Identify the transaction first
Under section 25(4) and (5) of the Central Goods and Services Tax (CGST) Act, 2017, separate GST registrations and covered establishments can be distinct persons. Entry 2 of Schedule I brings supplies between distinct persons in the course or furtherance of business into GST even without consideration. A cost allocation or an incidental benefit alone does not establish that a head office supplied a service. Document what was procured, who used it and what the head office actually provided.
| Question | Cross-charge | Input Service Distributor (ISD) |
|---|---|---|
| What does it do? | Accounts for an actual or deemed supply between distinct persons. | Distributes tax credit on covered input service invoices. |
| Which costs? | For example, an internal IT service actually supplied by the head office. | For example, a third-party service procured for or on behalf of one or more distinct registrations. |
| Goods and capital assets? | Test asset transfers under Schedule I and applicable valuation and capital goods rules. | Cannot distribute credit on goods or capital goods. |
| Which registration? | Use the regular supplier GSTIN. | Apply separately as ISD under section 24(viii) and Rule 8. |
| When required? | Check whether a taxable supply occurred and whether a specific valuation clarification applies. | Mandatory for covered services from 1 April 2025 under amended section 20. |
| Which document? | Use a tax invoice under section 31 where required. | Use the ISD document under Rule 54; use the prescribed transfer document for covered reverse-charge credits. |
| Which return? | Report as applicable in regular GSTR-1 and GSTR-3B. | Distribute available credit in the same month and report it in GSTR-6, ordinarily due by the 13th of the next month, subject to extensions. |
| How measured? | Apply section 15 and Rule 28, including the full-credit proviso when available. | Directly attribute single-recipient credit; apportion shared credits using Rule 39. |
| What about salaries? | CBIC says head office employee salaries need not be included in valuing internally generated services supplied to branches. | Payroll is not third-party input service credit. |
| How recorded? | Reconcile GST returns separately from elimination of intra-entity amounts in legal-entity accounts. | Reconcile distributed credit separately from external revenue and expenses. |
Value an actual branch supply under Rule 28
Under Rule 28(1), first consider open market value, then the value of a comparable supply of like kind and quality. If neither is available, apply Rule 30 or Rule 31 in that order, subject to the option for service suppliers to go directly to Rule 31. Rule 30 uses 110% of the relevant cost when it applies. For goods intended for further supply as such, Rule 28(1) also provides a qualifying option based on 90% of the price charged by the recipient to an unrelated customer for like goods. For a recipient eligible for full ITC on the supply, the second proviso deems the invoice value to be open market value. Verify eligibility on the supply itself under sections 16 and 17, including any restrictions. A branch making taxable supplies can still have blocked credit.
CBIC Circular 199/11/2023–GST, dated 17 July 2023, also addresses internally generated services where no invoice was issued and the recipient was eligible for full credit: the circular says the value may be treated as nil for that valuation proviso. Apply this clarification to its facts. It does not waive invoicing generally, apply to unrelated external vendor credit, or establish that all branch transactions are tax free. For internally generated services, the circular says inclusion of the relevant head office employee salary is not mandatory, even if the branch lacks full credit. Check the value of the inter-branch supply separately from the treatment of employee services under Schedule III.
Distribute vendor credit under amended section 20
Sections 11 and 12 of the Finance Act, 2024 (Act 8 of 2024), amended the ISD definition and replaced section 20 from 1 April 2025. The Finance Act, 2025 expressly included input services liable under section 5(3) or (4) of the IGST Act with effect from the same date. An office receiving covered input service invoices for or on behalf of distinct persons must register as an ISD and distribute the credit accordingly. The rule can apply to a service used by just one other registration. Review invoices for inputs procured solely for the receiving office separately. For periods before 1 April 2025, Circular 199 described the former choice between ISD and invoicing actual services provided to branches, subject to its conditions; do not apply that choice to covered credits under amended section 20.
For vendor invoices under forward charge, arrange correct invoicing against the appropriate registration. For covered reverse-charge services, a regular GST registration with the same PAN and State code as the ISD can use Rule 39(1A) and the document prescribed by Rule 54(1A) to transfer credit to the ISD after the applicable tax is paid. From 1 November 2026, Notification 05/2026 also removes “common” from Rule 39(1A) and expressly aligns Rule 54(1A) with input services attributable to one or more distinct persons. Track the underlying invoice and tax payment and avoid duplicate claims. This procedure is separate from invoicing an internal service.
Under Rule 39, attribute an invoice solely to the recipient to which it relates if there is just one. If the service relates to multiple recipients, apportion to the relevant operational recipients by their applicable turnover. Use the preceding financial year where the relevant turnover exists for all recipients; otherwise use the last quarter before the distribution month for which turnover details for all of them are available. Distribute eligible and ineligible credit separately. Through 31 October 2026, Rule 39(1)(i) specified IGST credit as the distribution head for underlying IGST. From 1 November 2026, Notification 05/2026–Central Tax adds central-tax credit as an alternative in that clause. Verify the prescribed head and the actual portal treatment for the distribution; do not assume either head is available in every case. Central tax and State or Union territory tax are distributed under their respective heads to same-state recipients and as IGST to recipients in another State or Union territory. Check the underlying tax treatment and recipient eligibility before posting the distribution.
Seven worked illustrations
1. Cloud services imported for four registrations
Assume an Indian company's Bengaluru office is the recipient under a ₹12 crore overseas cloud contract, the supply qualifies as an import of services subject to reverse charge and the applicable IGST rate is 18%. The regular Bengaluru registration pays ₹2.16 crore, or ₹216 lakh, of IGST. If that credit is otherwise available, the regular registration uses the prescribed document to pass it to the same-state ISD. Assume all four relevant recipients are operational and the preceding financial year's relevant turnover proportions are Karnataka 40%, Maharashtra 30%, Haryana 20% and Telangana 10%. The respective allocations are ₹86.40 lakh, ₹64.80 lakh, ₹43.20 lakh and ₹21.60 lakh, totalling ₹216 lakh. This example assumes distribution under the IGST head; apply the rule in force for the distribution period. Reconcile GSTR-6 to the recipients' records and test entitlement before claiming credit.
