GST ITC Reforms: Section 17(5), Rule 86A, Banks and Demonstration Vehicles

Summary: The 57th GST Council meeting held on 8 October 2026 recommended changes concerning accumulated credit and proposed section 17(5) relaxation, rule 86a, isd, banks and demonstration vehicles, ims and credit-reconciliation proposals. The Ministry of Finance press release records recommendations and, in some cases, proposals for future circulars, consultation or in-principle approval. It is not itself an amending Act, rule or rate notification. This analysis explains the precise measures described in the release, their relationship with the statutory provisions identified there, and the practical questions that remain unresolved until the implementing instruments are published. Taxpayers should continue to apply the law currently in force and should not change return positions, claim additional credits, discontinue documentation or alter rates merely on the basis of the Council announcement.

Background and legal status

The Council’s 57th meeting concentrated on process reform following earlier rate rationalisation. The press release distinguishes existing portal measures from new statutory or procedural proposals. Council recommendations require the appropriate amendment, notification, rule, circular or portal implementation, as applicable. A suggested implementation date in the release is not proof of commencement.

Accumulated credit and proposed section 17(5) relaxation

Reforms for improving seamless flow of Input Tax Credit (ITC) Refund of accumulated ITC on account of capital goods and input services:

8.1 The Council recommended amendment in clause (ii) of proviso to section 54(3) of the CGST Act, 2017, and in the CGST Rules, 2017, to provide for refund of accumulated ITC on account of capital goods in case of refund pertaining to zero-rate supplies, and of accumulated ITC on account of input services and capital goods in case of refund pertaining to inverted duty structure.

8.2 The Council recommended that the refund of accumulated ITC on input services for refunds pertaining to inverted duty structure shall be available in respect of ITC availed on input services on or after 1 November, 2026.

8.3 In respect of refund of ITC on capital goods in refunds pertaining to zero rated supplies and inverted duty structure, the Council recommended that refund of ITC on capital goods will be spread over 60 months, and shall be available in respect of ITC availed on capital goods on or after 1 April, 2027.

8.4 This will ease working capital constraints for taxpayers and remove blockage of ITC on account of input services and capital goods in such cases. Rationalization of blocked ITC by a mendment in section 17(5) of the CGST Act, 2017: The Council recommended amendment in section 17(5) of the CGST Act, 2017 to remove the restrictions on availment of ITC on the supplies of outdoor catering, health and life insurance, telecommunication towers, pipelines laid outside factory premises, free samples, goods destroyed or written off on expiry of shelf life as required by law. This will reduce the cascading of taxes and ensure a smoother flow of ITC across the supply chain.

Legal reading and implementation questions

The recommendation must be tested against the final statutory or delegated instrument: the operative wording, class of eligible persons or supplies, procedural conditions, effective date, and treatment of past periods. Until those elements are notified, this section describes a proposal rather than a presently enforceable entitlement or restriction.

Rule 86A, ISD, banks and demonstration vehicles

The Council recommended amendment in Schedule-II of CGST Act, 2017 to provide that transfer of title in IPRs, whether temporary or permanent, will be uniformly treated as supply of services. This will ease GST compliances and will facilitate smoother cross border transactions involving IPR. Amendment in rule 86A of the CGST Rules, 2017 to provide for opportunity of being heard to the taxpayer : The GST Council recommended amendment in rule 86A of the CGST Rules, 2017 to provide a mechanism for enabling a taxpayer to file an objection against blocking of any amount in electronic credit ledger and to avail a personal hearing before the proper officer takes a decision on such objection.

Extending relief for small taxpayers on late fees : The GST Council recommended waiver of late fee on delayed filing of return under section 39(1) of the CGST Act, 2017, for taxpayers with an annual turnover up to Rs. 5 crore in the preceding financial year, if the said delayed return is filed by the end of the month in which it was due. Clarification in respect of various issues through circulars: The GST Council recommended issuance of circulars to provide clarity and to remove ambiguities arising due to varied interpretations by the field formations, in respect of the following issues:

Issues relating to Input Service Distributor (ISD) mechanism for distribution of input service credit. Availment of input tax credit by banking companies and financial institutions including NBFCs who opt for section 17(4) of the CGST Act, 2017. Various issues relating to payment of pre-deposits. Admissibility of input tax credit in respect of demonstration vehicles in certain situations. Omission of rule 96 (10) of the CGST Rules, 2017 to be effective from 23.10.2017, in accordance with the Hon’ble Supreme Court decision.

Legal reading and implementation questions

The recommendation must be tested against the final statutory or delegated instrument: the operative wording, class of eligible persons or supplies, procedural conditions, effective date, and treatment of past periods. Until those elements are notified, this section describes a proposal rather than a presently enforceable entitlement or restriction.

IMS and credit-reconciliation proposals

the following measures to streamline return filing process, so as to minimize mismatches in liability and input tax credit (ITC) in returns Enhancements in FORM GSTR-1/1A/IFF to enable better reconciliation of the details furnished in these forms with the details reported in the return in FORM GSTR-3B. Insertion of a rule 86D in the CGST Rules, 2017, to provide for a facility namely, “Electronic Statement of tax paid on Reverse charge basis and input tax credit claimed” on the portal, to facilitate the taxpayers in correct reporting of tax liability and ITC on supplies liable to RCM in returns.

