What is Input Service Distribution, a new system launched by GoI to ensure fair tax distribution?

Significant amendments in the Goods and Services Tax (GST) have been introduced by the Government of India, effective from April 1, 2025. The major changes implemented include the introduction of the Input Service Distributor (ISD) system. 

What is the ISD system? 

According to the government's official statement, the launch of the ISD system will ensure the equal, proper, and transparent distribution of tax revenue across the states. The state governments will be able to levy appropriate taxes on shared services provided in a single region. 

Purpose of ISD system - 

As mentioned above, the most important factor behind this new implementation is fair tax revenue distribution, providing operation benefits to businesses in multiple states. The new ISD system will allow businesses to centralize their invoices for common input services at their headquarters, allowing accurate distribution of Input Tax Credit (ITC) among branches. 

Potential benefits of Input Tax Credits (ITC) - 

In common language, ITC refers to the tax paid by businesses on their purchases, which is usually deducted from their output tax liabilities, reducing the total GST payments. 

Now, the new rule will mandate the proper allocation of ITC.

Features of the New Rule - 

• With the launch of the new ISD system, businesses will not be eligible for ITC at the location of the recipient if they don’t use the ISD system. 
• The tax authorities will recover the amount with interest if the ITC distribution is improper. 
• If any unethical ITC distribution is reported, a penalty equal to ITC or ₹10,000 will be collected.