The Head Office That Hoarded ITC: An ISD Lesson Every Multi-Branch Business Must Learn

Meet a mid-sized IT services firm we will call "Aarohi Tech." Its head office is in Mumbai, and it has delivery centres in Pune, Bengaluru, and Gurugram. Each location has its own GST registration under the same PAN — which, under Section 25 of the CGST Act, makes them distinct persons.

Everything ran smoothly until an internal review before their annual audit flagged a problem that had been quietly building for two years.

The Scene: One Office Paying, Everyone Benefiting

Aarohi's head office signed the big central contracts — the annual software licence, the group insurance, the statutory audit fee, and the pan-India advertising campaign. All these invoices were raised in the name of the Mumbai GSTIN.

So naturally, the Mumbai office claimed the full input tax credit (ITC) on all of it. In one year alone, this came to roughly Rs 22 lakh of ITC sitting entirely in the Mumbai books.

The catch? These were common input services benefiting all four branches. The teams in Pune, Bengaluru, and Gurugram were using that software and enjoying that insurance too — but their registrations never saw a rupee of the related credit.

The GST Problem: Common Credit in the Wrong Hands

When input services are procured centrally but consumed across multiple registrations, the ITC cannot simply be parked in the office that received the invoice. It must be distributed to each unit that benefits from the service.

The mechanism for this is the Input Service Distributor (ISD), defined under Section 2(61) of the CGST Act. And here is the part many businesses missed: the ISD route, which was once optional in practice, has been made mandatory for distributing credit on common input services among distinct persons.

By keeping all the credit in Mumbai, Aarohi had:

• Over-claimed ITC at the Mumbai GSTIN.
• Starved its other branches of legitimate credit.
• Exposed itself to interest and penalty on the wrongly retained credit if picked up in scrutiny.

Why This Trips Up Growing Firms

Most businesses set up one "main" registration and route every big invoice through it out of habit. It feels efficient. But GST treats each GSTIN as a separate taxpayer, and credit has to flow to where the service is actually used.

How Aarohi Solved It Correctly

Working with their consultant, Aarohi did four concrete things:

1. Obtained a separate ISD registration. An ISD needs its own registration under Section 24, distinct from its normal GSTIN, even at the same address.
2. Rerouted common-service invoices to the ISD. Vendors were asked to bill the ISD registration for shared services going forward.
3. Distributed credit as per Rule 39. Credit attributable to a specific unit went to that unit; credit common to all was distributed on a turnover ratio of the relevant period. The ISD issued proper ISD invoices for each distribution.
4. Filed GSTR-6. The ISD files a monthly GSTR-6 to report and distribute the credit, which then reflects in each recipient branch's return.

For the past errors, they corrected their position, moved the credit to the right registrations where the timeline allowed, and reversed the excess in Mumbai — cleaning the slate before the audit rather than after a notice.

The Key Lesson for Readers

If your business has more than one GST registration under the same PAN and pays for shared services centrally — software, audit, marketing, insurance, professional fees — you almost certainly need an ISD registration. Distributing common ITC through the ISD is no longer a nice-to-have; it is the required route.

Ask yourself: which of my invoices benefit more than one location? Those are the ones that belong in the ISD.

How GSTClear Helps

GSTClear flags invoices that look like common input services across your registrations, helps you set up and manage your ISD filings, and auto-computes the turnover-based distribution under Rule 39 — so credit lands in the right GSTIN every month. It also reconciles what each branch receives against your GSTR-2B, catching mismatches before they become notices.

If you run multiple GSTINs under one PAN, do not let credit pile up in the wrong place. Start your ISD compliance with GSTClear today and keep every branch's books clean.

FAQ

Who needs an ISD registration?

Any business with multiple GST registrations under the same PAN that receives common input service invoices at one location and needs to distribute that ITC to other locations must register as an ISD, separately from its regular GSTIN.

Can an ISD distribute credit on goods or capital goods?

No. The ISD mechanism applies only to input services. Credit on goods and capital goods cannot be distributed through the ISD route; that follows the normal supply and cross-charge rules.

What return does an ISD file and by when?

An ISD files GSTR-6 monthly, reporting the credit received and how it has been distributed. Filing on time ensures the distributed credit reflects promptly in each recipient branch's records.