Rule 39 of CGST Act – ITC Distribution: Practical Insights & Examples

Decoding Rule 39 of the CGST Act: A Comprehensive Guide with Practical Insights, Real-Time Examples, and ITC Distribution Analysis for Input Service Distributors (ISD)

Introduction

The Input Service Distributor (ISD) mechanism under the Goods and Services Tax (GST) regime plays a crucial role in ensuring seamless distribution of input tax credit (ITC) across businesses with multiple branches or units. The Central Board of Indirect Taxes and Customs (CBIC), vide Notification No. 12/2024 – Central Tax dated 10th July 2024, has introduced amendments to Rule 39 of the Central Goods and Services Tax (CGST) Rules, 2017. These changes aim to bring greater clarity, efficiency, and compliance in the distribution of ITC for common input services.

With the increasing complexity of business operations, many organizations rely on centralized procurement of services such as legal, accounting, advertising, and IT support, which are used by multiple units under the same PAN. The ISD mechanism ensures that the ITC on such common services is fairly distributed among eligible recipients, preventing tax inefficiencies and disputes.

The latest amendments provide detailed guidelines on:

• Pro rata distribution of ITC based on turnover.
• Treatment of cross-charge transactions for distinct persons.
• Documentation requirements (ISD invoices, credit/debit notes).
• Definition of key terms like “common credit,” “relevant period,” and “recipient of credit.”

This article breaks down the revised Rule 39, explains the ISD concept in simple terms, and highlights the practical implications of the 2024 amendments. Whether you are a tax professional, business owner, or finance manager, understanding these changes is essential for accurate ITC distribution and GST compliance.

To understand Rule 39 of the CGST Rules (with changes) and its Explanation, it is important to first understand the meaning of some key terms.

1. Input Service Distributor (ISD)

A registered entity (under Section 2(61) of CGST Act) that receives tax invoices for common input services used by multiple units (having the same PAN) and distributes the input tax credit (ITC) to eligible recipients.

ISD must distribute credit only for input services (not goods or capital goods).

2. Distribution of Input Tax Credit (ITC)

ISD must distribute ITC monthly in FORM GSTR-6.

Conditions for distribution:

Proportional basis: Based on turnover of recipients in the relevant period (clauses d, e, f).

Separate distribution for eligible/ineligible credit (clause g).

Tax-wise distribution: Central Tax (CGST), State Tax (SGST), Union Territory Tax (UTGST), and Integrated

Tax (IGST) must be distributed separately (clauses h, i, j).

3. Relevant Period

The period used to calculate turnover for pro rata distribution:

Default: Previous financial year (if recipients had turnover).

Alternate: Last quarter before distribution month (if no turnover in the previous FY).

4. Recipient of Credit

A supplier (registered or unregistered) with the same PAN as the ISD.

Includes recipients making exempt supplies or those not registered.

5. Turnover

Adjusted turnover: Value of supplies excluding taxes/duties under:

Union List (List I): Central excise (Entry 84), customs duty (Entry 92A).

State List (List II): State VAT (Entry 54), petroleum tax (Entry 51).

Used to determine the ratio for ITC distribution.

6. ISD Invoice & Credit/Debit Notes

ISD Invoice (Rule 54(1)): Issued to distribute ITC (must state it is for ITC distribution).

ISD Credit Note: Issued if distributed ITC needs reduction (e.g., due to supplier credit note).

ISD Debit Note: Issued for additional ITC (e.g., due to supplier debit note).

7. Cross-Charge Mechanism (Sub-Rule 1A)

If input services are attributable to distinct persons (same PAN, different State), the supplier can issue

an invoice/debit/credit note to transfer credit to the ISD, which then distributes it under Rule 39(1).

8. Key Clauses in Rule 39(1)

Clause (f): Formula for pro rata distribution (C1 = (t1 / T) × C).

Clause (j): Distribution rules for CGST/SGST (same State) vs. IGST (other States).

