. Because this is a third-party input service received centrally for distinct persons, the credit should be examined under the ISD mechanism and distributed under section 20 and rule 39.
Now assume the Delhi team also operates a central finance desk that prepares branch management reports, processes certain payments and supports the other State registrations. That internally generated support is not merely the transfer of the software vendor's ITC. It is a separate distinct-person service question, so the business should analyse whether a cross charge is required and how the supply should be valued.
Documentation checklist for finance and tax teams
- Map every GST registration of the legal entity and identify the office that receives common service invoices.
- Tag vendor invoices as exclusive to one registration, attributable to selected registrations, or common to all relevant registrations.
- Use the Rule 39 allocation basis for credit that must be distributed through ISD.
- Keep separate records for internally generated services supplied between registrations.
- Document the business basis for each cross charge, including the nature of service, recipient registrations and valuation support.
- Reconcile ISD-distributed credit with GSTR-6 and recipient credit records.
- Do not rely on a pre-1 April 2025 SOP that treated ISD as optional without updating it for amended section 20.
Common mistakes
- Using cross charge merely to move third-party common-service ITC after the mandatory ISD amendment.
- Assuming ISD covers the head office's own internally generated services.
- Allocating common credit equally without checking the turnover-based Rule 39 formula.
- Ignoring recipients that are attributable to the common service merely because their credit position is inconvenient.
- Failing to distinguish eligible and ineligible credit during ISD distribution.
- Using Circular 199/11/2023-GST without considering the later statutory amendment effective from 1 April 2025.
Practical takeaway
The cleanest way to choose between ISD and cross charge is to ask where the service came from. If an outside vendor supplied the input service to a central office for one or more distinct-person registrations, the current section 20 framework points to ISD distribution. If the head office itself supplied an internally generated service to another registration, the distinct-person supply and cross-charge rules need to be analysed separately. Keeping those two flows separate in the ERP, GST reconciliations and internal SOPs makes the compliance position easier to defend.
