Circular No. 260/06/2026-GST: CBIC Clarifies Input Service Distributor (ISD) Issues

The CBIC has issued Circular No. 260/06/2026-GST dated 26.10.2026 under Section 168(1) of the CGST Act. It answers seven questions on the Input Service Distributor (ISD) under Section 2(61) and Section 20 of the CGST Act, and Rules 39 and 54(1A) of the CGST Rules.

An ISD is an office that receives invoices for input services, including services under reverse charge, on behalf of its distinct persons (other GSTINs under the same PAN), and distributes the credit to them. From 1 April 2025, credit of such common input services has to be distributed through the ISD.

Summary of the Seven Clarifications

1. One ISD for Each Registered Vertical

Under Sections 25(2) and 25(4), each separate registration for a business vertical or place of business in a State is a distinct person. There is no bar on more than one ISD registration in a State. So every such registrant that receives input service invoices for distinct persons must obtain an ISD registration. The ISD can distribute credit only to the distinct person to whom it is attributable (Rule 39(1)).

2. Section 16 Conditions Apply to the Recipient

The ISD only distributes credit under Section 20. The recipients must satisfy Sections 16 and 17 and the related rules. If the ISD distributes in breach of Section 20:

• the ISD is liable to penalty under Section 122(1)(ix): ₹10,000 or the credit wrongly distributed, whichever is higher; and
• any excess credit is recovered from the recipients with interest, under Section 21 read with Section 73, 74 or 74A.

3. “Distribute in the Same Month” — Rule 39(1)(a)

The ISD receives invoices in GSTR-6A and files GSTR-6 (Rule 65). Because services are bought centrally, the ISD is best placed to judge whether the credit is eligible. The circular therefore clarifies that credit is “available for distribution” only when the ISD ascertains it to be prima facie eligible. It must be distributed in the month of that ascertainment, showing eligible and ineligible credit separately (Rule 39(1)(g)), and reported in GSTR-6.

Note: In BirlaNu Ltd. v. Union of India (W.P. No. 14564 of 2024), the Telangana High Court held that the same-month requirement in Rule 39(1)(a) is ultra vires Section 20. The circular does not refer to this judgment. ISDs facing a notice on this point should consider both.

4. Reversals Are Made by the Recipients

The ISD should distribute the entire credit to the recipients to whom it is attributable. Reversals under Section 17(1)/(2) read with Rules 42 and 43, or Section 17(4) read with Rule 38, are made by the recipients, not the ISD.

5 to 7. Rule 54(1A) Cross-Charge to the ISD

Rule 54(1A) lets a regular registration with the same PAN and State as the ISD issue an invoice, debit note or credit note to the ISD. It transfers credit on input services, mainly reverse-charge services where tax is paid by the regular registration, so that the ISD can distribute it. The taxable value is the value of those services. The circular calls this merely a credit-transfer mechanism. So:

• Not turnover: the amount is not “turnover in State/UT” under Section 2(112) of the issuing person. It is ignored when computing the ISD distribution ratio under Rule 39 and “Adjusted Total Turnover” for refund under Rule 89. This holds even though it is shown in GSTR-1.
• Not Net ITC: the transferred credit is not the issuing person’s own ITC, so it is not “Net ITC” for refund under Rules 89(4) and 89(5).
• No reversal by the issuing person: it transfers the full reverse-charge credit to the ISD. Reversals are made by the recipients, which may include the issuing person itself, if part of the credit comes back to it.

Example (illustrative)

A company has a regular GSTIN in Uttar Pradesh (the head office) and an ISD registration in Uttar Pradesh under the same PAN. The head office pays GST of ₹18,000 under reverse charge on legal services of ₹1,00,000 used by all branches, and issues a Rule 54(1A) invoice of ₹1,00,000 to the ISD.

• The ₹1,00,000 is not part of the head office’s turnover in the State, and the ₹18,000 is not its Net ITC for refund.
• The head office does not reverse any part of the ₹18,000. It transfers the full amount.
• The ISD distributes the credit to the branches, which may include the head office itself. Each branch makes its own reversals, if any.

Checklist for Businesses Using an ISD

• Check that every separately registered vertical that receives common input service invoices has its own ISD registration.
• Record the month in which the ISD finds each invoice prima facie eligible. Distribute in that month, eligible and ineligible separately, in GSTR-6.
• Recipients should apply Sections 16 and 17 and make their own reversals. The ISD should not reduce the credit before distributing.
• Leave Rule 54(1A) cross-charge amounts out of turnover in the ISD ratio and refund calculations, and out of Net ITC.
• Wrong distribution can lead to penalty on the ISD and recovery with interest from the recipients. Keep the basis of distribution on record.

Related

• Telangana HC: Rule 39(1)(a) Same-Month ISD Distribution Held Ultra Vires
• BirlaNu Ltd. v. Union of India — Case Law Summary
• GST Notice Reply Draft Generator

Reference: Circular No. 260/06/2026-GST dated 26.10.2026, CBIC. The example is for illustration only. This page is for general information only.