Clause (n): Adjustment for credit notes (reduces ITC or adds to recipient’s liability).

9. Special Cases

Unregistered recipients: ITC attributable to them must still be calculated (but cannot be claimed).

Exempt supplies: Credit attributable to exempt supplies is ineligible (Section 17(5)).

10. Common Credit

Definition:

Common credit refers to the input tax credit (ITC) on input services that are used commonly by multiple units/branches (having the same PAN) of a business.

These services cannot be directly attributed to a single recipient (e.g., corporate services like legal fees, audit charges, branding expenses, etc.).

11. Credit Note:

A Credit Note is a document issued by a supplier to the recipient when there is a reduction in the value of the original supply or the tax charged on it. This can occur due to reasons like return of goods, reduction in price, or any post-supply adjustments. In the context of Input Service Distributor (ISD), a credit note issued by the supplier reduces the input tax credit (ITC) distributed by the ISD to its recipients.

12. Debit Note:

A Debit Note is a document issued by a supplier to the recipient when there is an increase in the value of the original supply or the tax charged on it. This may happen due to additional quantities supplied, price revisions, or errors in the initial invoice. In the ISD context, a debit note increases the ITC that can be distributed by the ISD to its branches.

In the said rules, with effect from a date to be notified, in rule 39, – (i) for sub-rule (1), the following sub-rule shall be substituted, namely: –– ―(1) An Input Service Distributor shall distribute input tax credit in the manner and subject to the following conditions, namely: ––

“Monthly Distribution of ITC and Reporting in GSTR-6”

(a) the input tax credit available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6 in accordance with the provisions of Chapter VIII of these rules;

(Example)

Suppose an ISD collects common input tax credit (ITC) of ₹1,20,000 for input services received in November 2024. This common ITC must be distributed by reporting it in the GSTR-6 return for November 2024, which must be filed on or before 13th December 2024.

“Credit Distribution Limit: Not Exceeding Available ITC”

(b) the amount of the credit distributed shall not exceed the amount of credit available for distribution;

(Example)

An Input Service Distributor (ISD) receives input tax credit (ITC) of ₹1,00,000 in a month for common input services like legal fees and audit services. This is the total ITC available for distribution.

Application of the Rule:

The ISD can distribute ITC up to a maximum of ₹1,00,000 to its registered branches/units based on their turnover ratio.

However, the ISD cannot distribute more than ₹1,00,000 in that month. If the ISD tries to distribute ₹1,20,000, it would violate this rule, as the distribution amount exceeds the actual credit available.

“Recipient-Specific ITC Distribution Rule”

(c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient;

(Example)

XYZ Ltd. has a head office (registered as an ISD) in Mumbai and branch offices in Chennai, Bangalore, and Hyderabad.

1. The Mumbai head office (ISD) hires a marketing consultant specifically to promote XYZ’s products only in Chennai and pays ₹50,000 as GST on the consultancy fee.

2. This ₹50,000 GST becomes part of the common input tax credit available to the ISD in Mumbai.

3. According to Rule 39(c), since the input service (marketing consultancy) was used only for the Chennai branch, the ISD must allocate and distribute the entire ₹50,000 ITC to the Chennai branch when filing GSTR-6.

Purpose of the Rule:

This rule ensures that ITC on input services is distributed to the specific branch that has actually availed and benefited from those services. It prevents the misallocation of input tax credit across other branches that are not entitled to it.

“Pro Rata Distribution of ITC for Multiple Recipients Based on Turnover”

(d) The credit of tax paid on input services attributable to more than one recipient of credit shall be distributed amongst such recipients to whom the input service is attributable 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 such recipients to whom such input service is attributable and which are operational in the current year, during the said relevant period;

Clause (d) – ITC Distribution Among More Than One Recipient (Specific Recipients)

This clause applies when a particular input service is attributable to a specific subset of recipients (branches) and not all recipients. The ISD must distribute the input tax credit only to these specific branches on a pro rata basis, based on their turnover during the relevant period.

