GST ITC Clarifications 2026: Input Service Distributor, Banks and NBFCs (Section 17(4)) and Demo Vehicles

The short answer

Three CBIC circulars dated 26 October 2026 settle long-running input tax credit (ITC) questions:

• Circular No. 260/06/2026-GST (Input Service Distributor). The recipients of distributed credit, not the ISD, must meet the section 16 and 17 conditions and make the reversals. The ISD distributes in the month it finds the credit prima facie eligible. Credit transferred to an ISD under rule 54(1A) is not "turnover" of the transferring unit, nor part of its Net ITC for refunds.
• Circular No. 261/07/2026-GST (banks, financial institutions and NBFCs under section 17(4)). It sets out which registrations can or must opt for the 50% credit route, and how to report it in GSTR-3B.
• Circular No. 262/08/2026-GST (car dealers). ITC on demo vehicles is not blocked under section 17(5)(a) for dealers in the dealer-agency model either. Paragraph 4.6 of Circular 231/25/2024-GST is withdrawn.

Circular 260: Input Service Distributor

One ISD per vertical or place of business

Where a business holds separate registrations for business verticals or places of business in the same State, each registration is a distinct person. Each such registrant that receives input service invoices for, or on behalf of, distinct persons must obtain its own ISD registration. The ISD can distribute credit only to the distinct person to whom it is attributable (rule 39(1)).

Who must meet the ITC conditions

• The ISD distributes credit in the manner in section 20.
• The recipients of credit must satisfy the eligibility conditions, including those in sections 16 and 17.
• If the ISD distributes in breach of section 20, it is liable to penalty under section 122(1)(ix): ₹10,000 or the credit distributed irregularly, whichever is higher. Any excess credit distributed is recovered from the recipients under section 21, with interest.

"Available for distribution in a month"

Rule 39(1)(a) requires the ISD to distribute the credit available in a month in that same month. The circular says credit becomes "available" only when the ISD, having received the invoices in GSTR-6A, ascertains that the credit is prima facie eligible. The ISD distributes in the month of that ascertainment, separately as eligible and ineligible credit (rule 39(1)(g)), and reports it in GSTR-6.

Reversals

The ISD distributes the entire credit available to it. Reversals under section 17(1), 17(2) (rules 42 and 43) or 17(4) (rule 38) are made by the recipients.

Rule 54(1A) transfers to the ISD

Under rule 54(1A), a regular registration with the same PAN and State as the ISD can issue an invoice to transfer to the ISD credit on input services attributable to other distinct persons. This is used mainly where that unit has paid tax on the services under reverse charge. The circular calls this "merely a credit transferring mechanism", so for the transferring unit:

• the amount is not its turnover in the State under section 2(112), even though it is declared in GSTR-1. It is left out both of the ISD's distribution ratio and of the "Adjusted Total Turnover" in a refund under rule 89;
• the credit transferred is not its Net ITC for refunds under rule 89(4) or 89(5);
• it makes no reversal of that credit under section 17(1), 17(2) or 17(4). It transfers the full credit to the ISD, and the recipients (which may include the transferring unit itself) make the reversals.

Circular 261: banks, financial institutions and NBFCs (section 17(4))

Section 17(4) lets a banking company or a financial institution, including an NBFC, engaged in accepting deposits or extending loans and advances, avail 50% of eligible ITC instead of apportioning credit under section 17(2). The circular clarifies:

• Who can opt. A registration that does not supply deposit or lending services at all, for example one engaged only in bullion trading, can neither opt nor be required to follow section 17(4). A registration that does supply those services, even with other services, has the option.
• All or none. If one such deposit- or lending-engaged registration of an entity opts, all of the entity's registrations engaged in those services must follow section 17(4).
• Same-PAN supplies. The second proviso to section 17(4) relaxes the 50% restriction for tax on supplies from another registration with the same PAN. The circular confines it to supplies from a same-PAN registration that has also opted for section 17(4).

How to report it in GSTR-3B

Out of the ITC auto-populated from GSTR-2B (plus reverse-charge ITC), after ascertaining what is eligible under section 16:

1. credit for non-business use and blocked credit under section 17(5) is reversed permanently in Table 4(B)(1);
2. credit on same-PAN supplies covered by the second proviso is availed in full;
3. 50% of the remaining ITC is availed, and the balance reversed permanently in Table 4(B)(1) in the same period.

Credit not yet eligible because a section 16 condition is unmet goes to Table 4(B)(2) and can be reclaimed later in Table 4(A)(5), within the section 16(4) time limit, also shown in Table 4(D)(1). Once the IMS-related rule amendments are notified, such invoices are to be kept pending on IMS instead, and only accepted or deemed-accepted credit flows into GSTR-2B. Officers are told not to take an adverse view of a different reporting method used in past periods, as long as the ITC availed matches these principles.

Circular 262: ITC on demo vehicles for car dealers

Section 17(5)(a) blocks ITC on motor vehicles seating up to 13 persons, except when they are used for further supply of such motor vehicles (and two other uses). Paragraph 4.6 of Circular 231/25/2024-GST had said that a dealer acting only as the manufacturer's agent (the dealer-agency model, where the manufacturer sells directly to the customer) could not take ITC on demo vehicles.

Circular 262 reverses that. Its reasons:

• demo vehicles serve the same purpose in both models;
• both are bought on tax invoices, carried as capital assets, and later sold with tax;
• the words "such motor vehicles" cover vehicles used to further the supply of similar vehicles.

Paragraph 4.6 is withdrawn. ITC on demo vehicles is not blocked under section 17(5)(a) for the dealer in the dealer-agency model.

What to do now

• Groups with an ISD: check that each vertical or location receiving common invoices has its own ISD registration. Make sure the recipient units, not the ISD, run the section 16/17 checks and the reversals. Remove rule 54(1A) amounts from turnover in your distribution and refund workings.
• Banks and NBFCs: confirm which registrations are in or out of section 17(4), and apply the opt-in consistently across all lending or deposit registrations. Restrict the same-PAN relaxation to supplies from registrations that have also opted.
• Car dealers on the agency model: ITC on demo vehicles is available. Where it was denied or reversed relying on paragraph 4.6, review the open periods and any pending notices.

Related: 57th GST Council overview and the 2026 refund rule changes.

Sources: CBIC Circulars No. 260/06/2026-GST, 261/07/2026-GST and 262/08/2026-GST, all dated 26 October 2026, read from the copies on CBIC's Tax Information Portal. Statutory provisions are as quoted or cited in the circulars. This article is not legal advice on a particular case.