Rule 39(1A) and Rule 54(1A): Moving RCM Credit to the ISD

Rule 39 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.

The law now requires an ISD to distribute reverse charge credit. But an ISD cannot pay reverse charge. The route between those two facts is a four-step detour, it needs a second registration in the same State, and it costs the business a month of working capital.

An ISD registration "does not have the facility to discharge tax liability, and there is no provision in Form GSTR-6 to pay tax" — so self-invoicing under section 31(3)(f) does not apply to an ISD. Instead, rule 39(1A) allows a registered person having the same PAN and State code as the ISD to issue an invoice, credit note or debit note under rule 54(1A) transferring the credit of common RCM input services to the ISD, which then distributes it under rule 39(1). Notification No. 13/2025-Central Tax dated 17.09.2025 amended rule 39(1A) with effect from 01.04.2025 to add sections 5(3) and 5(4) of the IGST Act.

Why the detour exists

The Handbook states the constraint plainly:

"An ISD cannot pay tax under the reverse charge mechanism. An ISD registration does not have the facility to discharge tax liability, and there is no provision in Form GSTR-6 to pay tax like a regular taxpayer as in Form GSTR-3B. Invoices for services subject to RCM must be obtained by another distinct person with the same PAN in the same State as the ISD. Alternatively, ISD must register as a distinct person being regular taxpayer to pay RCM tax in the same State as that of ISD. The credit from such transactions is then transferred to the ISD via an invoice issued by the entity registered as a regular taxpayer. Consequently, self-invoicing under section 31(1)(f) does not apply to ISDs."

And section 20(2) is drafted to match. It requires the ISD to distribute credit in respect of RCM services "paid by a distinct person registered in the same State as the said Input Service Distributor" — the same-State condition is in the statute, not merely the rule.

Rule 39(1A), and what the 2025 amendment added

Rule 39(1A) provides that for the distribution of credit in respect of input services attributable to one or more distinct persons, subject to levy of tax under section 9(3) or 9(4) of the CGST Act , a registered person having the same PAN and State code as an ISD may issue an invoice, credit note or debit note under rule 54(1A) to transfer the credit of such common input services to the ISD, and such credit shall be distributed by the ISD in the manner provided in rule 39(1).

The taxable value point. Rule 39(1A) requires that "The taxable value in the invoice issued shall be the same as the value of the common services." This is not an internal charge to be valued afresh — it mirrors the underlying service.

The amendment. Notification No. 13/2025-Central Tax dated 17.09.2025 amended rule 39(1A) with effect from 01.04.2025 to give reference to sections 5(3) and 5(4) of the IGST Act, covering inter-State supplies on which integrated tax is payable under reverse charge. That aligns the rule with the amendment to section 2(61) made by the Finance Act, 2025 and notified through Notification No. 16/2025-CT of the same date.

So the two stages, once more: intra-State RCM credit came in through the Finance Act, 2024 (notified 06.08.2024); inter-State RCM credit came in through the Finance Act, 2025 (notified 17.09.2025, effective 01.04.2025).

Rule 54(1A): the seven particulars

A registered person with the same PAN and State code as an ISD may issue an invoice, credit note or debit note transferring the credit of common input services to the ISD, containing:

• (a) name, address and GSTIN of the registered person having the same PAN and same State code as the ISD;
• (b) a consecutive serial number, unique and not exceeding 16 characters;
• (c) date of issuance;
• (d) GSTIN of the supplier of the common service and the original invoice number whose credit is sought to be transferred to the ISD;
• (e) name, address and GSTIN of the ISD;
• (f) taxable value, rate and amount of credit to be distributed;
• (g) signature or digital signature.

Compare this with the ISD invoice under rule 54(1), which carries no taxable value and no rate. The rule 54(1A) document does — because it sits closer to the underlying supply and has to be traceable to it. Limb (d) is the audit trail: it names the original vendor and the original invoice number.

The timeline, and the month it costs

The Handbook's worked example is the clearest statement of the cash-flow consequence. ABC Ltd has its head office at Mumbai, branches at Bangalore, Chennai and Kolkata, and an ISD registration at Mumbai. It takes legal advice from an advocate on a quarterly retainer of ₹1,00,000, and the advocate raises an invoice on 5 April 2025 for January to March 2025:

The Handbook's own note on it: "The above example highlights that this mechanism inherently involves a one-month lag, which may temporarily tie up working capital."

Trace the delay. The tax is paid in cash on 20 May; the branch takes the credit on 20 June. That is a month of funding on every rupee of common RCM tax — legal fees, GTA freight, security services, director's fees, imported services — for a business of any scale.

The consequence for registration planning

The Handbook draws it out in two places, and it changes where an ISD can sensibly be located.

"If tax on input services has been charged by the supplier under forward charge, ISD registration can be taken in any State even if there is no regular registration of another entity having same PAN in the same State. If the tax on input services is payable under reverse charge, the registration of ISD needs to be in same State in which tax has been paid under reverse charge by the regular registration."

And from the FAQs: "If the amount of ITC to be distributed by ISD is arising out of forward charge, registered office may not be necessary. But if ITC is arising out of tax payable according to the provisions of sections 9(3) or 9(4) of CGST Act or sections 5(3) or 5(4) of IGST Act it will be necessary to register normal office in that State in which ISD is registered to make payment of RCM liability and to raise invoice on ISD as per provisions of rule 54(1A)."

So the practical rule is: put the ISD where you already have a regular registration. Almost every group has some common RCM spend, and an ISD in a State with no regular registration cannot handle any of it.

What the ISD may claim credit on

The Handbook lists the three source documents:

• (a) an invoice issued by the supplier under section 31;
• (b) an invoice issued by a distinct person in the same State for tax paid on RCM basis, prepared under rule 54(1A);
• (c) a debit note issued by a supplier under section 34.

And the invoicing discipline for vendors: "The invoices issued by suppliers shall be in the GSTIN of ISD if the services are taxable under forward charge. The invoices shall be in the GSTIN of the distinct person in the same State if it is relating to services on which tax is payable on RCM basis."

That is a vendor-master instruction, not a book-keeping preference. Getting an RCM service billed to the ISD GSTIN leaves the tax payable by a registration that cannot pay it.

Key takeaways

• An ISD cannot pay reverse charge; section 31(3)(f) self-invoicing does not apply to it.
• Rule 39(1A) routes RCM credit through a registered person with the same PAN and State code, which pays the tax and transfers the credit.
• Notification No. 13/2025-CT dated 17.09.2025 added sections 5(3) and 5(4) of the IGST Act to rule 39(1A), w.e.f. 01.04.2025.
• The rule 54(1A) document carries taxable value and rate — and, critically, the original supplier's GSTIN and invoice number.
• The taxable value must equal the value of the common services.
• The route builds in a one-month lag between paying the tax in cash and the branch claiming the credit.
• An ISD handling RCM credit must be in a State where the entity also holds a regular registration.
• Forward-charge invoices go to the ISD GSTIN; RCM invoices go to the regular registration.

Read next

• Rule 54(1): The ISD Invoice and the ISD Credit Note
• ISD Registration in REG-01 and the Same-State Condition
• ISD Becomes Mandatory: "May" to "Shall" from 1 April 2025

Disclaimer: Positions stated as on 5 September 2026, based on sections 20 and 31 of the CGST Act, 2017, rules 39(1A) and 54(1A) of the CGST Rules, 2017 and Notification Nos. 13/2025 and 16/2025-Central Tax dated 17 September 2025, as reproduced in the ICAI Handbook on Input Service Distributor under GST (2nd edition, September 2025).