Example for Clause (d):

ABC Ltd. has an ISD (head office) in Mumbai and 4 branches in Delhi, Chennai, Kolkata, and Hyderabad.

Suppose the head office pays GST on a legal consultation fee, which benefits only the Delhi, Chennai, and Kolkata branches.

The ITC of ₹90,000 needs to be distributed only to these three branches, based on their turnover during the relevant period (e.g., previous financial year).

If their turnover is as follows:

Delhi: ₹5 crore

Chennai: ₹3 crore

Kolkata: ₹2 crore

Pro rata distribution formula:

ITC for each branch = (Turnover of branch ÷ Total turnover of eligible branches) × Total ITC

Note: Hyderabad is excluded from this distribution because the service wasn’t attributable to that branch.

“Pro Rata Distribution of Common ITC Among All Operational Recipients Based on Turnover”

(e) 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;

Clause (e) – ITC Distribution to All Recipients (General Allocation)

This clause applies when an input service benefits all branches/recipients (not just a subset). The ITC must be distributed among all operational branches based on their turnover during the relevant period.

Example for Clause (e):

ABC Ltd., with its ISD in Mumbai and branches in Delhi, Chennai, Kolkata, and Hyderabad.

Suppose the head office pays GST on a common service, like company-wide software subscription fees, which benefits all four branches.

The ITC of ₹1,00,000 must be distributed among all four branches based on their turnover.

Difference Between Clause (d) and Clause (e):

Clause (d): Applies when the input service benefits only some branches. ITC is distributed only to those

specific branches based on their turnover.

Clause (e): Applies when the input service benefits all branches. ITC is distributed to all branches based on their turnover.

“Formula-Based ITC Distribution to Specific Recipients, Including Exempt or Unregistered Entities”

(f) 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

Formula:

C1 = (t1 / T) × C

Where:

• C1 = The ITC amount to be distributed to a specific recipient (R1).
• C = Total ITC to be distributed.
• t1 = Turnover of recipient R1 (specific branch) during the relevant period.
• T = Aggregate turnover of all recipients eligible for that input service. “Separate Distribution of Eligible and Ineligible ITC by the Input Service Distributor”

(g) the Input Service Distributor shall, in accordance with the provisions of clause (d) and (e), separately distribute the amount of ineligible input tax credit (ineligible under the provisions of sub-section (5) of section 17 or otherwise) and the amount of eligible input tax credit;

Interpretation of Clause (g) of Rule 39:

This rule means that when an Input Service Distributor (ISD) (like the Head Office of a company) distributes the Input Tax Credit (ITC) to its branches, it must separate the eligible and ineligible ITC. Eligible ITC: This is the ITC that can be legally claimed by the branches as per GST rules.

Ineligible ITC: This includes ITC that cannot be claimed due to restrictions under Section 17(5) (e.g., ITC on motor vehicles, personal expenses, etc.) or for any other reason specified in the GST law. The ISD must allocate these credits based on the branches’ turnover (following the turnover formula explained in earlier rules) and clearly show which part of the ITC is eligible and which part is ineligible.

Example Based on Clause (g) of Rule 39

Scenario:

XYZ Ltd. has a Head Office acting as an Input Service Distributor (ISD) and has four branches:

Delhi, Mumbai, Chennai, Hyderabad

The Head Office receives invoices for input services that contain both eligible and ineligible ITC.

According to Section 17(5) of the CGST Act, certain ITC may be ineligible (e.g., for motor vehicles, club memberships, etc.).

For November 2024, the Head Office receives an invoice for consulting services and others amounting

to ₹2,00,000, where:

Eligible ITC = ₹1,60,000

Ineligible ITC (as per Section 17(5)) = ₹40,000

Distribution of ITC (Based on Clause (g))

According to clause (g), the ISD must separately distribute the eligible and ineligible ITC to the branches using the pro rata turnover ratio. Let’s assume the turnover of the branches is as follows for the relevant period:

Note: This sets the base for pro-rata distribution of both eligible and ineligible ITC as per clause (g) of Rule 39.

