Automating Input Tax Credit Distribution through Input Service Distributor (ISD) Mechanism using SAP

[Avnish_Goyal]

In India’s GST system, many companies use a shared services model. This means that departments like HR, IT, legal, or finance offer services to multiple business locations (branches). But often, invoices for these services are billed only to one location, such as the head office. The challenge is: how do you share the input tax credit (ITC) from these invoices with the branches that actually used the service?

This is where Input Service Distributor (ISD) becomes important.

In this blog, I will first explain what ISD means under GST law and then walk you through how to implement it in SAP systems, both technically and functionally. This will help finance and IT teams to make sure they stay compliant, while automating the process effectively.

What is ISD Under GST?

ISD is a special type of GST registration that allows one office (usually the head office) to receive GST invoices for services used across multiple branches and then distribute the input tax credit (ITC) to those branches in proportion to their turnover.

This is defined under Section 2(61) of the CGST Act and guided by Rule 39 of the CGST Rules.

Please note: 

1. ISD applies only to input services, not goods or capital goods.
2. The Govt of India has made ISD provisions mandatory from April 1, 2025, via notification No. 16/2024 – Central Tax, dated the 6thAugust 2024.

Key Features and Conditions:

1. ISD must have a separate GST registration, different from normal branch GSTINs.
2. Only common input services are eligible for distribution.
3. ITC must be shared based on the turnover of each branch.
4. Distribution must be done via proper documentation and reported in GSTR-6 every month.
5. All branches must be under the same PAN (Permanent Account Number).

Example: How ITC Distribution Works

Example 1: Company HQ has incurred an audit expense of INR 100000 and paid GST of INR 18000 e.g. 18% (9%CGST + 9%SGST) on the expense. The audit was for Pune and Delhi location. Below will be the ITC distribution:

ISD Branch	Receipt Branch	Branch Turnover	Total Turnover	Ratio (Branch Turnover/Total Turnover)	ITC Amount (Total Credit*Ratio)	Receipt Tax Type
Mumbai	Pune	6000000	10000000	60%	10,800	CGST+SGST
Mumbai	Delhi	4000000	10000000	40%	7,200	IGST

How ISD is Handled in SAP?

If you need step-by-step instructions with screenshots, refer to the detailed papers I’ve written on ISD configuration in SAP. These are free to download. These guides explain:

• How ITC is handled using ISD
• Full setup for both SAP ECC and SAP S/4HANA

ISD Conceptual Overview and SAP Technical Implementation Steps

Provides a clear conceptual understanding of the ISD mechanism along with detailed, screenshot-based instructions for technical configuration in SAP.

ISD Conceptual Overview and SAP Technical Implementation Steps

ISD SAP Functional Configuration and Operational Execution

Offers step-by-step guidance on functional ISD setup in SAP and explains how to execute ISD transactions effectively within the system.

ISD SAP Functional Configuration and Operational Execution

I am also giving reference steps in this blog below on How to Handle ISD configurations in SAP.

SAP offers a standard solution for handling ISD under its India Localization package. The setup includes two phases:

1. Technical Implementation
2. Functional Implementation

Below are the steps for technical and functional implementation.

1. Technical Implementation:

This is the first step in implementing the ISD solution in SAP. It involves setting up the required prerequisites and applying the necessary SAP OSS notes to enable the required functionality in SAP. 

1. Prerequisites:

It is important to make sure the system meets all the prerequisite requirements.

• Minimum support pack:

To implement Input Service Distribution, the SAP system must be at least on the below support pack mentioned in SAP note 1175384

AP_APPL Release	Support Pack
SAP ERP 6.0 (600)	SP 26
EHP2 FOR SAP ERP 6.0 (602)	SP 16
EHP3 FOR SAP ERP 6.0 (603)	SP 15
EHP4 FOR SAP ERP 6.0 (604)	SP 16
EHP5 FOR SAP ERP 6.0 (605)	SP 13
EHP6 FOR SAP ERP 6.0 (606)	SP 14
EHP6 FOR SAP ERP 6.0 for HANA (616- SAP HANA)	SP 08
EHP7 FOR SAP ERP 6.0(617)	SP 07
EHP8 FOR SAP ERP 6.0(618)	SP 02
SAP S/4HANA ON-PREMISE 1511	SP 02

• Create Functional Group:

It is mandatory to create the ISD function group, J_1IG_ISDN, before starting the ISD implementation using transaction code SE80.

1. Implement Necessary SAP Notes to Activate Functionality:

The next step is to ensure that the required SAP notes are implemented in the SAP system.

• Data Dictionary:

SAP introduced a new standard solution for ISD in 2018 and updated some of the existing SAP tables with additional data dictionary objects. To check the applicability of these additional data dictionary objects, please refer to SAP note 2620349 for ECC clients and SAP note 2676848 for SAP S4 Hana clients.

• Implement OSS Notes for new ISD functionality:

Perform the manual steps as outlined in OSS note 2621654 (for ECC Clients) or 2677060 (for S4 Hana) to enable the new ISD functionality in SAP.

1. Activation of Service

Below are the configuration steps in SAP to activate the latest India Localization solution.

• Activate Country Version for India:

Follow the IMG path below to activate the India localization component in SAP:

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Activate Local Version India for Specific Fiscal Years.

