Finance Act, 2025-ISD Provisions applicable from FY 2025-26!

The Finance Act, 2025, has introduced key amendments to the Input Service Distributor (ISD) provisions under the CGST Act, 2017, which will take effect from FY 2025-26. These changes aim to streamline the distribution of input tax credit (ITC), particularly by expanding the scope of ISD to include inter-state reverse charge mechanism (RCM) invoices. With these amendments, businesses can ensure a more efficient allocation of ITC across different branches, leading to better tax compliance and operational efficiency. In this blog, we explore the revised definition of ISD and the updated procedure for ITC distribution.

Changes in Finance Act, 2025 related to ISD:

Section 2- Clause (61) – Definition of ISD:

Section 2(61) of the CGST Act, 2017, defines the term Input Service Distributor (ISD). An ISD refers to an office of a supplier of goods or services that receives tax invoices for input services and distributes the corresponding input tax credit to other branches or units of the same organization, each identified by the same Permanent Account Number (PAN). 

As per the earlier definition of ISD, the following are the types of input invoices that can distributed by ISD to its branches:

• Tax invoice -forward charge
• Tax invoices- RCM- Intra-state only

This definition did not cover RCM invoices on which IGST is payable by the recipient of goods/services.

Now, as per the amendment in Finance Act, 2025, after the word and figure “section 9”, the words “of this Act or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017)” are inserted with effect from the 1st April 2025. This amendment makes Inter-state RCM Invoices on which IGST is payable; available for distribution to ISD.

The amended definition is as follows:

“"Input Service Distributor" means an office of the supplier of goods or services or both which receives tax invoices towards the receipt of input services, including invoices in respect of services liable to tax under sub-section (3) or sub-section (4) of section 9 of this Act or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act, 2017 (13 of 2017), for or on behalf of distinct persons referred to in section 25, and liable to distribute the input tax credit in respect of such invoices in the manner provided in section 20.”

Amendment of section 20- Procedure for Distributing ITC by ISD:

Section 20 of the CGST Act, 2017 deals with the procedure for Distributing ITC by Input Service Distributor (ISD). 

Earlier, this section covered the procedure for distribution of ITC for forward charge invoices and invoices of RCM for Intra-state supply only. Now, it covers the distribution procedure for invoices of RCM for inter-state supply too.

Conclusion

The amendments to the ISD provisions in the Finance Act, 2025, mark a significant step in simplifying tax credit distribution under GST. By allowing inter-state RCM invoices to be included in the ISD framework, businesses can now optimize their ITC utilization more effectively. This change will help ensure a smoother tax compliance process while reducing unnecessary tax burdens on organizations operating across multiple states. As these provisions come into effect from FY 2025-26, businesses must stay informed and make the necessary adjustments to their tax management strategies to leverage these benefits.

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