–

Note: This format clearly demonstrates the pro rata turnover-based distribution of both eligible and ineligible ITC in accordance with Rule 39(g) of the CGST Rules.

“Separate Distribution of ITC for Central, State, UT, and Integrated Tax”

(h) The input tax credit on account of central tax, State tax, Union territory tax and integrated tax shall be distributed separately in accordance with the provisions of clause (d) and (e);

This rule emphasizes that the Input Tax Credit (ITC) related to different types of taxes—Central Tax (CGST), State Tax (SGST), Union Territory Tax (UTGST), and Integrated Tax (IGST)—must be distributed separately by the Input Service Distributor (ISD) to the recipient branches based on the turnover ratio.

The distribution should follow the pro-rata turnover method outlined in clause (d) (for ITC attributable to more than one recipient) and clause (e) (for ITC attributable to all recipients), as per Rule 39.

–

NOTE: The ITC for CGST, SGST, and IGST is distributed separately based on the pro-rata turnover ratio. Each branch receives a portion of ITC proportional to its turnover share during the relevant period. This table helps demonstrate compliance with Rule 39 and clause (g) by showing the separate and proportional distribution of ITC for each type of tax.

“ITC of Integrated Tax to Be Distributed as Integrated Tax”

(i) The input tax credit on account of integrated tax shall be distributed as input tax credit of integrated tax to every recipient;

The rule states that the Input Service Distributor (ISD) must distribute input tax credit (ITC) related to Integrated Goods and Services Tax (IGST) as IGST credit only to the respective branches (recipients).

In simpler terms:

• IGST credit cannot be converted into CGST, SGST, or UTGST while distributing it.
• If the head office (ISD) has IGST credit, it must pass it on as IGST credit to the branches (recipients) based on their turnover ratio, following the pro-rata distribution rules.

“State-wise Distribution of ITC Based on Recipient Location: Central, State, and Integrated Tax Allocation”

(j) The input tax credit on account of central tax and State tax or Union territory tax shall–

(i) in respect of a recipient located in the same State or Union territory in which the Input Service Distributor is located, be distributed as input tax credit of central tax and State tax or Union territory tax respectively;

(ii) in respect of a recipient located in a State or Union territory other than that of the Input Service Distributor, be distributed as integrated tax and the amount to be so distributed shall be equal to the aggregate of the amount of input tax credit of central tax and State tax or Union territory tax that qualifies for distribution to such recipient as referred to in clause (d) and (e);

This rule governs how the Input Service Distributor (ISD) should distribute Central Tax (CGST), State Tax (SGST), or Union Territory Tax (UTGST) based on whether the recipient is located in the same state/Union Territory as the ISD or in a different state/Union Territory.

Rule (j)(i): Distribution Within the Same State/UT

If the recipient branch is located in the same state/UT as the ISD, the input tax credit must be distributed as follows:

CGST will remain as CGST, and

SGST or UTGST will remain as SGST/UTGST.

Example 1:

Suppose the ISD is located in Tamil Nadu and has ₹50,000 CGST credit and ₹50,000 SGST credit to distribute to branches located in Tamil Nadu.

Tamil Nadu branch will receive ₹50,000 CGST and ₹50,000 SGST as is, without any conversion.

Rule (j)(ii): Distribution to a Different State/UT

If the recipient branch is located in a different state/UT than the ISD, the ISD must convert the CGST and SGST/UTGST into Integrated Tax (IGST) and distribute it as IGST.

This means that the total CGST + SGST/UTGST credit will be aggregated, converted to IGST, and distributed to the recipient in the other state based on the pro rata turnover ratio.

Example 2:

Suppose the ISD is located in Tamil Nadu and has ₹40,000 CGST and ₹40,000 SGST to distribute to a branch located in Karnataka.

The total credit = ₹40,000 + ₹40,000 = ₹80,000, which will be distributed as ₹80,000 IGST to the Karnataka branch.

