GST Circular 260/06/2026: Seven ISD Clarifications on ITC Distribution and Refunds

Summary: CBIC Circular No. 260/06/2026-GST dated 26 October 2026 addresses seven practical issues arising from the mandatory Input Service Distributor (ISD) mechanism under GST. It clarifies that multiple ISD registrations may be obtained within the same State for separately registered business verticals or places of business receiving common input service invoices on behalf of distinct persons. While the ISD is responsible for distributing credit in accordance with Section 20 and Rule 39, recipient registrations must independently comply with Sections 16 and 17, including applicable input tax credit reversals. The circular explains that credit becomes available for distribution when the ISD determines its prima facie eligibility and must be distributed in that month, with eligible and ineligible amounts reported separately in GSTR-6. It further clarifies that invoices issued under Rule 54(1A) merely transfer credit from a regular registration to the ISD and do not constitute outward supplies. Consequently, such transfers are excluded from turnover and net ITC calculations for refund purposes, and the transferring registration need not reverse credit under Section 17 before distribution. These clarifications are particularly relevant to multi-State businesses, exporters, finance teams and GST refund practitioners.

Input Service Distributor After Mandatory ISD: Seven Clarifications in Circular 260/06/2026

Since ISD became mandatory for distribution of common input service credit, the questions that used to be theoretical have become practical. Companies with several registrations in one State want to know whether each needs its own ISD. Finance teams want to know who carries the burden of Section 16 conditions when the credit flows through an ISD. Refund consultants want to know whether the Rule 54(1A) transfer invoice disturbs turnover or net ITC in the refund formula. Circular No. 260/06/2026 GST dated 26.10.2026 takes up seven such issues and answers them in a table. The answers are mostly logical, and a couple of them will affect refund computations for exporters that run an ISD in the same State.

More than one ISD in a State is permitted

The first question is whether ISD registration is needed for each business vertical or place of business within the same State. The circular reads Section 2(61) with Sections 25(2) and 25(4) and concludes that there is no bar on obtaining more than one ISD registration for each separately registered vertical or place of business in a State. Each registrant that receives input service invoices on behalf of distinct persons and has to distribute the credit under Section 20 must obtain its own ISD registration. The only rider is Rule 39(1), under which the ISD distributes credit only to the distinct person to whom it is attributable.

Section 16 compliance rests with the recipient, penalty rests with the ISD

This is the clarification that allocates responsibility, and it does so sensibly. The ISD distributes credit in the manner laid down in Section 20. The recipients of that credit are the ones who must satisfy Sections 16 and 17 and the rules under them. If the ISD distributes in contravention of Section 20, two things follow. The ISD becomes liable to penalty under Section 122(1)(ix), which is ten thousand rupees or the amount of credit distributed irregularly, whichever is higher. Where the contravention results in excess distribution to one or more recipients, the excess is recovered from those recipients with interest under Section 21, through proceedings under Sections 73, 74 or 74A as the case may be. So the ISD answers for the manner of distribution and the recipient answers for eligibility and for any excess that lands in its ledger.

What available for distribution in a month means

Rule 39(1)(a) says the credit available for distribution in a month shall be distributed in the same month and shown in GSTR 6. The doubt was whether available means the moment an invoice appears in GSTR 6A or something later. The circular reasons that although the ISD does not itself avail credit, it is the one receiving the invoices centrally and is best placed to judge prima facie eligibility, and Rule 39(1)(g) in any case requires it to distribute eligible and ineligible credit separately. It therefore clarifies that credit becomes available for distribution only when the ISD has ascertained it to be prima facie eligible for availment, and the ISD must distribute it in the month in which it makes that ascertainment, split into eligible and ineligible, with the details in GSTR 6. This gives the ISD a defensible reason for a lag between the invoice appearing in GSTR 6A and its distribution, so long as the lag reflects a real eligibility check and not simple delay.

Reversals under Section 17 are for the recipient

The fourth clarification follows from the second. The ISD should distribute the entire credit available to it to the recipients to whom it is attributable. The recipients then carry out whatever reversals are required under Section 17(1) and 17(2) read with Rules 42 and 43, or under Section 17(4) read with Rule 38 for banks and financial institutions. The ISD does not apply Rule 42 before distributing.

Rule 54(1A) invoice is not turnover

The fifth and sixth clarifications are the ones refund practitioners should read twice. Rule 54(1A) allows a regular registration having the same PAN and State code as the ISD to issue an invoice, debit note or credit note to the ISD to transfer the credit on input services attributable to other distinct persons, so that the ISD can distribute it. The circular explains the purpose. This was essentially to let the regular registration discharge tax on reverse charge transactions before the credit moves to the ISD, so that the tax is paid before anyone avails the credit. Rule 54(1A) is therefore described as merely a credit transferring mechanism and not an outward supply.

Two consequences flow. The amount on a Rule 54(1A) document is not turnover in State or turnover in Union territory of the issuing registration under Section 2(112), even though it may have to be reported in GSTR 1 to transmit it to the ISD. It must therefore be excluded when computing the turnover basis on which the ISD distributes credit under Section 20 read with Rule 39, and it must be excluded from adjusted total turnover under Section 54(3) read with Rule 89 when computing the maximum refund. Likewise, the credit so transferred is not input tax credit on inward supplies of the transferring registration and does not form part of net ITC under Rules 89(4) and 89(5). An exporter who has been including the RCM credit transferred to the ISD in its net ITC, or including the Rule 54(1A) invoice value in its adjusted total turnover, will need to revisit the computation in both directions.

No Section 17 reversal on the transferring registration

The seventh clarification closes the circle. Since the credit transferred under Rule 54(1A) is not the transferring registration’s own input tax credit, that registration does not make any reversal under Section 17(1), 17(2) or 17(4) on it. It transfers the entire credit on the reverse charge tax it paid to the ISD. The reversals are made by the recipients of credit when the ISD distributes it, and the circular notes that the transferring registration may itself be one of those recipients and will make its reversal at that stage on the portion distributed back to it.

Points to keep in mind

The circular does not change the law but it does fix the sequence. Pay RCM at the regular registration, transfer the full credit to the ISD through a Rule 54(1A) document without any reversal, let the ISD ascertain eligibility and distribute in the month of ascertainment with eligible and ineligible shown separately, and let each recipient apply Sections 16 and 17 to what it receives. Keep the Rule 54(1A) values out of turnover and out of net ITC for refund. Where the group has multiple registrations in one State with separate common service procurement, a separate ISD for each is permissible and in fact required where each receives invoices on behalf of distinct persons.

One thing the circular does not address is the treatment of past periods where companies followed a different sequence, for instance where the regular registration applied Rule 42 before transferring credit to the ISD. Given that the clarification describes Rule 54(1A) as a mere transfer mechanism, a demand on the transferring registration for not reversing under Section 17 would be hard to sustain, but exporters who claimed refund on an inflated net ITC should expect the question to be raised in audit.