Head Office, Branch Office & the ITC Maze: ISD vs Cross Charge-A Complete GST Playbook for Multi-State Businesses

If you run a business with registrations in multiple States/UTs, you already know the recurring pain: common expenses (audit fees, software subscriptions, brand/marketing, HR, legal, security, cloud services) are often billed to one location, while the benefit is enjoyed across many. Under GST, that's not just an accounting allocation problem-it's a tax-position problem.

Two mechanisms dominate this space:

• ISD (Input Service Distributor) - a credit distribution framework for common input services.

• Cross Charge - charging GST between "distinct persons" for inter-branch services (often "internally generated" services).

And here's the key modern reality: from 1 April 2025, ISD is no longer optional for common input service invoices received for/on behalf of distinct persons. It's effectively mandatory in the law's core design.

This guide explains what to use, when, why, and how to implement it cleanly-without accidental overpayment, ITC blockage, or avoidable disputes.

1) The foundation: "Distinct persons" and why GST cares

Under GST, each registration under the same PAN in different States/UTs (and even multiple registrations within the same State, where applicable) is treated as a distinct person.

That matters because supplies between distinct persons are treated as supplies even if made without consideration (i.e., even if no money changes hands).

So, whenever HO does something that benefits branches (or vice-versa), the GST system asks:

• Was there a supply of service from one distinct person to another?

• If yes, should it be taxed via an invoice (cross charge)?

• Or is it simply distribution of ITC of third-party services (ISD)?

2) ISD in 2026: what it is (and why it became "must-do")

What ISD means under law

ISD is an office that receives tax invoices for input services (including specified reverse charge services) for or on behalf of distinct persons, and is liable to distribute the ITC as per Section 20.

The big shift (effective 1 April 2025)

Section 20 now uses "shall" and explicitly requires:

• that such office be registered as ISD under compulsory registration category, and

• it shall distribute the ITC for those invoices.

In plain English: If common input service invoices are being received centrally for multiple GSTINs, you're expected to route credit distribution through ISD.

3) Cross charge: what it is (even though the term isn't in the Act)

"Cross charge" is industry shorthand for:

Issuing a tax invoice from one GSTIN to another GSTIN of the same entity for services supplied between distinct persons-commonly HO → Branch (or Shared Services Unit → operational units).

This typically covers internally generated services, such as:

• management oversight, strategy, finance & treasury support

• HR shared services, training, recruitment support

• IT helpdesk, internal cybersecurity team

• brand building done by HO for all units

• centralized procurement team effort

• internal compliance/secretarial team support

Because these are services performed by one registration for the benefit of another, they can fall within the "distinct persons supply" concept.

4) The CBIC Circular that changed the conversation:

Circular 199/11/2023

Before ISD became mandatory, taxpayers debated:

• Should HO cross charge branches for third-party invoices to pass on ITC?

• Is ISD the only acceptable route?

Circular No. 199/11/2023 clarified, at that time, that for common third-party input services procured by HO, HO had an option (then) to distribute via ISD or issue invoices to branches (subject to conditions).

It also clarified something extremely practical for cross charge valuation:

If the recipient branch has full ITC eligibility

• Under Rule 28's second proviso, invoice value is deemed open market value, so the declared value is accepted.

• The circular goes further: if HO doesn't invoice a particular internally generated service and full ITC is available, the value can be treated as NIL (deemed OMV under the proviso).

• Even salary components of HO employees need not be "forced into valuation" in such full-ITC cases.

Important in 2026: the "option" for third-party common services is heavily curtailed by the post-2025 mandatory ISD framework, but the valuation logic for cross charge remains highly relevant.

5) ISD vs Cross Charge: the practical difference

Here's the clean way to separate them:

Use ISD when…

You are dealing with third-party input service invoices received centrally for multiple GSTINs (or for/on behalf of other distinct persons), and you want to distribute the ITC.

Use Cross Charge when…

You are dealing with services actually supplied internally by one registration to another (shared services, management support, internal IT/HR, etc.), i.e., a service supply that must be invoiced and taxed (with valuation per Rule 28).

Comparison snapshot (no fluff)

ISD mechanics are anchored in Rule 39 (distribution, pro-rata, eligible/ineligible segregation, and tax-type conversion for inter-State recipients).

Cross charge valuation is anchored in Rule 28 (OMV, like kind/quality, or cost methods, plus the "invoice value deemed OMV" for full ITC cases).

