Background:
The Finance Act, 2024 amended Sections 2(61) and 20 of the CGST Act to make the ISD route mandatory, with effect from 01.04.2025, for distribution of input tax credit on input services (including services liable to reverse charge) procured by a head office/branch on behalf of distinct persons. Rule 39 prescribes the manner of distribution and Rule 54(1A) enables a registered person having the same PAN and State as the ISD to issue an invoice/credit note/debit note to transfer the credit of “common input services” (principally RCM credit) to the ISD for onward distribution. Several operational issues persisted; whether Rule 36 (documentary requirements for ITC) covered credit distributed by the ISD; whether transfer to the ISD under Rule 54(1A) was confined to “common” services; whether credit had to be distributed in the same tax period in which the inward supplies were received; and the absence of an auto-drafted statement of inward supplies for the ISD.
The 57th GST Council (08.10.2026) recommended issuance of a circular to clarify issues relating to the ISD mechanism. Pursuant thereto, CBIC has issued Circular No. 260/06/2026-GST dated 26.10.2026 clarifying, inter alia, that a separate ISD may be obtained for each registrant, that Rule 54(1A) is only a transfer mechanism, and that credit is to be distributed in the month in which eligibility is ascertained. The rule amendments notified alongside give statutory backing to these positions.
What the Notification provides:
Now, the CBIC vide Notification No. 05/2026-Central Tax dated 26.10.2026 has made the following ISD-related amendments to the CGST Rules, 2017:
- Rule 36(1) and (2): The words “including” the ISD have been replaced so that ITC may be availed by a registered person “or be distributed by” the ISD on the basis of the prescribed documents, and the condition in Rule 36(2) that all applicable particulars be contained in the document now expressly applies to credit distributed by the ISD as well.
- Rule 39(1)(i): The words “or central tax” have been inserted after “input tax credit of integrated tax”, widening the manner in which the ISD distributes credit to recipients.
- Rule 39(1A): The word “common” has been omitted, so that a registered person may transfer to the ISD the credit of tax paid under reverse charge on input services attributable to distinct persons, without the services having to qualify as “common” input services.
- Rule 54(1A): In clause (a), “credit of common input services to the Input Service Distributor” has been substituted by “credit in respect of input services attributable to one or more distinct persons to the Input Service Distributor”, and in sub-clause (iv) the word “common” is replaced by “such”; in clause (b), “common services” is replaced by “services whose credit is sought to be transferred to the Input Service Distributor”.
- Rule 60(2): The details of inward supplies furnished by suppliers will now also be made available to the ISD in FORM GSTR-6A (in addition to FORM GSTR-2A for other recipients), and FORM GSTR-6A has been updated accordingly.
- FORM GSTR-6: Table 7 and Table 11 and the related entries have been omitted; the reference to Table 7 in Table 8 is deleted; and in the Instructions, the words requiring distribution “in the same tax period in which the inward supplies have been received” have been omitted along with instructions 9 and 10.
Effective date:
These amendments are effective from 1st November, 2026. Read with Circular No. 260/06/2026-GST, the ISD is no longer bound to distribute credit in the very month of receipt of the inward supply, and transfer of RCM credit to the ISD under Rule 54(1A) is available for input services attributable to one or more distinct persons. Multi-location entities should revisit their ISD processes, GSTR-6 reporting and Rule 54(1A) documentation accordingly.
The Notification can be accessed at: https://a2ztaxcorp.net/wp-content/uploads/2026/10/CBIC-NN-05-2026–Central-Tax.pdf