2. Head office payroll and vendor costs in FY 2022–23
A Delhi head office incurs ₹15 crore, comprising ₹10 crore of employee salaries and ₹5 crore of third-party overheads. At an assumed 18%, the salary component alone would add ₹1.80 crore to an audit calculation. For internal services actually supplied to Rajasthan and Gujarat, use the circular's specific salary guidance; if the recipient has full ITC, also apply the second proviso as appropriate. Assess attribution of the ₹5 crore vendor pool separately under the rules for that period. The figures illustrate a response to a proposed adjustment; they do not establish the result of an audit.
3. A branch uses the service only for exempt supplies
Assume the diagnostic branches' relevant outputs are qualifying exempt healthcare supplies and no ITC is available on the head office support used exclusively for them. The full-credit proviso is unavailable. Assume no market or comparable value is available, the company applies Rule 30, documented annual cost of provision is ₹2.40 crore, and tax on the support service is 18%. The value is ₹2.64 crore and tax is ₹47.52 lakh. If the head office previously used ₹1 lakh per month for the same scope and paid ₹2.16 lakh for the year (18% of ₹12 lakh), the difference is ₹45.36 lakh before any applicable interest. Document the cost and scope and use a defensible allocation method. For mixed-use branches, test the actual credit allocation and reversals instead of assuming nil ITC.
4. Laptops and a software licence
A Gurugram office buys 50 laptops and specialised software for an aggregate ₹1 crore plus ₹18 lakh IGST. After six months it transfers 30 laptops, or 60% by count, to a distinct Odisha GST registration and extends software access. The aggregate invoice does not establish the laptop transfer value or Odisha's eligible credit. Where ITC was taken on capital goods transferred as a supply, section 18(6) requires comparison of the prescribed reduced credit with tax on the properly determined value, paying the higher amount. Do not substitute income-tax written-down value. Classify the licence and determine who received the underlying service before choosing ISD or treating software access as a separately supplied service.
5. Audit notice for earlier years
A 40-store chain receives a hypothetical ₹4.50 crore notice concerning marketing support for FY 2018–19 through FY 2021–22. Reconcile contracts, invoices and recipient-wise eligibility for those periods. Apply the circular's nil valuation clarification only to qualifying internally generated services where the recipient had full credit. Examine third-party campaign costs under the earlier law and respond to the notice on its own facts.
6. Domestic tariff area and SEZ recipients
A Chennai ISD receives legal service invoices attributable to both domestic tariff area units and a Chennai SEZ developer. Apply the attribution and tax-head rules based on the underlying credit. If the underlying tax is IGST and distribution is made as IGST, the same-state location does not by itself convert it to CGST and SGST. For distributions from 1 November 2026, check the amended wording of Rule 39(1)(i). A supply to an SEZ unit or developer is interstate; zero-rating relates to supplies for authorised operations under the applicable IGST Act. The ISD invoice distributes credit and does not itself establish a zero-rated supply or a refund entitlement.
7. Reconcile internal documents across 14 registrations
For a manufacturer with 14 GST registrations and more than 2,000 internal documents a year, keep separate registers for supplier invoices, ISD allocations and cross-charge invoices. Reconcile GSTR-6 and eligible recipient credit with GSTR-2B and regular return records. Separately reconcile and eliminate intra-entity balances or internal income and expense from legal-entity financial reporting as applicable.
Frequently asked questions
When must a multi-state company register as an ISD?
From 1 April 2025, the obligation applies to an office receiving covered input service invoices for or on behalf of distinct persons. Having multiple registrations alone does not identify which office must register.
Must head office salaries be included?
Circular 199 says inclusion of head office employee salaries is not mandatory for internally generated services supplied to branches, including where the branch lacks full ITC. Identify and value the underlying supply separately.
Can an ISD distribute credit on machinery or raw material?
No. ISD covers input services. Review goods transfers under the supply, valuation, invoicing and capital goods rules that apply to the transaction.
When is invoice value deemed to be market value?
The second proviso to Rule 28(1) applies where the recipient is eligible for full credit on the particular supply. Keep evidence of that entitlement.
What if a branch makes exempt supplies?
Test the actual use and credit restrictions. If full credit is unavailable, use the applicable Rule 28 valuation route; cost plus 10% is one possible route, not the default whenever there are exempt outputs.
What should a multi-branch accounting workflow reconcile?
Match vendor invoices and any reverse-charge payments to ISD documents and GSTR-6; track internal supply invoices and recipient claims separately. Reconcile return balances to the legal entity's books.
Sources
- Telangana Commercial Taxes Department: consolidated GST Acts and Rules, including CGST sections 2, 15–20, 24–25, 31 and 39, Schedule I, and Rules 28, 30, 31, 39 and 54
- Gazette of India: Notification 16/2024–Central Tax (commencement on 1 April 2025)
- Finance Act, 2025: sections 124 and 125 (interstate reverse-charge input services)
- CBIC Circular 199/11/2023–GST: third-party inputs and valuation of internal services
- Integrated Goods and Services Tax Act, 2017: imports, interstate supplies and zero-rating (read with amendments)
- Notification 10/2017–Integrated Tax (Rate), entry 1: reverse charge on specified cross-border services (read with amendments)
- Gazette text: Notification 05/2026–Central Tax, paragraphs 1, 10 and 12
- GST portal: how ISD documents are reflected in GSTR-2B