6) How ISD works: the operational logic (with a simple example)

Rule 39 distribution: the core idea

If an input service is attributable:

• only to one unit → distribute only to that unit.

• to multiple units → distribute pro-rata based on "turnover in the State/UT" during the relevant period.

Also:

• IGST credit is distributed as IGST to recipients.

• CGST/SGST credit distributed to a unit in another State becomes IGST to that recipient.

Example: common software expense billed to HO

Assume HO (Maharashtra) receives a software subscription invoice:

• Value: Rs.10,00,000 + GST (say Rs.1,80,000 as CGST+SGST)
  This software benefits MH, KA, and DL units.

Under ISD:

1. ISD distributes ITC pro-rata by turnover.

2. For KA and DL (inter-State recipients), the CGST+SGST portion is distributed as IGST.

Result: each unit gets ITC aligned to usage/attribution logic-with cleaner audit defensibility than "random journal allocations".

7) How cross charge works: tax invoice + valuation choices

The valuation rule you can't ignore

For supplies between distinct persons, value is generally open market value; if OMV isn't available, go to like kind/quality; failing that, use cost-based rules (Rule 30/31).

But the "magic lever" is:

If the recipient is eligible for full ITC, the value declared on the invoice is deemed to be OMV.

So, for full-ITC branches, businesses often use a nominal value cross charge (still paying GST, still allowing ITC-net revenue-neutral), simplifying valuation fights.

Example: HO provides management support to a fully taxable branch

HO issues a cross charge invoice to Branch KA:

• "Management support services" value declared: Rs.1,00,000 (or a reasonable allocation key)

• GST charged accordingly; Branch KA takes full ITC (if eligible)

If Branch KA is fully eligible for ITC, the declared invoice value is accepted as OMV under Rule 28.

8) The "both are needed" reality for large groups

Most multi-State businesses end up using both, but for different buckets:

Bucket A: Third-party common input services → ISD

• audit/tax advisors, consultants

• group insurance admin fees (service portion), SaaS licenses

• security agency for multiple premises (if billed centrally)

• cloud hosting for multiple units

Bucket B: Internally generated / shared services → Cross charge

• corporate HR, finance, legal, IT support

• marketing & brand team services

• procurement support, compliance team services

Bucket C: Mixed situations (the danger zone)

When one cost has:

• a vendor invoice component (ISD), and

• an internal service component (cross charge)

Example: HO procures a vendor tool (ISD), and HO's internal IT team also provides implementation support (cross charge). Treating both as one bucket often triggers mismatches.

9) Common mistakes that cause notices (and how to avoid them)

1. Using cross charge to "pass on" third-party vendor ITC even after ISD became mandatory

Post-2025, this is increasingly hard to defend against the Section 20 design.

2. No documentation for "attribution" logic

Rule 39 expects attribution or pro-rata logic. If your allocation key is "because Excel said so," litigation becomes a hobby.

3. Cross charge value disputes for partial-ITC branches

If a recipient makes exempt supplies or has blocked credits, the "invoice value deemed OMV" shortcut may not apply cleanly; valuation needs stronger support.

4. Forgetting Schedule I's impact

Even without consideration, supplies between distinct persons can be taxed.

5. Missing GSTR-6 hygiene

ISD distribution is only as good as your invoice ingestion, mapping, and month-wise discipline. Rule 39 expects monthly distribution and reporting.

10) Implementation checklist for 2026 (practical and audit-friendly)

ISD readiness

• Identify all common input services billed centrally.

• Ensure vendors are instructed to bill the ISD GSTIN where appropriate.

• Build an attribution matrix (service → benefiting GSTINs → allocation key).

• Automate Rule 39 distribution logic (turnover pulls + mapping).

• Monthly GSTR-6 reconciliation discipline (invoice, debit/credit notes).

Cross charge readiness

• List internal shared service functions (HR/IT/Finance/Legal/Brand etc.).

• Decide a consistent allocation key (headcount, revenue, cost pool usage hours, tickets raised, etc.).

• Apply Rule 28 logic-especially for partial ITC units.

• Keep an internal memo aligning your approach with Circular 199/11/2023 valuation clarifications.

Closing thought

If you want a one-line decision rule:

• Vendor billed common services? Think ISD (credit distribution).

• HO/shared team actually served another unit? Think cross charge (taxable supply).

Done right, ISD + cross charge isn't "extra compliance"-it's clean ITC, defensible valuations, and fewer surprises during audit. And for multi-State businesses, that's not just GST hygiene-it's margin protection.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.