GST Rule Changes from April 1: Key Updates for Business Owners

The government has announced some significant modifications in the GST rules, introducing the input service distributor (ISD) regime on 1 April 2025. The regime will make sure that the state government receives the correct amount of tax on common services that have been provided at one location.

What is the ISD system in GST?

The Finance Act (No. 1) 2024 amended the CGST Act for the purpose of introducing ISD. This model allows businesses undertaking operations in two or more states to centralise invoices for composite input services (domestic as well as foreign) at one specified branch or head office

It guarantees the impartial or fair division of input tax credit (ITC) among branches that use these shared services.

What is Input Tax Credit (ITC)?

Input tax credit refers to the tax paid on the purchases of businesses that could be deducted from the output tax liability. It is applicable to the GST paid on goods and services that were used for the business objective. Overall tax liability of the business can be reduced by proper utilisation of ITC.

Important Changes in the New ISD System

Mandatory ISD system: Businesses should adopt the ISD mechanism rather than the cross-charge method for the allocation of ITC extending over branches.

No ITC without ISD: If a business does not make use of ISD, ITC cannot be redeemed at recipient locations.

Penalties for Incorrect ITC Distribution:

• If ITC has been miscalculated, then interest charges could apply.
• For non-compliance, businesses may need to pay charges of Rs 10,000 or the ITC amount (whichever is higher) as a penalty.

Conclusion

This ISD system focuses on verifying a fair and transparent tax distribution extending over states. It is mandatory for businesses to update their tax compliance processes before 1st April 2025.