Input Service Distributor Mechanism Failure: Why ISD Rules Don’t Work for Shared Service Centers in Group Companies

Introduction

The Input Service Distributor (ISD) mechanism under India’s Goods and Services Tax framework was conceived as a practical solution for large businesses that procure common services centrally but consume them across multiple locations. The idea was straightforward — a head office receives a vendor invoice, pays the GST, and then passes on the corresponding Input Tax Credit (ITC) proportionately to its branches. Over the years, however, the practical workings of this mechanism have exposed a fundamental design gap that disproportionately affects one particular category of corporate structure: the Shared Service Centre (SSC) model used by group companies in India.

Group companies — which include holding companies, subsidiaries, affiliates, and related entities operating under a common corporate umbrella — routinely centralise functions like human resources, finance, legal, IT infrastructure, and procurement at a single entity or SSC. This SSC then renders services to other entities within the group. Under any economically sensible reading, this is exactly the kind of arrangement the ISD mechanism should serve. Yet, as the law stands, the ISD mechanism is structurally incapable of addressing the credit flow requirements of group company SSC arrangements. The reason is both simple and consequential: the ISD mechanism is PAN-bound.

The Legal Framework: Section 2(61), Section 20, and Rule 39 of the CGST Act

The statutory definition of an Input Service Distributor is found in Section 2(61) of the Central Goods and Services Tax Act, 2017 (CGST Act), which defines it as “an office of the supplier of goods or services or both which receives tax invoices issued under section 31 towards the receipt of input services and issues a prescribed document for the purposes of distributing the credit of central tax, integrated tax, State tax or Union territory tax paid on the said services to a supplier of taxable goods or services or both having the same Permanent Account Number as that of the said office.” [1]

The operative phrase in this definition — “having the same Permanent Account Number” — is not a drafting technicality. It is the structural boundary of the entire ISD framework. Only units or branches sharing the same PAN as the distributing ISD office can receive ITC through this channel. When a parent company’s SSC holds one PAN, and its subsidiaries or group affiliates each hold separate PANs (as they inevitably must, being separate legal entities), the ISD mechanism is simply inapplicable. There is no workaround within the ISD framework itself.

Section 20 of the CGST Act lays down the manner of credit distribution through the ISD. It requires that the ITC on common input services be distributed in the same month it is received, and that distribution to each recipient be made in proportion to the turnover of each recipient unit in the relevant state during the relevant period relative to the aggregate turnover of all recipient units. The formula is expressed as: C1 = (t1/T) × C, where C1 is the credit attributable to a specific recipient, t1 is that recipient’s turnover, T is the aggregate turnover of all recipients, and C is the total credit to be distributed. [1]

Rule 39 of the CGST Rules, 2017, further prescribes the mechanics — specifying the manner of distribution, the requirement to issue ISD invoices in the format mandated under Rule 54(1), and the obligation to file monthly returns in Form GSTR-6 by the 13th of the following month. From April 1, 2025, following the Finance Act, 2024 amendments to Sections 2(61) and 20 of the CGST Act, and Notification No. 16/2024-Central Tax dated August 6, 2024, registration as an ISD became mandatory for any person receiving common input service invoices on behalf of multiple GSTINs under the same PAN. [2] This shift from an optional to a compulsory mechanism has intensified the consequences of the ISD’s inherent limitations for group structures.

What Shared Service Centres Actually Do — And Why the ISD Doesn’t Help

A Shared Service Centre in a group company context is an entity whose express purpose is to provide common back-office or support services to multiple group companies. These services may include enterprise resource planning (ERP) software support, group-wide audit coordination, centralised legal and compliance functions, HR management, procurement, treasury management, and IT infrastructure. The SSC typically procures services from third-party vendors — software vendors, law firms, auditors, consultants — and the invoices for these services are raised in the SSC’s name. The SSC pays GST on these invoices and logically ought to be able to pass on the ITC to the group companies that actually consume those services.