Why This Distinction Exists:

Within the same state/UT: The credit remains in the same tax type (CGST/SGST) since the state remains unchanged.

In a different state/UT: Since CGST and SGST are state-specific taxes, they must be converted into IGST when crossing state/UT boundaries to avoid interstate tax issues and facilitate correct input tax credit utilization.

“Issuance of ISD Invoice for ITC Distribution as per Rule 54”

(k) The Input Service Distributor shall issue an Input Service Distributor invoice, as provided in sub-rule (1) of rule 54, clearly indicating in such invoice that it is issued only for distribution of input tax credit;

This provision deals with the issuance of an Input Service Distributor (ISD) Invoice, which is a special type of invoice that the ISD must issue while distributing input tax credit (ITC) to its branches or units (recipients).

ISD Invoice Requirement:

The Input Service Distributor must issue an ISD invoice when distributing ITC.

This invoice is mandatory and must follow the format and details prescribed in Rule 54(1) of the CGST Rules, 2017.

Purpose of the ISD Invoice:

The ISD invoice should clearly mention that it is issued only for the distribution of ITC and not for any other taxable supply of goods or services.

It ensures transparency and proper documentation in the distribution process.

Details Required in the ISD Invoice (Based on Rule 54(1)):

As per Rule 54(1), the ISD invoice must contain the following details:

1) Name, Address, and GSTIN of the ISD.

2) Serial Number of the Invoice: This must be unique and consecutive.

3) Date of Issuance: The date on which the ISD distributes the ITC.

4) GSTIN of the Recipient (Branch or Unit): The branch to which the ITC is being distributed.

5) Amount of ITC Distributed: This includes ITC on CGST, SGST/UTGST, and IGST.

6) Original Document Reference Number: The reference number of the original invoice based on which the ITC is being distributed (e.g., invoice received by the ISD for input services).

7) Signature or Digital Signature: To validate the invoice.

Demo ISD Invoice (Based on Rule 54(1))

“Issuance of ISD Credit Note for Reduction of Distributed ITC under Rule 54”

(l) The Input Service Distributor shall issue an Input Service Distributor credit note, as provided in sub-rule (1) of rule 54, for reduction of credit in case the input tax credit already distributed gets reduced for any reason;

The provision mandates that when there is a reduction in input tax credit (ITC) already distributed by the ISD (for any reason, such as incorrect distribution or cancellation of services), the ISD must issue a credit note. This helps to adjust or reverse the ITC that was previously allocated to a recipient branch or unit.

A credit note is issued to reduce the ITC distributed earlier. Some situations where it might be needed include:

1) Cancellation or Return of Services: If the services for which ITC was distributed are later canceled or returned.

2) Reduction in ITC Eligibility: If there’s a re-evaluation, and it is found that the eligible ITC amount was lower than what was initially distributed.

3) Change in Taxability: When ITC eligibility changes due to changes in the type of supply (e.g., exempt supply instead of taxable supply).

Short Example for ISD Credit Note Adjustment:

Scenario:

XYZ Ltd. (ISD) initially distributed ₹1,00,000 IGST ITC to its four branches based on their turnover. Later, it finds that only ₹80,000 should have been distributed due to a change in eligibility. Thus, XYZ Ltd. must issue an ISD credit note to reduce ₹20,000 ITC proportionately for each branch.

Original Distribution: Based on ₹1,00,000 ITC, the branches received ITC as per the pro rata formula. New Adjustment: After re-evaluation, the total eligible ITC was reduced to ₹80,000, so an ISD credit note is issued for the excess ITC of ₹20,000.

Credit Note Distribution: The adjustment of ₹20,000 is split across the branches in the same pro rata turnover ratio to avoid excess ITC utilization.

Example Scenario:

If ABC Ltd. initially distributed ₹10,000 of IGST ITC to its Bengaluru branch but later finds that it should have distributed only ₹7,000 due to a change in eligibility, ABC Ltd. will issue an ISD credit note to reduce the ITC by ₹3,000. This adjustment helps avoid excess ITC utilization by the Bengaluru branch.