• Activate Business Transaction Event:

Follow the IMG path below to activate the Business Transaction Event (BTE) for India Localization:

IMG Path: SPRO --> IMG à Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings à India --> Activate Business Transaction Events.

II. Functional Implementation:

This is the next step in implementing the ISD solution in SAP. It includes activation, functional configuration, and ODN configuration to enable the ISD functionality in SAP

1. Functional Configuration

Below are the functional configuration steps to enable ISD for India.  

• Creation of ISD business place

In SAP, all branches of a company are set up as business places

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India à General Settings --> Define Business Places.

• Creation of an ISD plant

Each business place is linked to a plant, though it is not necessary to create a separate plant for each business place.

IMG Path: SPRO --> IMG --> Enterprise Structure --> Definition --> Logistics – General --> Define, copy, delete, check plant.

• Assigning ISD Business place to ISD Plant

Assign the newly created plant to the ISD business place by following the below IMG path.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> General Settings --> Assign Business Places to Plants.

• Creation of ISD Document Type

It is recommended to create a separate document type in SAP to distribute Input Tax Credit (ITC) from the ISD branch to other branches of the organization.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Document --> Basic Settings --> Document Types --> Define Document Types for Entry View.

• Assign ISD Document type to ISD transfer postings.

Assign the ISD document type to the ISD process using the IMG path below.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Specify Document Types.

• Map ISD Business Places to Receiving Business Places (J_1IG_ISD_MAP_V)

This is an important configuration to assign the ISD branch to the receiving branch.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India à Goods and Services Tax --> Input Service Distributor --> Map ISD Business Places to Receiving Business Places.

• Maintain Turnover for Receiving Business Places (J_1IG_ISD_TO_V)

This is a recurring activity where the turnover of each branch needs to be updated annually.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings à India --> Goods and Services Tax --> Input Service Distributor --> Maintain Turnover for Receiving Business Places.

• Create ISD GL accounts for CGST, SGST, and IGST.

It is recommended to create a separate set of Tax GL accounts for ISD.

IMG Path: SAP East Access à SAP Menu --> Accounting --> Financial Accounting --> General Ledger --> Master Records --> G/L Accounts à Individual Processing --> FS00 - Centrally

• Create a new ISD tax code activating all three GST tax conditions e.g. three conditions - JIS, JIC, JII

A new tax code needs to be created for ISD to distribute the ITC. This tax code will have all three GST tax conditions—CGST, SGST, and IGST—activated.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Calculation --> Define Tax Codes for Sales and Purchases.

• Configure ISD Invoice Posting Settings (J_1IG_ISD_POST_V)

In the next customization, please maintain the ISD GL accounts created in step h for ISD tax posting

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Input Service Distributor --> Configure ISD Invoice Posting Settings.

• Maintain default tax code

In the next customization, please maintain the ISD tax code created in step I above in the default tax code settings.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India à Goods and Services Tax --> Input Service Distributor à Configure ISD Invoice Posting Settings.

1. Official document number (ODN) Configuration:
   • Maintain Document Classes

The first step is to create a 3-digit document class to set up ODN for the ISD branch.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Cross-Application Document Numbering --> Maintain Document Classes.

• Assign Document Types to Document Classes

The next step is to maintain default document type for the document class using the below IMG path.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Cross-Application Document Numbering --> Assign Document Types to Document Classes.

• Maintain Number Groups

The following setting is used to create a 6-digit ISD number group.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Cross-Application Document Numbering à Maintain Number Groups.

• Maintain Number Ranges

The next step is to maintain the ODN number range for the ISD branch. Please make sure to select the object as J_1IG_ODN and the number group as GISD01.

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India -->Goods and Services Tax --> Cross-Application Document Numbering --> Maintain Number Ranges.

• Assign Number Ranges to Business Places (Table J_1IG_OFNUM)

The final step in setting up ODN for ISD is to activate and assign the ODN number range to the ISD business place using the IMG path below

IMG Path: SPRO --> IMG --> Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Cross-Application Document Numbering --> Assign Number Ranges to Business Places.

• The fiscal year check for the distribution for the ISD formula (April to March) for India will be considered by the below configuration

India follows a fiscal year from April to March. The turnover and ODN number range customization are maintained by the calendar year. The customization below links the calendar fiscal year with India’s fiscal year

IMG Path: SPRO --> IMG à Financial Accounting --> Financial Accounting Global Settings --> Tax on Sales/Purchases --> Basic Settings --> India --> Goods and Services Tax --> Cross-Application Document Numbering à Maintain Fiscal Year Variant for ODN.

Read in Detail at Below Paper:

Once again, if you’d like to explore the ISD mechanism further and need step-by-step, screenshot-based instructions to implement it in SAP, refer to the two freely available papers below:

ISD Conceptual Overview and SAP Technical Implementation Steps

Explains the ISD concept under GST and provides detailed technical configuration steps for SAP readiness.

ISD Conceptual Overview and SAP Technical Implementation Steps

ISD SAP Functional Configuration and Operational Execution

Guides you through the complete functional setup and execution of ISD transactions in SAP.

ISD SAP Functional Configuration and Operational Execution

Conclusion:

With ISD becoming mandatory from April 1, 2025, businesses must ensure seamless ITC distribution across branches using standard SAP features. SAP’s India Localization offers a comprehensive solution to automate and comply with ISD requirements. Proper technical and functional setup in SAP not only ensures GST compliance but also simplifies ITC allocation, making the process efficient and error-free.