Here lies the fundamental problem. Each group company — say, a holding company, three subsidiaries, and two joint ventures in a corporate group — is a distinct legal entity with its own PAN, its own GSTIN, and its own GST registration. The SSC may be a wholly owned subsidiary of the holding company, or an independently structured entity within the group. Regardless of the ownership structure, it holds a different PAN from every other entity it serves. Under the plain text of Section 2(61), the ISD mechanism is simply unavailable for credit distribution across different PANs. As multiple authoritative GST sources have confirmed, “ISD mechanism cannot be used for transfer of credit to holding company, subsidiary company, group entities, related parties as they have different PAN.” [7]

This is not a gap that can be addressed by the cross-charge mechanism either, at least not in a manner that avoids GST leakage. Cross-charge refers to the practice of one entity — typically a head office or SSC — issuing a tax invoice to another entity for services rendered. Under Entry 2 of Schedule I of the CGST Act, supplies between distinct persons made in the course or furtherance of business are treated as deemed supplies even if made without consideration, and are therefore liable to GST. In a group company context, however, the entities are not merely “distinct persons” under Section 25(4) of the CGST Act — they are entirely separate legal persons. Cross-charge between separate legal entities is a full taxable supply, meaning GST is charged by the SSC to the group company, and the group company can claim that GST as ITC only if it is otherwise eligible to do so.

The Jurisprudence: Contradictory Advance Rulings and the Road to Circular 199

The confusion between ISD and cross-charge was not merely theoretical. It translated into substantial litigation risk for businesses, and the advance ruling authorities contributed to — rather than resolved — the confusion for several years.

The Karnataka Appellate Authority for Advance Ruling (AAAR) in M/s Columbia Asia Hospitals Pvt. Ltd. (Order No. KAR/AAAR/05/2018-19) drew an early and important distinction between the two mechanisms. It held that the activities of employees at the India Management Office (corporate office) — including accounting, administrative work, and IT system maintenance — for the benefit of the hospital units located in other states constituted a taxable supply under Entry 2 of Schedule I read with Section 7 of the CGST Act. The AAAR further observed that there is a fundamental conceptual difference between ISD and cross-charge: in the ISD mechanism, there is no supply at all — only a distribution of credit — while in the cross-charge mechanism, an actual service is being rendered and charged for. [3]

The Maharashtra AAAR took an almost directly contradictory position in M/s Cummins India Limited (Advance Ruling No. MAH/AAAR/AM-RM/01/2021-22 dated December 21, 2021). In that case, the AAAR held that the Head Office’s act of procuring common input services on behalf of branch offices constituted a supply and attracted GST. It further held that “the Appellant is bound to take the ISD registration as mandated by section 24(viii) of the CGST Act, 2017, and comply with all the provisions made in this regard, if it intends to distribute the credit of tax paid on the common input services received by it, on behalf of the branch offices/units, to the branch offices/units.” [4] In doing so, the Maharashtra AAAR effectively ruled out cross-charge as an alternative to ISD for third-party service invoices, directly contradicting the flexibility that the Karnataka AAAR had recognised.

These contradictory rulings created a compliance nightmare for businesses across India. Taxpayers faced the prospect of notices and demands from GST authorities for adopting whichever route the authorities chose to disagree with. The matter was finally escalated to the GST Council, which addressed it in its 50th meeting held on July 11, 2023 in New Delhi. The Council recommended issuing a circular to clarify the taxability of internally generated services and to confirm that ISD was not yet mandatory for third-party invoices, while recommending that it be made mandatory prospectively by law.

Acting on this recommendation, CBIC issued Circular No. 199/11/2023-GST dated July 17, 2023 [5], which clarified that for common input services procured from third-party vendors, the head office may distribute ITC either through the ISD mechanism or by issuing a tax invoice to the concerned branch offices through cross-charge. It further clarified that for internally generated services where the recipient is eligible for full ITC, the value declared on the invoice shall be deemed to be the open market value of such services and the cost of employees’ salaries need not be mandatorily included. To this extent, the AAAR rulings in Columbia Asia and Cummins were prospectively overruled. [8]

The Structural Exclusion of Group Companies: Why No Circular Can Fix This

What Circular 199/11/2023-GST did not — and indeed could not — address is the structural exclusion of group companies from the ISD framework entirely. Even with the clarifications brought in by the Circular and the post-amendment mandatory ISD regime from April 2025, the PAN-level restriction embedded in Section 2(61) remains intact and unchanged. An SSC that serves subsidiaries, joint ventures, or affiliates with different PANs cannot use the ISD route.

