Think of a large company like Sharma & Sons Pvt. Ltd. that has its head office in Mumbai and three branch factories in Pune, Chennai, and Hyderabad. The Mumbai HQ pays for services that benefit all branches — say, a ₹12,00,000 annual software subscription or a legal retainer. The GST paid on these services is sitting with the HQ, but the actual business happens at the branches. How do the branches claim that ITC? That's exactly what an Input Service Distributor (ISD) does — it acts as the credit-forwarding hub, legally distributing ITC from the HQ to the branches.
Section 20 lays down how this distribution must happen. First, the type of tax must be preserved: CGST can only become CGST or IGST, and IGST can only become IGST or CGST — you can never convert CGST into SGST or vice versa. Distribution happens via a special ISD invoice (like a credit note, but for distributing ITC). The golden rule: amount distributed ≤ amount available — you cannot distribute more credit than the ISD actually holds. Now, how much does each branch get? Three situations arise: (a) if the expense is for one specific branch only, 100% of that ITC goes to that branch alone; (b) if it's for a few identified branches, split it pro rata based on their turnover; (c) if it's for all branches, again split pro rata across all of them. The turnover used is of the relevant period — normally the preceding financial year's turnover of each branch in its respective State. If a branch is brand new and has no prior-year turnover, fall back to the last quarter for which all branches have available turnover data. One more critical definition: "recipient of credit" means only those entities sharing the same PAN as the ISD — so an ISD cannot distribute credit to unrelated third parties.
Example 1 — Pro-rata distribution across all branches
Rajesh & Co. Pvt. Ltd. (PAN: AABCR1234M) has its ISD registered in Delhi. It pays ₹5,00,000 + 18% GST (= ₹90,000 IGST) for a cloud ERP license that benefits all three branches.
| Branch | State | Turnover (Prev. FY) |
|--------|-------|---------------------|
| Branch A | Maharashtra | ₹80,00,000 |
| Branch B | Karnataka | ₹60,00,000 |
| Branch C | Tamil Nadu | ₹60,00,000 |
| Total | | ₹2,00,00,000 |
Pro-rata formula: (Branch Turnover ÷ Total Turnover) × Available ITC
- Branch A: (80/200) × ₹90,000 = ₹36,000 IGST
- Branch B: (60/200) × ₹90,000 = ₹27,000 IGST
- Branch C: (60/200) × ₹90,000 = ₹27,000 IGST
Total distributed = ₹36,000 + ₹27,000 + ₹27,000 = ₹90,000 ✓ (equals available ITC)
Final Answer: Branch A gets ₹36,000; Branches B and C get ₹27,000 each.
---
Example 2 — Expense attributable to only one branch
The same ISD pays ₹2,00,000 + 18% GST (= ₹36,000 CGST) for a repair service performed exclusively at Branch B in Karnataka.
Since the input service is attributable to Branch B only, the entire ₹36,000 ITC is distributed only to Branch B — no pro-rata split needed.
Final Answer: Branch B receives ₹36,000 CGST (distributed as CGST or IGST per applicable rules). Branches A and C receive ₹0.
📖 Bare Act text — Section 20, CGST Act 2017
(click to expand)
(1) The Input Service Distributor shall distribute the credit of central tax as central tax or integrated tax and integrated tax as integrated tax or central tax, by way of issue of a document containing the amount of input tax credit being distributed in such manner as may be prescribed.
(2) The Input Service Distributor may distribute the credit subject to the following conditions, namely:––
(a) the credit can be distributed to the recipients of credit against a document containing such details as may be prescribed;
(b) the amount of the credit distributed shall not exceed the amount of credit available for distribution;
(c) the credit of tax paid on input services attributable to a recipient of credit shall be distributed only to that recipient;
(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;
(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.
Explanation.––For the purposes of this section,––
(a) the ―relevant period‖ shall be––
(i) 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
(ii) 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;
(b) 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;
(c) 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.