GST Section 20: Updated Rules for Input Service Distributor (ISD) Credit Distribution [Effective April 2025]

Section 20 of the CGST Act, as substituted by the Finance Act 2024 effective from April 1, 2025, outlines the manner in which Input Service Distributors (ISDs) must distribute input tax credit (ITC) related to input services—including those under reverse charge—to distinct persons registered under the same PAN.

The updated provision mandates ISD registration for offices receiving such invoices, prescribes the method of distributing central and integrated tax credits, and requires issuance of proper documentation in a prescribed format. As explained by AUBSP, these changes are crucial for multi-location businesses to ensure compliant and optimized credit utilization under GST.

GST Section 20: Manner of Distribution of Credit by Input Service Distributor (ISD)

Welcome, reader. If you’re managing GST compliance for a business with multiple registrations under a single PAN, you’ll want to fully understand Section 20 of the CGST Act, which governs how Input Service Distributors (ISDs) should handle the distribution of Input Tax Credit (ITC).

In this article, AUBSP takes you through the updated Section 20, amended and substituted by the Finance Act, 2024, effective from 1st April 2025. We’ll explore who qualifies as an ISD, how credit must be distributed, and what documents and conditions apply.

What is an Input Service Distributor (ISD)?

An Input Service Distributor is an office of the supplier that receives tax invoices for input services used across multiple locations (distinct persons under Section 25 of the CGST Act). Such an office must be registered as an ISD under Clause (viii) of Section 24.

AUBSP emphasizes that the ISD mechanism is not meant for distributing input credit of goods — only for services.

Breakdown of Updated Section 20 Provisions

Let’s explore each subsection of Section 20 in a simplified yet detailed manner:

Section 20(1): Mandatory ISD Registration

Any office of the supplier receiving invoices for input services on behalf of distinct persons (as defined under Section 25), including services under reverse charge [Sections 9(3) & 9(4) of CGST Act or Sections 5(3) & 5(4) of IGST Act], must register as an ISD.

Key Points:

• Applies to offices that centralize invoicing for services.
• Includes invoices received under reverse charge mechanism.
• Registration under ISD category is compulsory for eligible entities.

Section 20(2): Distribution of ITC

The ISD shall distribute the credit of central tax or integrated tax to distinct persons within the same State, as per the rules prescribed.

Conditions:

• Only input service credit can be distributed.
• Credit of services paid by a distinct person in the same State is also includible.
• Distribution must comply with:
  • Time limits
  • Prescribed manner
  • Applicable conditions and restrictions

Note by AUBSP:

This subsection aligns with practical business structures where shared services (e.g., legal, IT, consulting) are consumed across various branches, allowing centralized credit allocation.

Section 20(3): Mode of Distribution

The credit shall be distributed by issuing a prescribed document, clearly indicating:

• Credit of Central Tax as either Central or Integrated Tax.
• Credit of Integrated Tax as either Integrated or Central Tax.

Key Compliance Element:

The document of distribution serves as the legal record — this must comply with the format and conditions notified by the Government.

Important Dates Table

Why is This Important for Businesses?

For companies with multiple registrations under a single PAN, proper distribution of input tax credit for services is crucial to ensure:

• No loss of credit
• Correct GST returns
• Reduced tax disputes

Failure to comply with ISD provisions can lead to interest, penalties, or ITC denial.

Common Mistakes to Avoid

• Distributing ITC on goods – Only services are allowed.
• Improper documentation – Use prescribed format for distribution.
• Ignoring reverse charge invoices – These too must be considered.
• Not registering as ISD when required – Can trigger non-compliance penalties.

Final Thoughts from AUBSP

The substitution of Section 20 clarifies and modernizes the ISD mechanism under GST. Businesses must reassess their centralized service models, ensure proper registration, and follow prescribed distribution methods to remain compliant from April 1, 2025.

At AUBSP, we advise GST professionals and businesses to:

• Revisit ISD registrations.
• Create a credit distribution SOP.
• Update ERP systems to align with the prescribed formats.

FAQs on Manner of Distribution of Credit by Input Service Distributor

What is GST Section 20 about?
Section 20 of the CGST Act governs the manner in which Input Service Distributors (ISDs) distribute input tax credit (ITC) of services to distinct persons registered under the same PAN.

When does the substituted Section 20 come into effect?
The updated Section 20, as substituted by the Finance Act, 2024, comes into effect from April 1, 2025.

Who needs to register as an Input Service Distributor (ISD)?
Any office of a supplier that receives invoices for input services on behalf of distinct persons under the same PAN must register as an ISD under clause (viii) of Section 24.

Can input tax credit on goods be distributed through ISD?
No, ISDs are only allowed to distribute input tax credit related to input services, not goods.

Are reverse charge services included in ISD credit distribution?
Yes, input services received under reverse charge under Section 9(3) or 9(4) of CGST Act or Section 5(3) or 5(4) of IGST Act are included in the ISD mechanism.

Can an ISD distribute credit to units in another State?
Yes, an ISD can distribute credit to any distinct person (registered unit) of the same legal entity across States, provided proper documentation is maintained.

What taxes can be distributed through ISD?
Only Central Tax (CGST) and Integrated Tax (IGST) credits related to input services can be distributed by ISD.

What is meant by ‘distinct persons’ under Section 25 of the CGST Act?
Distinct persons are different GST registrations obtained under a single PAN for multiple States or business verticals, treated as separate taxable persons under GST.

How should the ISD distribute input tax credit?
The ISD must distribute credit via a prescribed document, in a manner, time, and subject to conditions and restrictions as notified by the government.

What format should the ISD use to distribute credit?
The ISD must issue a document, similar to an invoice or credit note, containing the details of the credit distributed, in the prescribed format.

Can an ISD distribute credit received from another registered unit in the same State?
Yes, if the ISD receives services on which another distinct person in the same State has paid tax, such credit can also be distributed.

Is registration as ISD optional or mandatory?
It is mandatory for any eligible office that receives input service invoices on behalf of multiple units to register as an ISD.

What happens if a company fails to register as an ISD but distributes credit?
Distributing ITC without valid ISD registration is a violation and may result in recovery of credit, interest, and penalties.

Can the ISD mechanism be used for distributing credits of capital goods?
No, only input service credits can be distributed via ISD; capital goods and goods are excluded.

How is IGST credit distributed by an ISD?
IGST credit can be distributed as IGST or CGST, depending on the location of the recipient and in line with the prescribed rules.

How is CGST credit distributed by an ISD?
CGST credit can be distributed as CGST or IGST, based on whether the recipient unit is in the same State as the ISD or in another State.

Are there any specific rules notified for ISD credit distribution?
Yes, the government has prescribed specific rules, formats, and procedures under the CGST Rules for ISD credit distribution.

What is the role of AUBSP in understanding GST Section 20?
AUBSP provides professional, detailed guidance on GST provisions like Section 20, helping businesses stay compliant and optimize ITC usage.

Is it necessary to distribute input credit every month?
The distribution frequency is governed by the rules, and generally, it should align with the return filing cycle or as prescribed.

How should businesses prepare for the new Section 20 effective from April 2025?
Businesses should reassess their ISD registration status, update internal accounting systems, and align their ITC distribution process with the new rules.

Can a single office be both a regular taxpayer and an ISD?
Yes, but it must obtain separate GSTINs for both roles—one for regular supply of goods/services and another for ISD purposes.

Where can I find the notification regarding the substitution of Section 20?
The substitution is notified through Notification No. 16/2024–Central Tax, S.O. 3161(E), dated August 6, 2024.

Should you need further guidance or practical tools for implementing ISD under the updated law, AUBSP.com is here to assist.