ITC Adjustment: The recipient’s branch will have to adjust its ITC in its GSTR-3B for the relevant month to reflect the reduced ITC.

Details in the ISD Credit Note :The ISD credit note, as per Rule 54(1), should contain similar details to an ISD invoice but for adjusting or reversing the credit:

“Distribution of Additional ITC Due to Debit Note Issued to ISD under Rule 39 and FORM GSTR-6”

(m) Any additional amount of input tax credit on account of issuance of a debit note to an Input Service Distributor by the supplier shall be distributed in the manner and subject to the conditions specified in clauses (a) to (j) and the amount attributable to any recipient shall be calculated in the manner provided in clause (f) and such credit shall be distributed in the month in which the debit note is included in the return in FORM GSTR-6;

This rule deals with the distribution of additional ITC arising from a debit note issued to the Input Service Distributor (ISD) by a supplier. A debit note is generally issued by a supplier when there is an increase in the value of supply, resulting in additional GST liability and, consequently, additional ITC for the ISD.

Additional ITC from Debit Note:

When a supplier issues a debit note to the ISD, the ISD will receive extra input tax credit (ITC). This could happen due to reasons like an increase in the value of services initially invoiced.

Distribution as per Clauses (a) to (j):

The additional ITC must be distributed in the same way as the original ITC, following the rules and ratios mentioned in clauses (a) to (j) of Rule 39:

Eligibility and Turnover-Based Distribution: The ISD must determine whether the ITC is eligible or ineligible and distribute it based on the pro rata turnover ratio of the recipient branches.

Same-State or Interstate Distribution: The ITC should be distributed as CGST/SGST if the recipient branch is in the same state as the ISD or as IGST if the recipient branch is in a different state, as per Rule 39(j).

Example for ISD Debit Note Adjustment with Inclusive Turnover Proportionate Distribution

Scenario:

XYZ Ltd. (ISD) initially distributed ₹80,000 IGST ITC to its branches based on their turnover. Later, XYZ Ltd. receives a debit note from a supplier, adding an additional ₹20,000 ITC. As per Rule 39, the new total ITC (₹1,00,000) is to be distributed proportionately based on the inclusive turnover of all branches.

“Adjustment of ITC Due to Credit Note Issued to ISD and Apportionment in FORM GSTR-6”

(n) Any input tax credit required to be reduced on account of issuance of a credit note to the Input Service Distributor by the supplier shall be apportioned to each recipient in the same ratio in which the input tax credit contained in the original invoice was distributed in terms of clause (f), and the amount so apportioned shall be- (i) reduced from the amount to be distributed in the month in which the credit note is included in the return in FORM GSTR-6; or (ii) added to the output tax liability of the recipient where the amount so apportioned is in the negative by virtue of the amount of credit under distribution being less than the amount to be adjusted;

Explanation of Input Service Distributor (ISD) Credit Note Adjustment Provision:

When a credit note is issued by a supplier to the Input Service Distributor (ISD), it may lead to a reduction in the input tax credit (ITC) that was originally distributed to the recipients. The reduced ITC is apportioned among the recipients in the same ratio in which the ITC was initially distributed. This ensures that each branch’s ITC is reduced proportionately.

After apportionment, the reduced ITC is handled in either of the following two ways: Clause (i): Adjustment in GSTR-6 Return (Reduction of ITC)

If the apportioned amount (reduced due to the credit note) is positive, it is simply deducted from the ITC that is to be distributed in the month when the credit note is reported in the ISD’s GSTR-6 return.

Example:

If a branch originally received ₹10,000 ITC and, due to the credit note, its apportioned ITC reduction is ₹2,000, then ₹2,000 will be reduced from the branch’s ITC in that month.

Clause (ii): Addition to Output Tax Liability (In Case of Negative ITC)

If the credit note reduces the ITC to a point where the apportioned amount is in the negative, i.e., the ITC under distribution becomes less than the reduction amount, the negative balance will be added to the output tax liability of the branch/recipient.

