All about ITC Allocation by ISD under GST from 1st April 2025

Now w.e.f. 01.04.2025 every GST Regd. Persons having distinct entities and is receiving Tax invoices relating to input services (incl. RCM Related)  received by other distinct entities shall not be eligible to claim such ITC but required to allocate it by obtaining ISD Regd., to respective distinct entities in the same month in which the invoices received. Earlier Head office can claim the ITC as ISD was optional. With the compulsion to get ISD Registration and allocation of ITC relating to INPUT SERVICES only, one more compliance imposed.

The most complex issue which needs understanding, clarification and discussion is “How to calculate allocation value of the ITC by ISD Registrants” . Although CGST Rule 39 has already been introduced to take care of the concern but the said rule is also prone to doubt akin to  some others persistent doubts in GST era. Lets try to discuss on complexities :-

1. Allocation of ITC has to be done on pro-rata basis of the turnover in the state of such recipient, during the relevant period, to the aggregate of the turnover of all such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period;

This provision explains how to distribute ITC on input services when a particular service is used by more than one branch/unit (i.e., multiple recipients).

Situation:

• A business has multiple units/branches in different States/UTs.
• An input service (e.g., Audit, software, security, consultancy) is used by more than one of these units.
• The ISD wants to distribute the credit of GST paid on such common input services.

Rule for Distribution:

1. The credit must be distributed only to those units (recipients) to whom the input service is attributable.

2. The distribution must be on pro rata.

3. The proportion is based on each recipient’s turnover in their respective State/UT, during the relevant period, as compared to:

• The total turnover of all such recipient units, to whom the service is attributable, and
• Who are operational in the current financial year, during the same relevant period.

To understand more better take the Example :

• Three branches: Unit A, B, and C
• An input service (e.g., Cloud Software ) is used by Unit A and B, not by C.
• During the relevant period:
  • Unit A turnover in State Maharashtra = Rs.10 lakh
  • Unit B turnover in State Gujarat                   = Rs.30 lakh
  • Unit C = Not attributable to this service → excluded
• Total relevant turnover for A & B = Rs.40 lakh
• Suppose GST credit to be distributed = Rs.4,000

 Credit Allocation:

• Unit A gets = Rs.4,000 × (10 ÷ 40) = Rs.1,000
• Unit B gets = Rs.4,000 × (30 ÷ 40) = Rs.3,000

 This ensures that input service credit is distributed fairly, in proportion to how much the benefiting units are contributing to the business (based on turnover).

2. the credit of tax paid on input services attributable to all recipients of credit shall be distributed amongst such recipients and such distribution shall be pro rata on the basis of the turnover in a State or turnover in a Union territory of such recipient, during the relevant period, to the aggregate of the turnover of all recipients and which are operational in the current year, during the said relevant period;

This clause deals with the distribution of Input Tax Credit (ITC) by an Input Service Distributor (ISD) when a common input service is used by all units/branches (recipients of credit).

Scenario:

• The input service (e.g., advertisement, software license, audit services) is used by all the branches or units (recipients of credit) of a company.
• Hence, the credit of GST paid on such service needs to be distributed to all units.

Distribution Rule:

• The credit must be distributed among all recipients who are operational in the current year.
• The distribution should be done proportionately (pro rata).
• The proportion is based on:
  • The turnover of each recipient in their respective State or Union Territory, during the relevant period,
  • Compared to the aggregate turnover of all such operational recipients, during the same relevant period.

 Example for Better Understanding:

Let’s say:

• A company has 3 operational units: Unit A, B, and C
• An input service (e.g., corporate branding) is used by all 3
• Turnovers during the relevant period:

 Credit Allocation:

• Unit A: Rs.10,000 × (20 ÷ 100) = Rs.2,000
• Unit B: Rs.10,000 × (30 ÷ 100) = Rs.3,000
• Unit C: Rs.10,000 × (50 ÷ 100) = Rs.5,000

This provision ensures fair and proportional distribution of ITC when a service benefits all branches, aligning credit with the relative scale of operations (turnover) of each recipient.

