Cross charge versus ISD after the mandatory Input Service Distributor amendment

For years these were treated as alternatives. Since April 2025 one of them is mandatory, and the other is still required for the rest.

The two mechanisms, distinguished

ISD is a distribution mechanism. A third party invoices the head office for a service used by several branches — audit, insurance, software licences, advertising — and the head office distributes the credit to the branches in the prescribed ratio, without any supply by the head office.

Cross charge is a supply. Where the head office itself performs a function for the branches, using its own employees and infrastructure, that is a supply of service between distinct persons under Schedule I, taxable without consideration, valued under Rule 28.

Before the amendment, taxpayers used one or the other and Circular 199/11/2023-GST addressed the treatment of common input services and the valuation of internally generated services. After the amendment, ISD is compulsory for the distribution of third party common input services and cross charge cannot be used as a substitute for it.

What the mandatory ISD requires operationally

A separate ISD registration for the office receiving the common invoices, with its own returns in GSTR-6.

Vendors must invoice the ISD registration for common services. This is the single largest implementation problem, because vendor masters and purchase orders carry the operating GSTIN.

Distribution in the prescribed ratio of turnover, separately for eligible and ineligible credit, and separately for credit attributable to a single recipient.

The ISD mechanism now also covers credit in respect of services on which tax is payable under reverse charge, in the manner prescribed, which was a significant change and requires the RCM invoice to be routed correctly.

The valuation question on cross charge

Where the head office supplies a service to a branch, the value is determined under Rule 28. The second proviso permits the value declared in the invoice to be treated as the open market value where the recipient is eligible for full input tax credit.

Circular 199/11/2023-GST clarified that where full credit is available to the recipient branch, the value declared may be taken as the open market value even if the cost of some elements, such as employee cost, is not included.

That clarification is what makes cross charge manageable. Where a branch is not eligible for full credit — because it makes exempt supplies — the valuation exposure is real and the cost build up must be defensible.

The exposure that remains is the failure to cross charge at all, which is the most common departmental finding in multi state groups.

Authorities relied on

What to do on Monday

1. Classify every recurring common expense as ISD distributable, cross charge, or branch specific, and record the classification in the vendor master.

2. Communicate the ISD GSTIN to vendors of common services in writing and check the first invoice after the change.

3. Document the cross charge basis for internally generated services once, with the Rule 28 position and the circular reference.

4. Reconcile GSTR-6 distribution to branch credit each quarter; an undistributed balance is a lost credit.

Questions we are asked on this

Is ISD mandatory for all common expenses?

It is mandatory for the distribution of credit on common input services invoiced by third parties. Goods are not distributed through ISD, and internally generated services require cross charge.

Do we still need to cross charge if we have an ISD registration?

Yes, for services the head office itself supplies to branches. The two mechanisms cover different transactions.

Must employee cost be included in the cross charge value?

Where the recipient branch is eligible for full credit, the declared value may be treated as the open market value under the second proviso to Rule 28, as clarified by the circular. Where it is not, the cost build up matters.

What happens if vendors keep invoicing the operating GSTIN?

The credit is taken by the wrong registration and the distribution is not made, which is a demand in the operating state and a lost credit in the others. Fix the vendor master.

Does ISD apply to reverse charge services?

The amended mechanism provides for credit in respect of services subject to reverse charge to be distributed in the prescribed manner. Route the self invoice correctly.

In this cluster

• Input tax credit under GST: the complete 2026 position
• Section 16(2)(c): can your ITC be denied because the supplier did not pay tax?
• Section 16(4) time limit for claiming ITC: what survives after the amnesty
• GSTR-2A and 2B mismatch notices: how to answer without conceding
• Blocked credits under Section 17(5): the clause by clause map
• Safari Retreats: what the Supreme Court decided on ITC for construction, and what Parliament then undid
• ITC on canteen, transport, insurance and other employee benefits
• ITC reversal under Rules 42 and 43: working the formula correctly
• Rule 37: ITC reversal when you do not pay your supplier within 180 days
• Rule 37A: reversal where your supplier did not file its GSTR-3B

GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.