Press-release recommendation. Insertion of sub-rule (1A) in rule 61 of the CGST Rules, 2017 to provide a mechanism of correct reporting and correction/rectification of liability in the return, so that liability in the return in FORM GSTR-3B aligns with the details of liability furnished in FORM GSTR-1/1A/IFF. Amendment in FORM GST DRC-03, to declare the details of the underlying invoice for which payment has been made. Insertion of sub-rule (6A) in the rule 60 of the CGST Rules, 2017, in respect of the facility namely, Invoice Management System (IMS), to allow a recipient to accept, reject or keep pending a document pertaining to inward supply received on the portal, for the purpose of generation of statement of ITC in FORM GSTR-2B, subject to certain conditions, including the period for which a credit note can be kept pending on IMS.

Press-release recommendation. Insertion of rule 86C in the CGST Rules, 2017 to provide for a facility namely, “Electronic Credit Reversal and Reclaim Statement” on the portal, to facilitate the taxpayers in correct reporting of ITC reversed and reclaimed in FORM GSTR-3B. Insertion of sub-rule (1B) in the rule 61 of the CGST Rules, 2017, to provide a mechanism of correct reporting and correction/rectification of ITC in the return, so that ITC availed in the return in FORM GSTR-3B aligns with the details of ITC made available in FORM GSTR-2B.

Issuance of a circular to clarify the manner of furnishing correct and proper information of ITC and reversal thereof in return in FORM GSTR-3B, in the context of IMS, Electronic Credit Reversal and Reclaim Statement and Electronic Statement of tax paid on Reverse charge basis and input tax credit.

5.2 The Council recommended that the provisions regarding alternate mechanism for amendment of liability and ITC in the GST return, may be brought into force from the return of April, 2027. These measures will considerably reduce mismatches in liability and ITC in returns, thus not only reducing demand notices and system generated intimations on account of such mismatches, but also improving the integrity of ITC across the supply chain, thereby facilitating taxpayers.

Legal reading and implementation questions

The recommendation must be tested against the final statutory or delegated instrument: the operative wording, class of eligible persons or supplies, procedural conditions, effective date, and treatment of past periods. Until those elements are notified, this section describes a proposal rather than a presently enforceable entitlement or restriction.

Analysis

A Council recommendation to relax blocked credits does not automatically confer retrospective credit or override current section 17(5). The listed categories should be tested against the final amended text, including restrictions and conditions. The proposed rule 86A hearing relates to an objection against blocking of electronic-credit-ledger amounts. Matters assigned to future circulars should not be treated as settled interpretations before those circulars are issued.

Way forward

First, identify the relevant Act amendment, rule amendment, rate notification or circular when issued. Second, compare its wording with the Council announcement; the final text may narrow, qualify or stage the measure. Third, confirm the commencement clause and any retrospective or transitional provision. Fourth, update compliance procedures only after checking whether portal changes, prescribed forms and administrative instructions are available.

Key takeaways

• The 8 October 2026 press release is the primary source for the proposals discussed here.
• A recommendation, in-principle approval or proposed circular does not itself change the operative law.
• Where the release identifies thresholds, dates or exceptions, the final legal text must be checked before applying them.
• Existing statutory filing, payment, record-keeping and appeal obligations continue until lawfully changed.

Frequently Asked Questions

Have these Council recommendations come into force?

Not merely by publication of the press release. The applicable amendments, notifications, rules or circulars and their commencement provisions must be examined.

Can a taxpayer rely on the proposed relief in a current return or proceeding?

Only if the relevant legal instrument is effective and the taxpayer satisfies its conditions. The announcement alone is insufficient.

Will every measure commence on the same date?

The release refers to different proposed implementation arrangements. Each measure must be checked separately against its eventual legal instrument.

Does the release settle all procedural and documentary conditions?

No. Several recommendations expressly contemplate further rule changes, circulars, portal modifications or consultation.

What should advisers do before acting on the announcement?

Maintain the current-law position, identify the specific recommendation, and track the final text, commencement and any transitional provision.

TaxGuru source and related reading

Principal press release: 57th GST Council Meeting – TaxGuru

Provision-by-provision legal verification and qualifications

Scope of blocked-credit recommendation

The proposed section 17(5) relaxation names outdoor catering, health/life insurance, telecom towers, pipelines outside factory premises, free samples and goods destroyed/written off on expiry of shelf life as required by law. Do not treat this as repeal of all blocked-credit restrictions.

Rule 86A is not a universal prior hearing

The proposed hearing attaches to an objection against blocking, before decision on the objection. Existing judgments on reasons to believe and natural justice are background, not substitutes for final rules.

Clarifications still awaited

The Council recommends future circulars on ISD, banking/NBFCs opting for section 17(4), pre-deposits and demonstration vehicles. A circular has not been identified here as issued under this particular recommendation.

Second-hand vehicle margin scheme

The release clarifies that ITC restriction under the specified used-vehicle margin notifications attaches to purchased used vehicles, not otherwise eligible repairs, spares, rent, technology and advertising. This is a clarification, not an unconditional entitlement: sections 16–17 remain applicable.

Rule 96(10) retrospective point

The press release recommends omission of rule 96(10) with effect from 23 October 2017 in accordance with the Supreme Court decision. Verify the actual implementing instrument and retrospective operation before asserting refund rights.

Verified TaxGuru internal references

Primary source: 57th GST Council recommendations as published on TaxGuru

Related analysis: Section 17(5) blocked-credit guide

Related analysis: Rule 86A and pre-decisional hearing case

Related analysis: Used-car margin scheme AAR ruling

Related analysis: Section 54 refund framework

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Disclaimer: This article is an editorial explanation of the recommendations recorded in the Ministry of Finance press release dated 8 October 2026. It is not a statement that any proposed amendment has commenced. Readers must verify the relevant enacted law, notifications, rules, circulars and judicial developments before acting. TaxGuru accepts no responsibility for decisions taken solely on the basis of this article.