This happens because the recipient would have already utilized or claimed excess ITC based on the original distribution and now needs to adjust by paying it as an additional output tax liability.

Explanation:

Delhi ITC adjustment: Since ₹6,000 needs to be reduced, but only ₹4,000 is available, a shortfall of ₹2,000 arises. This shortfall is added to Delhi’s output tax liability.

Mumbai, Chennai, and Hyderabad adjustments:

In these branches, the reductions are within the limits of their available ITC, so no additional liability arises, and the adjustments are straightforward.

“Issuance of Invoice or Credit/Debit Note by Registered Person for Common Input Services and Distribution by ISD”

(ii) after sub-rule (1), the following sub-rule shall be inserted, namely:- ―(1A) For the distribution of credit in respect of input services, attributable to one or more distinct persons, subject to levy of tax under sub-section (3) or (4) of section 9, a registered person, having the same PAN and State code as an Input Service Distributor, may issue an invoice or, as the case may be, a credit or debit note as per the provisions of sub-rule(1A) of rule 54 to transfer the credit of such common input services to the Input Service Distributor, and such credit shall be distributed by the said Input Service Distributor in the manner as provided in sub-rule (1).

Explanation of the Provisions:

This amendment introduces a new sub-rule (1A) in Rule 39 of the CGST Rules, which focuses on the distribution of input tax credit (ITC) by the Input Service Distributor (ISD). It provides additional flexibility to entities with multiple GST registrations under the same PAN for managing common input services.

This rule applies when a company has availed common input services (e.g., legal consultancy, software services) that are shared by multiple GST-registered branches (distinct persons).

The company can now issue an invoice, credit note, or debit note from one GST registration (state) to another GST registration (state) within the same PAN.

Example: ABC Ltd. (having GST registrations in Karnataka and Maharashtra under the same PAN) receives legal services at its Karnataka office, which are attributable to both branches.

(iii) in sub-rule (2), for the words and brackets ―clause (j)‖, the words and brackets ―clause (n)‖ shall be substituted;

(iv) in sub-rule (3), for the words and brackets ―clause (h)‖, the words and brackets ―clause (l)‖ shall be substituted;

“Explanation of Relevant Period, Recipient of Credit, and Turnover for Distribution of Input Tax Credit (ITC)”

(v) after sub-rule (3), the following explanation shall be inserted, namely: Explanation. — For the purpose of this rule, –

(i) the term ―relevant period shall be—

(a) 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

(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;

This provision introduces an explanation after sub-rule (3) in Rule 39 to clarify how to determine the relevant period for calculating the proportionate distribution of input tax credit (ITC) by the Input Service Distributor (ISD).

The term “relevant period” is critical because it determines the basis (the time period) on which the turnover of each recipient branch (distinct person) will be considered when distributing ITC.

Established Businesses (Sub-Clause a):

If all branches are operational and have turnover in the previous financial year, the ISD will use the full-year turnover data to distribute ITC.

New or Recently Registered Businesses (Sub-Clause b):

If some branches were recently registered and lack turnover for the previous financial year, the ISD will base ITC distribution on the latest available quarter’s turnover data.

Example 2: Using the Last Available Quarter as the Relevant Period (Sub-Clause b)

Scenario:

ITC is to be distributed in June 2024.

Bihar and Odisha branches were newly registered in FY 2023-24 and do not have turnover data for that financial year.

The ISD uses the turnover data from the January-March 2024 quarter.

Example 3: Combining Both Sub-Clause (a) and (b)

Scenario:

ITC is to be distributed in FY 2024-25.

Delhi and Karnataka have turnover for FY 2023-24, but Bihar and Odisha are new branches registered in April 2024.

Turnover for Bihar and Odisha is available for April-June 2024 quarter.

