Optimizing Input Tax Credit Distribution through ISD Mechanism-Part 1: Conceptual Overview and SAP System Integration

Avnish Goyal

Abstract: The Input Service Distribution (ISD) mechanism in India, established under Section 2(61) of the CGST Act, 2017, serves as a crucial mechanism for distributing the Input Tax Credit (ITC) for common services used across multiple business units. With the mandatory introduction of the ISD provisions from April 1, 2025, as per notification No. 16/2024 ? Central Tax, the mechanism ensures that GST credits on common services are correctly apportioned and distributed to the various branches of an organization. This paper, the first in a two-part series, explores the key principles of ISD, its applicability, and the steps involved in its practical implementation within businesses. It focuses specifically on the technical implementation of ISD within SAP systems, including service activation and system preparation, given its widespread use among large Indian organizations. The functional configuration and operational execution aspects will be addressed in the second part of the series. Additionally, this paper illustrates case studies and examples to highlight the nuances of ITC distribution and explores the integration of ISD in SAP systems to streamline compliance and improve operational efficiency.

Keywords: Input Service Distribution (ISD), India GST, Input Tax Credit (ITC), SAP Solutions for ISD, CGST Compliance, SAP CIN Implementation