This is not a minor procedural gap. In the modern Indian corporate landscape, group companies are almost always structured as separate legal entities — either because of regulatory requirements, foreign investment norms, joint venture agreements, or corporate governance preferences. The Companies Act, 2013 treats each company as an independent legal person. The Income Tax Act assigns each company its own PAN. Under GST, each company must separately register under Section 22 of the CGST Act in each state where it makes taxable supplies. The net result is that a commercially legitimate group structure — where an SSC provides centralised services to multiple group entities — falls completely outside the ISD framework. [9]

The only route available to such groups is the regular cross-charge mechanism: the SSC issues a tax invoice to each group entity, charges GST at the applicable rate, and the recipient entity claims ITC if eligible. This sounds workable in theory, but generates significant problems in practice. First, it requires the SSC to determine the taxable value of services rendered under Rule 28 of the CGST Rules — and where the recipient is not eligible for full ITC, this valuation exercise becomes contested and expensive.

Second, it means GST cash outflows at the SSC level before the ITC can be claimed at the group entity level, creating working capital pressure. Third, for group entities that make partly exempt or non-taxable supplies — such as financial holding companies, entities in the education sector, or real estate companies — the ITC on cross-charged services may itself be blocked under Section 17(5) of the CGST Act, resulting in an actual tax cost to the group.

The Turnover-Based Allocation Formula and Its Limitations

Even within the domain where the ISD mechanism does apply — that is, within a single legal entity with multiple state registrations under the same PAN — the turnover-based allocation formula prescribed under Section 20 has attracted criticism for producing allocations that do not reflect actual consumption of services. [6]

Under the formula, if a head office pays for a nationwide software licence and distributes the ITC through ISD, the credit is allocated to each branch in proportion to that branch’s share of the entity’s total turnover. If Branch A in Delhi contributes 40% of turnover and Branch B in Chennai contributes 10%, then 40% of the ITC goes to Branch A and 10% to Branch B — irrespective of whether Branch A actually uses the software more intensively than Branch B. For services like enterprise audit, legal retainers, or executive manpower, turnover is a highly imperfect proxy for actual benefit received. The law does provide that where a service is exclusively attributable to one unit, the full credit goes to that unit — but for genuinely shared services, the only mechanism permitted is the turnover ratio. [1]

This bluntness of the formula compounds the difficulty for SSC structures: even if the PAN restriction were legislatively removed, the turnover-based formula would still produce allocations that distort the economic reality of how shared services are consumed within a group. The ISD return — GSTR-6, mandated under Rule 65 of the CGST Rules — must be filed by the 13th of each month, and ITC must be distributed in the same month it is received, leaving no flexibility for year-end or quarterly reallocation even where the actual pattern of consumption becomes clearer only over time. [6]

Compliance and Penalty Implications

The post-April 2025 mandatory ISD regime has sharpened the consequences of non-compliance. Under Section 21 of the CGST Act, where an ISD distributes credit in contravention of Section 20, the excess credit so distributed is recoverable from the recipient along with interest. Non-registration or failure to file GSTR-6 on time can attract notices, interest demands, and penalties under the CGST Act. [6] For businesses that distributed ITC through cross-charge rather than ISD where ISD was the applicable route, the risk of retrospective demands for periods prior to the April 2025 mandate remains a live concern, notwithstanding the clarificatory Circular.

For group companies operating SSCs, the compliance picture is structurally settled — but commercially disadvantageous. They are entirely outside the ISD framework and must structure their SSC arrangements as taxable cross-charge supplies. The practical implications include registering SSCs as regular GST taxpayers in all relevant states, issuing proper tax invoices for all inter-company services, determining and defending the value of such services under Rule 28, and ensuring that recipient group entities have made corresponding ITC claims — which they may not fully be able to do if they make exempt or non-taxable supplies. [9]

The Way Forward: Does Indian GST Need a Group Relief Provision?

