In short
Why these circulars matter
Since 1 April 2025, a business must use an Input Service Distributor (ISD) registration for input services received on behalf of its other GSTINs under the same PAN. Audits since then have taken different views on how many ISDs a State needs, who checks whether credit is eligible, when it must be distributed and who reverses it. Banks and NBFCs had a parallel argument over how the 50% option works across their many registrations, and vehicle dealers kept receiving notices on demo cars. Circular Nos. 260, 261 and 262 of 26 October 2026, with Notification No. 05/2026-Central Tax for the rule changes from 1 November 2026, settle these questions.
1. The Input Service Distributor (Circular 260)
| Question | Answer |
|---|---|
| Two registrations in one State: one ISD or two? | Each registration that receives input service invoices for other distinct persons takes its own ISD; more than one ISD in a State is allowed. |
| Who meets sections 16 and 17? | The recipient units. The ISD only distributes under section 20. |
| When is credit distributed? | In the month the ISD finds it prima facie eligible, not when it appears in GSTR-6A; eligible and ineligible credit shown separately in GSTR-6. |
| A unit makes exempt supplies, or is a bank on the 50% option | The ISD distributes the full credit; the unit reverses under rules 42 and 43, or under section 17(4) and rule 38. |
| Is a rule 54(1A) invoice the issuer's turnover? | No. It only transfers credit; it is left out of turnover, the rule 39 ratio and adjusted total turnover for refunds. |
| Is that credit the issuer's Net ITC for refund? | No. It is not credit on the issuer's inward supplies. |
| Must the issuer reverse it? | No. It transfers the whole credit; reversal happens at the recipients. |
A company's head office ISD in Tamil Nadu receives an advertising invoice of ₹10,00,000 plus 18% GST, ₹1,80,000, for campaigns that benefit its Karnataka and Kerala units equally. The ISD checks it in December and distributes ₹90,000 to each unit that month. The Kerala unit makes 25% exempt supplies, so it reverses ₹22,500 under rule 42 and keeps ₹67,500. Under the circular, the ISD does not reverse anything and does not hold back the ₹22,500 itself.
If an ISD distributes wrongly, the penalty under section 122(1)(ix) falls on the ISD (₹10,000 or the credit distributed irregularly, whichever is higher), and the excess credit is recovered from the recipients with interest under section 21. From 1 November 2026 the rules are aligned: rule 54(1A) covers services attributable to one or more distinct persons, ISD documents are recognised for credit under rule 36, GSTR-6A is available to the ISD under rule 60(2), and rule 39 allows CGST as well as IGST to be distributed.
2. Banks and NBFCs on the 50% option (Circular 261)
Section 17(4) lets a bank, financial institution or NBFC take 50% of its eligible credit each month instead of apportioning it between taxable and exempt supplies. The circular answers two questions. Only a GSTIN that accepts deposits or extends loans or advances can opt; a GSTIN that only, say, trades bullion has neither the option nor the obligation. And once one eligible GSTIN opts, every eligible GSTIN on that PAN must follow section 17(4). The second proviso, which allows full credit on supplies from another registration of the same PAN, applies only where the supplying GSTIN has also opted; otherwise those supplies are treated like any other inward supply, at 50%.
Reporting in GSTR-3B for a GSTIN that has opted
- 1Check eligibility
Review the credit from GSTR-2B and on reverse charge supplies; keep invoices not yet eligible pending in the Invoice Management System.
- 2Remove ineligible credit
Reverse permanently in Table 4(B)(1) the credit for non-business use and the credit blocked under section 17(5).
- 3Take same-PAN credit in full
Avail in full the credit on supplies from same-PAN GSTINs that have also opted.
- 4Take half of the rest
Avail 50% of the remaining credit and reverse the other 50% permanently in Table 4(B)(1) of the same period.
A bank's Maharashtra GSTIN has ₹20,00,000 of credit in GSTR-2B for November. Of this, ₹2,00,000 is blocked under section 17(5) and is reversed. ₹3,00,000 is on services from its own Karnataka GSTIN, which has also opted, so it is taken in full. The remaining ₹15,00,000 is split: ₹7,50,000 taken and ₹7,50,000 reversed permanently. Credit taken: ₹3,00,000 + ₹7,50,000 = ₹10,50,000. If the Karnataka GSTIN had not opted, the ₹3,00,000 would fall into the 50% pool, and the credit taken would be ₹9,00,000.
Credit that fails a section 16 condition for the time being, such as payment to the vendor or receipt of the service, is reversed temporarily in Table 4(B)(2), reclaimed in Table 4(A)(5) when the condition is met within the section 16(4) time limit, shown in Table 4(D)(1) and then put through the same four steps. A different reporting method followed in the past is not to be questioned where the credit taken matches these principles.
3. Demo vehicles (Circular 262)
| Traditional dealer | Dealer-agency model | |
|---|---|---|
| How cars are sold | The dealer buys a fleet and sells on its own account | The manufacturer sells directly to the customer |
| Demo vehicles | A few cars set apart from stock | Bought only for marketing and test drives |
| Credit before this circular | Allowed under section 17(5)(a)(A), per Circular 231 | Blocked by paragraph 4.6 of Circular 231 |
| Credit now | Allowed | Allowed: paragraph 4.6 withdrawn |
The circular reasons that demo vehicles serve the same purpose in both models: they are bought on tax invoices, capitalised and later sold on payment of tax, and "such motor vehicles" in section 17(5)(a)(A) covers vehicles used to further the supply of similar vehicles. So the credit is not blocked for an agency-model dealer either, and notices issued on the strength of Circular 231 can be answered with Circular 262, including for past periods.
What to do now
- ISD: record the month in which each invoice was checked, and distribute eligible and ineligible credit separately in GSTR-6.
- ISD: if an audit asks the ISD to reverse for exempt supplies at a unit, answer with Circular 260; the reversal belongs at the unit.
- Cross-charge registrations: leave rule 54(1A) invoices out of turnover in rule 42 and refund workings, including for periods under audit, since the circular is clarificatory.
- Banks and NBFCs: list every GSTIN on the PAN, mark which take deposits or give loans, and make sure all of those have opted before the November 2026 return.
- Vehicle dealers: reply to pending demo-vehicle notices citing Circular 262, and check whether credit on demo cars not yet claimed is still within the section 16(4) time limit.
Are these circulars binding on officers?
Circulars issued by the CBIC bind the department's officers. They clarify the law and do not bind courts or the taxpayer, but they are a strong answer to a notice that takes the opposite view.
Does the ISD ever hold back credit?
It distributes ineligible credit separately, marked as ineligible; it does not hold back the portion a unit will later reverse for exempt supplies.
Can one bank GSTIN opt and another apportion credit?
Not if both take deposits or give loans. All eligible GSTINs on the PAN must follow the same route once one opts.
Does the demo-vehicle relief cover cars used by staff?
No. It covers vehicles held to further the supply of similar vehicles, such as test-drive cars. Cars used for staff transport stay subject to section 17(5).
Need your ISD or credit reversals reviewed?
Aypa can map your GSTINs, set up ISD distribution and check reversals before the next return.
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