Indirect Tax Update No. 35

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Input Service Distributor mechanism clarified

In line with the recommendations of the 57th GST Council meeting held on 8 October 2026, the Central Board of Indirect Tax and Customs (‘CBIC’) has issued Circular No. 260/06/2026 dated 26 October 2026 clarifying various issues relating to the Input Service Distributor (‘ISD’) mechanism. The clarifications are in line with legal position provided in the Act and judicial interpretation on time of availment of ITC in ISD. The clarifications will help in settling various ongoing investigations and litigations in relation to ISD.

The Circular has clarified the following key issues:

A.  Multiple registrations for ISD under same PAN based on business vertical or place of business:

• ISD registration can be obtained for each business vertical or place of business which has received input service invoices for or on behalf of distinct persons.

• Circular has clarified that there is no bar on obtaining more than one ISD registration for each business vertical or each place of business, as the case may be, within a State or Union territory.

• However, the Circular also reiterates that ISD can distribute the credit only to the distinct person to whom the credit is attributable.

LKS comments:

• The law never restricted taking multiple ISD registration for company based on nature of establishments receiving common input services like regional office, back offices etc. ISD is applicable only for common input services wherein the companies can receive common service invoices at one ISD GSTIN. This is a welcome clarification for companies having multiple business verticals from the same place of business. This will help in optimization and correction of anomalies of ITC distribution and reversal for each business vertical linked to the turnover formula. However, companies not having pan-India business vertical registration will have practical challenges in attribution of common input services for each GSTIN as discussed in the ISD circular.

• After the deletion of business vertical wise registration and moving towards place of business-based registration, companies were facing difficulties in taking two registrations for different business verticals from same place of business. The circular is reiterating the concept of business vertical based voluntary registration even after deletion of the phrase ‘business vertical’.   

• Clarification has also emphasized that ISD has to check and ensure that each invoice is common for the GSTIN to which credit is being distributed as provided in Rule 39(1) of the CGST Rules.

B.  Compliance with Section 16 and Section 17 of the CGST Act:

• The recipients of input tax credit are required to comply with the conditions of Section 16 and Section 17 of the CGST Act. The reversal of ITC under Section 17(1) or Section 17(2) read with Rule 42 and Rule 43 or Section 17(4) read with Rule 38 is required to be undertaken by the recipient of credit.

• Where ITC is distributed in contravention of any of the conditions, ISD is liable for the penalty under Section 122(1) of the CGST Act, whereas for any excess distribution of credit to one or more recipients of credit, the excess credit so distributed is to be recovered from such recipients of credit, in terms of the provisions under Section 21 of CGST Act.

LKS comments:

• Circular has reiterated the legal position provided under Section 21 and Section 122 (ix) of the CGST Act. This will however result in multiple and parallel investigation at ISD GSTIN level and other recipient GSTIN level. The onus will be on the taxpayer to verify the factual position on distribution and eligibility to avail credit. 

C.  Interpretation of “input tax credit available for distribution in a month”:

• ISD, for the purpose of distribution of credit, is required to determine whether the credit in respect of input service invoice is prima facie eligible to be availed by the recipient, even though the responsibility lies with the recipient of credit to comply with the conditions for availing credit.

• The credit can be said to be available for distribution in a month once the ISD has ascertained its eligibility for availment by the recipient of credit based on the details available in Form GSTR-6A. Thereafter, ISD can distribute the credit separately as eligible and ineligible credit, in the same month.

LKS comments:

• The clarification is in line with judicial interpretation that ISD needs to determine the eligibility under Section 16 and 17 before distribution and there is no legal mandate to distribute credit in the same month of reporting.

• The phrase, “input tax credit available for distribution in a month” under Rule 39(1)(a) was interpreted by the High Courts. Taxpayers were facing practical difficulties with respect to timeline for distribution of credit. Penal consequences of Section 122 of the CGST Act were also imposed for wrongful distribution. The Hon’ble Madras High Court in Reliance Jio Infocomm [2026:MHC:925]has held that the phrase means the month in which the ITC becomes legally available to the registered person after fulfillment of conditions prescribed under Section 16 of the CGST Act. Whereas Telangana High Court in BirlaNu Ltd. [2026 (1) TMI 894]hasstruck down Rule 39(1)(a) on the ground that prescribing time limit for distribution of credit through ISD, is ultra vires Section 20 of the CGST Act.

• It is pertinent to highlight that special leave petition has been filed by the department against both the decisions before the Hon’ble Supreme Court. The question arises as to whether the department will withdraw its petition based on the circular or whether the circular itself can be challenged.

• The pending show cause notices need to be adjudicated in line with the above clarification.

• The Circular has put the onus to acertain the eligibility prima facie before distribution on the ISD. While the statute does not provide such provisional determination. The sword of Section 122 will be hanging on the ISD and taxpayer will have to justify bona fide distribution based on satisfaction of conditions of Section 16 of the CGST Act.

• Conditions like payment to vendor within 180 days from the date of issue of invoice also need to be satisfied post availment of ITC. The discretion given to ISD may cause friction between taxpayer and audit authorities. 

D.  Clarification with respect to Rule 54(1A) of the CGST Rules:

• Rule 54(1A) of the CGST Rules permits transfer of credit by regular GSTIN to ISD for common input services attributable to one or more distinct persons through invoice, credit note or debit note. The rule allows payment of tax on reverse charge transactions by regular GSTIN to ensure tax is discharged before credit is distributed by ISD to other GSTINs who in turn, can avail credit of tax so paid.

• Calculation of “turnover in State”/ “turnover in Union Territory”: The Circular has clarified that the amount declared in the invoice, credit note or debit note issued by the regular GSTIN, having same PAN and registered in the same State as the ISD under Rule 54(1A) of CGST Rules will not qualify as “turnover in State” or “turnover in Union Territory”, as there is no outward supply by the said GSTIN. The details are required to be declared in GSTR-1 to transmit the same to ISD for distribution.

• Calculation of ‘Net ITC’ under Rule 89(4) of the CGST Rules: Circular has clarified that credit transferred by the registered person, having same PAN and State code as the ISD, in terms of Rule 54(1A), does not qualify as input tax credit as there is no inward supply by such GSTIN. The same will not be included for “Net ITC” for claiming refund under Rule 89(4) of the CGST Rules.

• Requirement for reversal of credit under Section 17 of the CGST Act by the regular GSTIN: The regular GSTIN having same PAN and State code as ISD, is not required to reverse credit under Section 17(1) or Section 17(2) or Section 17(4) of CGST Act. The said GSTIN is required to transfer the entire credit available on account of payment of tax under reverse charge to the ISD for further distribution to the recipients of credit. The credit reversal is required to be carried out by the respective recipient of credit, as the case may be.

LKS comments:

• The above clarifies the position in relation to ongoing investigation on turnover for distribution of ITC, calculation of reversal and Net ITC for refund in relation to common reverse charge invoices distributed through ISD after payment of tax in normal GSTIN.

• Prior to the Circular, businesses had adopted different methodologies for computation of turnover and Net ITC. The business can align their position based on the Circular.

• Position of the above clarifications with respect to transactions where regular GSTIN has discharged tax on forward charge and transferred ITC under Rule 54(1A) of the CGST Act still remain open since the circular has only clarified in relation to RCM transactions.