Indirect Tax Update No. 36

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The Central Board of Indirect Taxes & Customs (‘CBIC’) has issued Circular No. 261/07/2026-GST dated 26 October 2026 (‘Circular’), providing clarifications on the applicability of Section 17(4) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’), which prescribes an optional mechanism for availment of input tax credit (‘ITC’) i.e., (50% of eligible ITC) by banking companies, financial institutions and non-banking financial companies (‘NBFCs’).

The Circular clarifies the following key points:

A. Section 17(4) vis-à-vis Section 17(2) of the CGST Act:

The Circular recognises that the option to comply with either Section 17(4) or Section 17(2) may be exercised separately for different business operating under the same PAN. Accordingly, compliance with Section 17(4) is not mandatory at the PAN level.
Option to avail 50% of eligible ITC under Section 17(4), instead of proportionate availment of ITC under Section 17(2), is exclusively available to a registrant of a banking company, financial institution or NBFCs engaged in supplying services by way of accepting deposits, extending loans or advances, and may also be engaged in supplying other services.
·Where one such registrant opts to avail ITC under Section 17(4), all registrants engaged in supplying services by way of accepting deposits, extending loans or advances, and which may also be engaged in supplying other services, are mandatorily required to comply with Section 17(4) of the CGST Act.

B. Second proviso to Section 17(4) of the CGST Act:

The benefit of the second proviso to Section 17(4), which excludes tax paid on supplies between registrations having the same PAN from the 50% ITC restriction, is available only where the supplier having same PAN has opted to comply with the provisions of Section 17(4).

C. Reporting of availment and reversal of ITC in Form GSTR-3B:

Where Invoice Management System (‘IMS’) has not been used:

Eligibility of (i) ITC auto-populated in Form GSTR-3B from the ITC available in Form GSTR-2B and (ii) ITC pertaining to inward supplies liable to reverse charge, are required to be ascertained.
Eligible ITC under Section 16 shall be availed by following the below procedure:

(a) Permanently reverse ITC attributable to non-business purpose and blocked ITC under Section 17(5) in Table 4(B)(1) of Form GSTR-3B;

(b) Avail ITC in terms of second proviso to Section 17(4); and

(c) Avail 50% of the remaining eligible ITC, while permanently reversing the balance 50% in Table 4(B)(1) of Form GSTR-3B in accordance with Section 17(4) of the CGST Act.

(d) Temporary reverse ITC which is ineligible due to non-fulfilment of conditions under Section 16 in Table 4(B)(2) of Form GSTR-3B. Such ITC may be reclaimed in subsequent tax periods in Table 4(A)(5) upon fulfilment of the prescribed conditions, subject to the time limit prescribed under Section 16(4). The reclaimed ITC shall be reported in Table 4(D)(1) of Form GSTR-3B.

The introduction of IMS enables taxpayers to accept, reject, or keep pending invoices and other documents relating to inward supplies. Where eligibility of ITC cannot be determined due to non-fulfilment of conditions under Section 16, the registrant is required to keep such invoices pending on IMS. Consequently, the ITC pertaining to invoices and other documents that are accepted or deemed accepted on IMS shall be reflected in Form GSTR-2B and auto-populated in Form GSTR-3B.
The remaining procedure for availment and reversal of ITC shall continue to be the same as discussed above.

Clarification on reporting methodology for past periods:

No adverse action shall be taken against taxpayers for adopting a different methodology for availment and reversal of ITC, provided the amount of ITC availed under Section 17(4) is in accordance with the applicable provisions.

LKS Comments:

The Circular clearly distinguishes between banking business and non-banking business for the purpose of determining the applicability of Sections 17(2) and 17(4) of the CGST Act.
The Circular provides clarity on the applicability of Section 17(2) vis-à-vis Section 17(4) across registrations under the same PAN but operating separate business. It is expected to reduce interpretational disputes and litigation for banking companies, financial institutions and NBFCs.
The applicability of the clarification to ongoing proceedings needs to be evaluated. Where adjudicating authority has already passed adverse order against the assessee, the same can be defended with the support of Circular before the appellate authority. Further, where any demand has already been discharged in pursuant to an adverse order or amount was paid during investigation or under protest, the refund of such deposited amount may be attempted.
The Circular provides that ITC temporarily reversed on account of non-fulfilment of conditions under Section 16 of the CGST Act may be reclaimed upon fulfilment of such conditions, subject to the time limit prescribed under Section 16(4) of the CGST Act. Section 16(4) provides timeline for availment and not re-availment.
The reversal under Section 17(4) in respect of ITC distributed through the ISD mechanism is required to be undertaken by the recipient registration and not by the ISD [Ref: Circular No.- 260/06/2026-GST dated 26 October2026].

Input Tax Credit – Issues related to Section 17(4) of the CGST Act, 2017 clarified