Rule 39: The Turnover Formula and the Relevant Period

Rule 39 explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.

Most people describe ISD distribution as "in the ratio of turnover". That is the second step, not the first. Rule 39 asks who the service is attributable to before it asks how to split it — and skipping the first question is the commonest error in the whole mechanism.

Rule 39 sorts every input service into three buckets: attributable to one recipient (distributed only to that recipient), attributable to more than one (split pro rata among those recipients), or attributable to all (split pro rata among all). The split uses C1 = (t1 ÷ T) × C, where C is the credit to be distributed, t1 is that recipient's turnover in the relevant period, and T is the aggregate turnover of the recipients to whom the service is attributable. The relevant period is the preceding financial year if all recipients had turnover then — otherwise the last quarter for which details of all recipients are available.

Step one: attribution

The Handbook's three rules, with its own examples built on ABC Ltd — head office at Mumbai, branches at Bihar, Chennai and Kolkata, ISD registered at Mumbai:

One — attributable to a single recipient. "The ITC of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient."

ABC Ltd appoints a marketing consultant for the Bihar branch for ₹5,00,000 + 18% GST. Mumbai ISD shall transfer the ITC to the Bihar branch only, as it is attributable to it.

Two — attributable to more than one recipient. The credit "shall be distributed amongst such recipients to whom the input service is attributable", pro rata on the basis of turnover in a State or Union territory of such recipient during the relevant period, to the aggregate turnover of all such recipients to whom the service is attributable and which are operational in the current year, during that period.

If the marketing consultant is appointed for the Chennai and Kolkata branches, the ISD transfers the ITC to Chennai and Kolkata only.

Three — attributable to all recipients. Distributed among all, pro rata on the same turnover basis.

If the consultant is appointed for the head office and all branches, the ISD transfers the ITC to all of them.

And distribution any other way is prohibited. The Handbook is emphatic: "Distribution in any other method is not permitted because the wording used in rule is, 'shall be distributed amongst such recipients to whom the input service is attributable.'"

A related limit from the FAQs: "the ITC of input services shall be distributed only amongst those distinct persons who have used the input services in the course or furtherance of business." An ISD cannot spread a Bihar-specific service across the whole network merely because the ratio is easier to compute.

Step two: the formula

C1 = (t1 / T) × C C = the amount of credit to be distributed t1 = the turnover of person R1 during the relevant period T = the aggregate of the turnover, during the relevant period, of all recipients to whom the input service is attributable

Two features of the definitions matter.

R1 may be unregistered. The rule applies to "one of the recipients 'R1', whether registered or not, from amongst the total of all the recipients to whom ITC is attributable, including the recipients who are engaged in making exempt supply, or are otherwise not registered for any reason." An exempt-supply unit or an unregistered establishment still takes its share of the denominator and its share of the credit.

"Recipient of credit" means same-PAN suppliers. By the Explanation, it is "the supplier of goods or services or both having the same Permanent Account Number as that of the ISD."

The relevant period, and the trap it contains

The Explanation to rule 39 gives two limbs:

• (a) If the recipients of credit have turnover in their States or UTs in the financial year preceding the year during which credit is to be distributed — that financial year.
• (b) If some or all recipients do not have any turnover in their States or UTs in that preceding financial year — 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.

The Handbook's worked example is the whole lesson. ABC Ltd, HO at Mumbai, ISD at Mumbai, with previous-year turnovers:

A new branch opened at Delhi in April 2025. Quarter ended June 2025 turnovers were: Mumbai ₹5 cr, Bangalore ₹4 cr, Chennai ₹3 cr, Kolkata ₹1.5 cr, Delhi ₹1.5 cr.

Distributing ₹2,00,000 for June 2025 and ₹2,10,000 for July 2025:

The Handbook draws out the point: "even if Delhi was in existence in the month of June 2025 and having turnover in that month, it did not get any share out of total ITC of ₹2,00,000/- because it was not in existence in previous year."

Read the two limbs carefully to see why. In June, limb (a) applied — all the then recipients had preceding-year turnover, so FY 2024-25 was the relevant period and Delhi's ratio was nil. By July, the June quarter figures for all recipients were available, so limb (b) supplied a period in which Delhi did have turnover.

The practical consequence: a new branch is starved of common credit until a completed quarter's data exists for all recipients. That is a working-capital fact to plan for when opening a location, not something to discover in the first month's GSTR-6.

Three timing conditions that sit on top

Same month. "the ITC available for distribution in a month shall be distributed in the same month and the details thereof shall be furnished in FORM GSTR-6." There is no ISD credit ledger to park it in.

No over-distribution. "the amount of the credit distributed shall not exceed the amount of credit available for distribution."

Totals must agree. The Handbook adds the reconciliation rule for the return: "the total ITC available for distribution and total ITC distributed should be equal in each month."

Debit notes and credit notes

A debit note from the supplier increases the credit. The additional amount is distributed in the same manner, and "in the same month in which the debit note is included in the return in FORM GSTR-6."

A credit note reduces it, in the original ratio. "The reduced ITC is apportioned among the recipients in the same ratio in which the ITC contained in original invoice was distributed." The apportioned amount is reduced from the credit to be distributed in the month the credit note is included in GSTR-6 — and if the apportioned credit exceeds the credit to be distributed, it is added to the output tax liability of the recipient.

The same process applies to any correction, "including that it was distributed to wrong recipient."

The Handbook's example: XYZ Ltd distributed ₹1,00,000 to four branches in the ratio 4:3:2:1; it later finds only ₹80,000 was distributable. The ₹20,000 reduction is apportioned 8,000 / 6,000 / 4,000 / 2,000 — the original ratio — leaving 32,000 / 24,000 / 16,000 / 8,000.

And one gap the Handbook flags honestly: "In cases where a registered unit is closed at the time of receipt of a credit note, the distribution or reversal of credit becomes problematic. The law does not clarify who will bear such reversal."

Key takeaways

• Attribution precedes apportionment — one recipient, some recipients, or all.
• Distribution in any other manner is not permitted.
• C1 = (t1 ÷ T) × C, with T limited to the recipients to whom the service is attributable.
• Unregistered and exempt-supply units count in the computation.
• Relevant period = the preceding financial year if all recipients had turnover then; otherwise the last quarter for which all recipients' details are available.
• A new branch gets nothing until a qualifying period exists — the Delhi example.
• Credit must be distributed in the same month, must not exceed what is available, and totals must match.
• Debit and credit notes flow in the month included in GSTR-6; credit notes apportion in the original ratio, with any excess added to output tax liability.

Read next

• ISD Turnover: What Comes Out Before the Ratio Is Struck
• How an ISD Converts Tax Heads: IGST, CGST, SGST and UTGST
• Eligible and Ineligible ITC: Why an ISD Distributes Both

Disclaimer: Positions stated as on 5 September 2026, based on section 20 of the CGST Act, 2017 and rule 39 of the CGST Rules, 2017 as substituted by Notification No. 12/2024-Central Tax and made effective from 1 April 2025 by Notification No. 09/2025-Central Tax, as reproduced in the ICAI Handbook on Input Service Distributor under GST (2nd edition, September 2025).