Several mature GST and VAT jurisdictions have specifically addressed the issue of intra-group credit flow by introducing group registration provisions. Under such provisions, multiple related entities are treated as a single GST or VAT person for the purposes of input tax credit, meaning that supplies between group members are disregarded for tax purposes and ITC flows freely within the group. The United Kingdom’s VAT grouping provisions under Section 43 of the Value Added Tax Act 1994 and Australia’s GST group registration provisions under the A New Tax System (Goods and Services Tax) Act 1999 are well-known examples. Both allow related bodies corporate that meet common control and establishment criteria to designate one representative member to account for group-wide transactions.

India’s GST law currently contains no equivalent provision. Each registered person is treated independently, and the concept of “distinct persons” under Section 25(4) applies only within the same PAN — leaving group companies with different PANs entirely outside any tax-neutral intra-group transfer framework. [10] The absence of a group relief provision is the deepest structural failure that the ISD mechanism reflects rather than resolves. Until such a provision is introduced, or until the definition of ISD in Section 2(61) is amended to extend to same-group entities beyond same-PAN entities, the ISD mechanism will continue to fail Shared Service Centre models in the Indian corporate group context.

Conclusion

The ISD mechanism under India’s GST law is, within its defined scope, a functional instrument for a specific type of multi-locational entity — a single legal person with multiple state registrations under the same PAN. It was not designed, and does not operate, as a solution for the broader challenge of intra-group credit distribution across separate legal entities. The Finance Act, 2024 amendments and the consequent mandatory ISD registration requirement from April 1, 2025 have made the mechanism more rigorous within its scope but have done nothing to expand that scope. Group companies operating through Shared Service Centres continue to find themselves outside the ISD framework, dependent on the cross-charge mechanism with its attendant valuation disputes, working capital costs, and ITC eligibility uncertainties. The legislative response required is not a further circular — it is a structural amendment to either broaden the ISD definition to cover same-group entities, or introduce a formal group registration provision within the CGST Act, as has been done in other GST jurisdictions worldwide.

References

[1] Central Goods and Services Tax Act, 2017, Sections 2(61), 20, 21, 24 and 25 — Ministry of Law and Justice, Government of India. https://www.indiacode.nic.in/handle/123456789/2265
[2] Notification No. 16/2024-Central Tax dated August 6, 2024, CBIC. https://cbic-gst.gov.in/pdf/notfctn-16-central-tax-english-2024.pdf
[3] M/s Columbia Asia Hospitals Pvt. Ltd., Order No. KAR/AAAR/05/2018-19, AAAR Karnataka. https://gstcouncil.gov.in/sites/default/files/2024-02/columbiaasiaappealorder.pdf
[4] M/s Cummins India Limited, Advance Ruling No. MAH/AAAR/AM-RM/01/2021-22, AAAR Maharashtra, December 21, 2021. https://gstcouncil.gov.in/ms-cummins-india-limited
[5] Circular No. 199/11/2023-GST dated July 17, 2023, CBIC. https://cbic-gst.gov.in/pdf/circular/cgst-circular-199-11-2023-english.pdf
[6] ClearTax — ITC Rules for Input Service Distributor. https://cleartax.in/s/itc-rules-input-service-distributor
[7] Taxmann — ISD vs Cross Charge, Post Finance Act 2024 Amendments. https://www.taxmann.com/post/blog/analysis-input-service-distributor-isd-vs-cross-charge
[8] Mondaq / Khaitan & Co — Cross Charge vs. ISD: An Attempt to Settle the Unsettled. https://www.mondaq.com/india/tax-authorities/1353100/cross-charge-vs-isd-an-attempt-to-settle-the-unsettled
[9] Business Standard — Companies with multi-state presence to register as ISD with GST authorities (August 7, 2024). https://www.business-standard.com/companies/news/companies-with-multi-state-presence-to-register-as-isd-with-gst-authorities-124080700491_1.html
[10] GST Council Flyer — Input Service Distributor in GST. https://gstcouncil.gov.in/sites/default/files/e-version-gst-flyers/51_GST_Flyer_Chapter10.pdf

Posted on: February 20th, 2026