(ii) the expression ―recipient of credit means the supplier of goods or services or both having the same Permanent Account Number as that of the Input Service Distributor;

As per Rule 39(ii), the expression “recipient of credit” refers to the following:

The supplier of goods or services (or both) who is part of the same legal entity that holds the same Permanent Account Number (PAN) as the ISD.

In simpler terms, it refers to the different branches or units of the same company (registered under the same PAN) that are eligible to receive ITC. These branches or units are registered as distinct persons under GST if they are located in different states or union territories.

(iii) the term turnover in relation to any registered person engaged in the supply of taxable goods as well as goods not taxable under this Act, means the value of turnover, reduced by the amount of any duty or tax levied under entries 84 and 92A of List I of the Seventh Schedule to the Constitution and entries 51 and 54 of List II of the said Schedule.

This provision defines how the term “turnover” should be interpreted for the purpose of distributing input tax credit (ITC) by an Input Service Distributor (ISD), especially when a registered person supplies both taxable goods/services and goods that are not taxable under the GST Act.

Turnover for Distribution of Credit:

In relation to a registered person who supplies both taxable and non-taxable goods, turnover is

calculated as follows:

1) Start with the total value of turnover (taxable + non-taxable).

2) Reduce (subtract) the amount of any duties or taxes levied under specific entries of the Constitution:

a) Entry 84 of List I (Union List): Covers taxes on goods like excise duties.

b) Entry 92A of List I (Union List): Covers central sales tax (CST) on inter-state sales.

c) Entry 51 of List II (State List): Refers to excise duty on alcoholic liquor for human consumption.

d) Entry 54 of List II (State List): Refers to state VAT on petroleum products such as crude oil, diesel, petrol, and natural gas.

e) Thus, “turnover” for ISD purposes means the net turnover after excluding the impact of these duties or taxes.

Example to Illustrate:

ABC Ltd. is a company with multiple branches. One of its branches in Tamil Nadu is engaged in the following activities:

a) Supplying taxable goods under GST

b) Supplying alcoholic liquor for human consumption (which is not taxable under GST and attracts state excise duty)

c) Selling petroleum products (which attract VAT, not GST)

Conclusion

In summary, Rule 39 of the CGST Rules plays a crucial role in regulating the proportionate and accurate distribution of input tax credit (ITC) by an Input Service Distributor (ISD) to its distinct branches. The rule ensures that ITC is distributed based on the turnover of each recipient branch, thereby maintaining fairness and avoiding excess ITC allocation. We examined various examples of credit adjustments through debit and credit notes, highlighting how the ITC allocation changes when the turnover or eligibility criteria of the recipient branches shift.

By following the provisions of Rule 39, businesses can mitigate the risks of excess or incorrect ITC distribution and reduce potential liabilities. Accurate ITC distribution helps improve cash flow, prevent disputes with tax authorities, and promote seamless compliance with GST laws. Thus, understanding and applying Rule 39 correctly is essential for any registered person functioning as an ISD under the GST regime.

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Disclaimer: I, Rathina Bharathi, the author of this article, am a qualified CMA professional with extensive knowledge of GST laws, including the provisions related to the Input Service Distributor (ISD) mechanism and Rule 39 of the CGST Rules. This article is intended to provide clarity, resolve confusion, and offer practical insights into the ISD mechanism, drawing from my professional expertise and experience in GST compliance and advisory services. While every effort has been made to ensure that the information presented here is accurate, up-to-date, and compliant with the latest GST provisions, readers are advised to verify the details and consider any subsequent amendments, notifications, or circulars issued by the GST authorities. The examples and interpretations provided are illustrative and are meant to simplify the understanding of ISD and Rule 39. This article is for educational and informational purposes only and should not be considered as legal or professional advice. I encourage readers to consult with a GST professional for personalized guidance tailored to their specific business scenarios. I disclaim any liability for decisions or actions taken by readers based on the contents of this article. My goal is to offer trust, clarity, and a deeper understanding of the GST ISD mechanism, but I also recommend keeping up with any legal or procedural changes to stay compliant with GST laws.