Input Service Distributor (ISD) Rules Clarified (2026): Circular No. 260/06/2026-GST
CA Meet Dhrangadhariya 
October 26, 2026
CA Meet Dhrangadhariya October 26, 2026
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Last updated: 26 October 2026 · Written and reviewed by CA Meet Dhrangadhariya, CSM & Co LLP
Quick summary
Many groups procure services centrally – a head office negotiating one contract that benefits branches across States – and then need to pass on the resulting input tax credit to the branches that actually used the service. This is what the Input Service Distributor (ISD) mechanism exists for, and Circular No. 260/06/2026-GST, dated 26 October 2026, answers seven questions that kept coming up in practice.
New to terms such as “distinct person” or “Net ITC”? See the technical terms explained in simple words further down.
An ISD is an office of a supplier that receives input service invoices on behalf of its distinct persons and distributes the credit under section 20. Since separate registrations for separate business verticals or places of business within a State are each treated as a “distinct person” under section 25, the circular clarifies there is no bar on taking more than one ISD registration within the same State – one for each business vertical or place of business, as needed. Each such ISD, however, can distribute credit only to the distinct person the underlying service is actually attributable to.
This is the central clarification. The ISD’s job is to distribute the credit it receives in the manner section 20 requires – including keeping eligible and ineligible credit (blocked under section 17(5) or otherwise) separate, as rule 39(1)(g) requires. But it is the recipient of credit who must independently satisfy the conditions for availing input tax credit under section 16 or section 17 of the CGST Act.
Consequences of getting this wrong:
Rule 39(1)(a) requires credit available for distribution in a month to be distributed in the same month, reported in FORM GSTR-6. The circular clarifies that credit is not “available” the moment an invoice shows up in FORM GSTR-6A – it becomes available for distribution only once the ISD has ascertained it is prima facie eligible for availment. The ISD must then distribute it in the month of that ascertainment, separately as eligible and ineligible credit under rule 39(1)(g).
Since the ISD only distributes and does not itself avail credit, it is the recipients of credit who must carry out any reversal required under section 17(1), (2) or (4) of the CGST Act (common-credit apportionment, exempt-supply reversal, or the banking-sector 50% option) – not the ISD.
Rule 54(1A) lets a regular registrant – sharing the same PAN and State as the ISD – issue an invoice, credit note or debit note to transfer credit on input services (typically reverse-charge credit) to the ISD, for onward distribution to other distinct persons. This matters most to banking companies, financial institutions and NBFCs, who commonly pay tax under reverse charge at one registration and need to pass the resulting credit through the ISD to branches elsewhere.
The circular clarifies that this transfer is purely a credit-transfer mechanism, with two practical consequences:
Because the transferred amount was never the issuing unit’s own credit, that unit is also not required to reverse it under section 17(1), (2) or (4) – that obligation sits with whichever distinct person ultimately receives the credit once the ISD distributes it, which may include the very unit that transferred it in the first place.
Deciding how many ISD registrations a group genuinely needs, and getting the rule 54(1A) credit-transfer paperwork right between a bank’s or NBFC’s own registrations, avoids both excess-credit recovery notices and refund-computation errors – please reach out to our team and we will be happy to assist.
| Term | What it means |
|---|---|
| Input Service Distributor (ISD) | An office that receives input service invoices on behalf of a group’s other registrations and distributes the resulting credit among them. |
| Distinct person | Two registrations of the same legal entity (for example, branches in different States, or separate registrations within one State) that GST law treats as separate persons for tax purposes. |
| Recipient of credit | The distinct person to whom the ISD actually distributes a share of input tax credit. |
| Net ITC | The amount of a registered person’s own eligible input tax credit used as the base for computing the maximum refund permissible under rule 89. |
| Rule 54(1A) | A CGST Rules provision letting a registration sharing the same PAN and State as the ISD transfer input service credit to the ISD by invoice, for onward distribution. |
Yes. Circular No. 260/06/2026-GST clarifies there is no bar on obtaining a separate ISD registration for each business vertical or each place of business within a State or Union Territory, since each such registrant is a distinct person under section 25. However, each ISD can only distribute credit to the distinct person the underlying input service is actually attributable to.
The recipient of the distributed credit, not the ISD. The ISD’s role is limited to distributing the credit it receives in the manner laid out in section 20, including separating eligible credit from credit that is blocked under section 17(5); the recipient must independently satisfy the conditions under sections 16 and 17.
Under section 21 of the CGST Act, the excess credit is recovered from the recipients of credit along with interest, using the ordinary demand provisions (section 73, 74 or 74A). The ISD itself is also liable to a penalty under section 122(1)(ix) – ten thousand rupees or the amount of credit wrongly distributed, whichever is higher.
In the same month the credit becomes available for distribution, as required by rule 39(1)(a). The circular clarifies that credit becomes “available” only once the ISD has ascertained it is prima facie eligible, so the distribution timeline runs from that ascertainment, not merely from when the invoice first appears in FORM GSTR-6A.
No. Circular No. 260/06/2026-GST clarifies that such an invoice, credit note or debit note is not in respect of an outward supply by the issuing unit, so its value is excluded both from that unit’s “turnover in State” and from its own “Net ITC” for refund computation under rule 89 – even though the amount must still be reported in its FORM GSTR-1 to transmit it to the ISD.
No. Since the transferred amount is not that unit’s own input tax credit, it is not required to make reversals under section 17(1), (2) or (4) on it. That obligation falls on whichever distinct person eventually receives the credit after the ISD distributes it, which may include the very unit that originally transferred it.
This article is for general informational purposes only and should not be considered professional advice. Please consult a qualified expert for advice tailored to your specific situation. The author and website owner are not liable for any errors or actions based on this content.
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