ISD Mandatory From 1 April 2025, Against Cross Charge

ISD Mandatory From 1 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 an FMCG head office could choose: distribute common credit as an ISD, or cross charge it as a service. From 1 April 2025 the choice is gone for third-party services — and, crucially, cross charge has not disappeared, because it still governs a category ISD was never designed to handle.

Section 20, as substituted by the Finance (No. 2) Act, 2024 and brought into effect by Notification No. 16/2024-Central Tax dated 6 August 2024, provides that any office receiving common input service invoices — including RCM invoices — "shall be required to be registered" as ISD and "shall distribute" the credit, with effect from 1 April 2025. Section 24(viii) makes that registration compulsory with no turnover threshold. But the mandate covers only common input services procured from third parties; internally generated services between registrations continue to require cross charge, valued under rule 28.

The line between the two mechanisms

The Guide is explicit on both halves:

"pursuant to the amendment of Section 20… the ISD mechanism has become mandatory with effect from 1 April 2025. Consequently, where the head office receives common input services from third parties… it must obtain ISD registration and distribute such credit only through the ISD mechanism, and can no longer do so through cross charge."

"The mandatory ISD requirement applies only to common input services procured from third parties. It does not extend to internally generated services — i.e., services rendered by employees or resources of one registration for the benefit of another registration (such as management, administrative, HR, or marketing support). Such internally generated services continue to be governed by cross charge, requiring valuation under Rule 28."

What the ISD mandate covers

Section 2(61) defines an ISD as an office "which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9 , for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit."

Note the RCM inclusion. From 1 April 2025, "reverse charge ITC can also be distributed through the ISD mechanism" — which the pre-amendment ISD could not do.

The services caught, in the Guide's list: "IT services, legal and advisory fees, national marketing and advertising campaigns, audit and consulting fees, head office rent, utilities, HR and training services, and logistics or supply chain management services", along with "brand promotion, celebrity endorsements, ERP systems, SAP licences, legal retainership, statutory audit, internal audit, market research, consumer surveys, digital marketing campaigns and employee training programmes."

Registration mechanics. "There is no turnover threshold for ISD registration… and a separate ISD GSTIN must be obtained in addition to regular GST registration. The application is to be made through Form GST REG-01, Serial No. 14, by selecting 'Input Service Distributor' as the registration type, typically at the head office location where common services are received."

How rule 39 distributes

Section 20 requires CGST, SGST/UTGST and IGST to be distributed separately, and eligible and ineligible credits separately. The credit "must be distributed in the same month it is available."

The formula:

CREDIT TO RECIPIENT = (TURNOVER OF RECIPIENT ÷ AGGREGATE TURNOVER OF ALL RECIPIENTS) × COMMON CREDIT

The Guide's worked example. A Delhi head office receives an advertising invoice of ₹1,00,00,000 plus GST of ₹18,00,000, for a campaign broadcast nationally:

And the reason distribution is required at all: "If the head office avails the entire ITC… and does not distribute it, the credit remains concentrated in Delhi even though the benefit is consumed throughout the country. Such treatment would be contrary to the ISD framework."

Distribute only to the units that benefit

This is the point most easily got wrong.

"No. Section 20 read with Rule 39 requires that credit should be distributed only to the recipient units which actually use or benefit from the service."

Two illustrations: "if a market research study relates only to Southern India and benefits only Karnataka and Tamil Nadu operations, the corresponding credit should be distributed only to those States. Similarly, where an advertising campaign is undertaken exclusively for a regional product sold only in Maharashtra and Gujarat, the credit should not be distributed to other registrations."

So the turnover ratio in rule 39 is applied within the set of beneficiary units, not across all registrations by default. "identification of beneficiary units becomes a critical exercise."

The documentation implication is real. Every ISD distribution needs a contemporaneous record of which registrations the service benefited and why — a mapping exercise that has to sit alongside the invoice, because turnover data alone will not evidence it.

Columbia Asia, and what has overtaken it

M/s. Columbia Asia Hospitals Pvt. Ltd., AAAR Karnataka, KAR/AAAR/05/2018-19, dated 12.12.2018. A head office performed "finance, accounting, human resources, legal, information technology, administration and management" functions benefiting other State registrations, and argued these were employee-to-employer services excluded by Entry 1 of Schedule III.

Held: taxable supplies between distinct persons. The Authorities held that "employees stationed at the location of a particular establishment of a distinct person are deemed to be rendering their services only to that establishment of a distinct person and not to any other distinct person even though all distinct persons are of the same business entity." Value was to be determined under rule 28.

It remains the foundation of cross charge — and precisely the reasoning that keeps internally generated services outside the ISD mandate today.

But the Guide adds the necessary qualification: its "practical application must now be considered in the light of subsequent legislative and administrative developments, including CBIC Circular No. 199/11/2023-GST dated 17 July 2023, the amendments to Rule 28 and the mandatory ISD framework introduced by the Finance Act, 2024."

The most important of those is rule 28's second proviso. Where the recipient registration is eligible for full ITC, the invoice value is deemed to be open market value — so a cross charge for internally generated services can be raised at a declared value without an OMV exercise. Rule 28 and the "any value" proviso →

Key takeaways

• Section 20, substituted by the Finance (No. 2) Act, 2024 (Notification No. 16/2024-CT), makes ISD mandatory from 1 April 2025.
• The mandate covers third-party common input services, including RCM invoices — which the old ISD could not distribute.
• No turnover threshold; a separate ISD GSTIN via REG-01, Serial No. 14.
• Rule 39 distributes on turnover ratio, with CGST/SGST/IGST separately and eligible and ineligible credit separately, in the same month.
• Credit goes only to units that actually benefit — a regional campaign is not distributed nationally.
• Cross charge survives for internally generated services (management, HR, administrative, marketing support), valued under rule 28.
• Columbia Asia remains the foundation of cross charge, read now with Circular No. 199/11/2023-GST and the amended rule 28.
• The second proviso to rule 28 lets a cross charge be raised at the declared invoice value where the recipient has full ITC.

Read next

• Rule 28 Valuation: The 90% Rule and the "Any Value" Proviso
• Schedule I Entry 2: Stock Transfers in the FMCG Supply Chain
• Blocked Credit in FMCG: Expired Stock, Recalls and Transit Losses

Disclaimer: Positions stated as on 5 September 2026, based on sections 2(61), 20, 24(viii) and 25 of the CGST Act, 2017, Schedule I thereto, rules 28 and 39 of the CGST Rules, 2017, Notification No. 16/2024-Central Tax dated 6 August 2024, Circular No. 199/11/2023-GST dated 17 July 2023 and the ruling in M/s. Columbia Asia Hospitals Pvt. Ltd., KAR/AAAR/05/2018-19 dated 12 December 2018, as reproduced in the ICAI GST Sectoral Guide on Fast-Moving Consumer Goods (July 2026).