Introduction
The interplay between the Input Service Distributor (ISD) mechanism and cross-charge has long been a contentious issue under the Goods and Services Tax (GST) regime. The substitution of Section 20 of the Central Goods and Services Tax Act, 2017 (CGST Act), effective from 1 April 2025, has now made ISD registration mandatory for distributing input tax credit (ITC) relating to common input services procured from third-party vendors. This legislative change has also prompted departmental scrutiny of past practices, with notices being issued to taxpayers who, before 1 April 2025, distributed common ITC through cross-charge instead of the ISD mechanism.
The legality of such notices must be examined against the law that existed during the relevant period. The unamended statutory provisions, contemporaneous CBIC clarifications, the GST Council's recommendations, the legislative history culminating in the 2025 amendment, and the recent decision of the Kerala High Court in Intertek India Pvt. Ltd. v. Assistant Commissioner of Central Taxes & Central Excise 2025:KER:99004 (Order dated 08 June 2026) collectively indicate that ISD registration was not mandatory before 1 April 2025 and that bona fide cross-charge arrangements cannot retrospectively be treated as unlawful.
The Statutory Framework Before 1 April 2025
Before its substitution by the Finance (No. 2) Act, 2024, Section 20 of the CGST Act employed permissive language. It provided that an Input Service Distributor may distribute ITC in the prescribed manner. The provision therefore prescribed the mechanism governing entities that chose to function as an ISD; it did not require every registered person receiving common input service invoices to obtain ISD registration.
The substituted Section 20 fundamentally altered this position by mandating ISD registration for specified situations from 1 April 2025. Parliament therefore chose to change the law prospectively rather than declare that such an obligation had always existed.
CBIC Clarifications and the GST Council's Position
The administrative understanding of the law was equally clear. In its August 2017 FAQ on IT and ITeS services, the Central Board of Indirect Taxes and Customs (CBIC) clarified that the ISD mechanism was not mandatory but merely prescribed the procedure where an entity opted to distribute credit through that route.
This position was reaffirmed through Circular No. 199/11/2023-GST dated 17 July 2023, which clarified that common input service costs, together with the applicable GST, could be allocated through tax invoices by adopting the cross-charge mechanism. The circular reflected the recommendation made by the GST Council at its 50th Meeting held on 11 July 2023, wherein the Council recommended that if ISD were to be made mandatory, such a requirement should be introduced only through a prospective legislative amendment.
The legislative chronology is significant. Parliament accepted the Council's recommendation by substituting Section 20 with effect from 1 April 2025. Had mandatory ISD registration already been implicit in the earlier law, there would have been little reason to amend the provision and postpone its operation. Although CBIC circulars do not bind constitutional courts, they are binding on the tax administration and cannot be disregarded by departmental authorities.
Judicial Recognition by the Kerala High Court
The recent decision of the Kerala High Court in Intertek India Pvt. Ltd. considerably strengthens this interpretation. The Court rejected the department's contention that distribution of common ITC through cross-charge without ISD registration violated the CGST Act for the period prior to 1 April 2025.
The Court held that the unamended Section 20 was merely an enabling provision governing the manner in which an ISD could distribute credit and did not require every registered person receiving common input service invoices to obtain ISD registration. Contrasting the unamended provision with the substituted Section 20, the Court observed that Parliament consciously introduced mandatory registration only through the amendment effective from 1 April 2025. It also relied upon the GST Council's recommendations and CBIC's FAQ, concluding that the administrative and legislative understanding consistently treated ISD as optional prior to the amendment. Further, the Court rejected the department's reliance on Section 24(viii), holding that the provision merely requires registration where a person chooses to function as an ISD and does not prohibit distribution of ITC through cross-charge where otherwise permissible.
Contrary Advance Rulings
The issue was not entirely free from controversy. In Cummins India Ltd. and Tata SIA Airlines Ltd. Order No. MAH/AAAR/RS-SK/22/2021-22. Dated 30 April 2025, the Advance Ruling Authorities held that common ITC could be distributed only through the ISD mechanism. These rulings undoubtedly contributed to uncertainty.
However, advance rulings bind only the applicant and the jurisdictional officer concerned. They neither constitute binding precedent nor override statutory provisions or CBIC's binding administrative instructions. More importantly, the Kerala High Court in Intertek India Pvt. Ltd. has now comprehensively analysed the statutory framework, the GST Council's recommendations, the CBIC clarifications and the legislative amendment before concluding that ISD registration was not mandatory under the pre-1 April 2025 regime.
A Prospective and Substantive Amendment
The substituted Section 20 is plainly substantive. It creates a fresh statutory obligation requiring eligible registered persons receiving common input service invoices to obtain ISD registration and distribute credit through that mechanism. Such a provision materially alters taxpayers' compliance obligations and cannot ordinarily apply to transactions completed before it came into force.
Nor can the amendment reasonably be characterised as clarificatory. Parliament consciously substituted the provision, introduced mandatory language and specified 1 April 2025 as the date from which the new regime would operate. These legislative choices indicate a change in law rather than a declaration of what the law had always been.
This approach accords with the Supreme Court's decision in CIT v. Vatika Township (P) Ltd. (2015) 1 SCC 1, which recognises that amendments imposing new obligations ordinarily operate prospectively unless the legislature expressly provides otherwise. Equally significant is the absence of any validation clause or retrospective provision invalidating cross-charge arrangements undertaken before 1 April 2025.
Revenue Neutrality and Practical Implications
The Kerala High Court also emphasised that the dispute was revenue neutral. The taxpayer had discharged GST, legitimately availed ITC and merely distributed the credit to the units that had actually benefited from the services. As no revenue loss was caused to the exchequer, the Court held that raising substantial demands solely on the technical ground of absence of ISD registration was inconsistent with the objective of the CGST Act and accordingly quashed the demand and the consequential penalty.
The judgment therefore provides taxpayers facing notices for the pre-1 April 2025 period with a strong legal defence based not only on CBIC's contemporaneous clarifications and the GST Council's recommendations but also on direct judicial authority recognising cross-charge as a legally permissible alternative under the earlier statutory framework.
Conclusion
The introduction of mandatory ISD registration from 1 April 2025 marks an important shift in the GST credit distribution framework. Businesses must comply with the amended statutory requirements going forward. That prospective reform, however, cannot be used to retrospectively invalidate bona fide cross-charge arrangements undertaken under a different legal regime.
The decision of the Kerala High Court in Intertek India Pvt. Ltd. significantly reinforces this position. By holding that the pre-amendment Section 20 was merely enabling, rejecting the department's reliance on Section 24(viii), endorsing the GST Council's recommendations and CBIC's contemporaneous clarifications, and recognising that mandatory ISD registration was introduced only through the prospective substitution of Section 20, the Court has substantially narrowed the basis for retrospective departmental action. In the absence of any express retrospective amendment, demands founded solely on the absence of ISD registration for the period prior to 1 April 2025 are legally vulnerable and deserve to be tested against the statutory framework that actually governed the relevant period.