3. The input tax credit that is required to be distributed in accordance with the provisions of clause (d) and (e) to one of the recipients “R1”, whether registered or not, from amongst the total of all the recipients to whom input tax credit is attributable, including the recipients who are engaged in making exempt supply, or are otherwise not registered for any reason, shall be the amount, “C1”, to be calculated by applying the following formula –

C 1 = (t 1 / T) x C

where,

“C” is the amount of credit to be distributed,

“t1 ” is the turnover, as referred to in clause (d) and (e), of person R1 during the relevant period, and

“T” is the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable in accordance with the provisions of clause (d) and (e);

This clause explains how to calculate the amount of Input Tax Credit (ITC) to be distributed to a specific recipient (R1) when the credit is attributable to multiple recipients, including those who:

• Are registered or unregistered under GST,
• Are engaged in exempt supply (i.e., non-taxable),
• Or are not registered for any reason.

This means:

• You take the turnover of the specific recipient (R1) during the relevant period (t1),
• Divide it by the total turnover of all recipients to whom the input service is attributable (T),
• Multiply that ratio by the total credit (C) available,
• The result is the credit share for recipient R1 (C1).

To fairly allocate credit based on each unit’s contribution to total turnover, regardless of whether they are registered or unregistered, or deal in taxable or exempt supplies.

Take an example to understand :-

• Total Credit (C)                                  =  Rs.1 lakh
• Recipient R1’s turnover (t1)               = Rs.20 lakh
• Total turnover of all recipients (T)     = Rs. 1 crore

Then,

C1 = (20,00,000 / 1,00,00,000) × 1,00,000 = Rs.20,000

So, R1 gets Rs.20,000 as its share of the input tax credit.

Here “Relevant period” shall be —

• if the recipients of credit have turnover in their States or Union territories in the financial year preceding the year during which credit is to be distributed, the said financial year; or

MEANING THEREBY :-

*  Suppose the ISD is distributing credit in September 2025 (i.e., FY 2025-26).

* The recipients (say Unit A and Unit B) had turnover during FY 2024-25.

*  In this case, the turnover from FY 2024-25 will be used to compute the proportion in which credit is distributed to Unit A and Unit B.

This provision ensures that the most recent and complete financial data is used when it is available, for a fair and proportional distribution of credit.

(b) if some or all recipients of the credit do not have any turnover in their States or Union territories in the financial year preceding the year during which the credit is to be distributed, the last quarter for which details of such turnover of all the recipients are available, previous to the month during which credit is to be distributed;

Meaning thereby :

• ISD wants to distribute credit in August 2025.
• But Unit A and Unit B had no turnover in FY 2024-25 till Dec., 24.
• However, turnover details are available for Jan–Mar 2025 (last quarter of FY 2024-25).
• In this case, the ISD should use turnover of Jan–Mar 2025 for distributing the credit.

This rule ensures that proportional distribution of ITC is done fairly and based on actual turnover, even if the recipient units didn’t operate in the entire last financial year.

CONCLUSION:-

With effect from 1st April 2025, the mandatory requirement for obtaining ISD registration and distributing input service-related ITC—whether taxable or under reverse charge—marks a significant shift from the earlier optional regime. This move, although aimed at enhancing procedural transparency and credit discipline, introduces yet another layer of compliance for GST-registered entities with multiple registrations across States/UTs. While Rule 39 attempts to guide the allocation mechanism, its practical application, particularly in diverse business models and turnover patterns, warrants greater clarity and consistency. In this evolving framework, businesses are expected to adapt swiftly and realign their internal systems for timely allocation of ITC on a pro-rata turnover basis during the relevant period. It is, therefore, earnestly hoped that initial implementation challenges will be met with a facilitative approach by the authorities. At the same time, every effort must be made by taxpayers to honour the law of the land in its true spirit and ensure diligent compliance with the new ISD requirements.