The Government of India has announced a significant change in the rules of Goods and Services Tax (GST). Under this change, the input service distributor (ISD) system will be implemented from 1 April 2025. This system will help the state governments to collect correctly on shared services provided from the same place. Do you also want to know how much this new rule will affect your business? So let’s know.

What is input service distributor (ISD) system

Under the ISD system, businesses working in many states can centralize their shared input services (domestic or imported) invoices to their headquarters or one branch. This system will be helpful in properly distributing input tax credit (ITC) on these services among branches using these services.

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What is input tax credit (ITC)

Input Tax Credit (ITC) is the tax that pays businesses on their purchase and can be reduced by their output tax liability. It can only be used for GST paid on goods or services made for commercial purposes. Proper ITC use reduces the total tax liability of business.

Major changes of new ISD system

ISD system mandatory: Now it will be mandatory for businesses to use only ISD system for distribution of ITC. The cross-charge method used earlier will not be allowed.

ITC claims without ISD: If a business does not use the ISD system, ITC will not be claimed at the respective places.

Fines on wrong ITC distribution: If a business incorrectly presents ITC, it can be fined with interest. As a penalty, ₹ 10,000 or wrong distributed ITC amount (whichever is higher) will have to be paid.

Necessary preparations for businesses

The purpose of this ISD system is to ensure transparency and justice in the distribution of ITC among the states. Businesses are advised to update their tax compliance processes before 1 April 2025, so that they do not face any problem under the new rules.

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