Published 28 October 2026
An Input Service Distributor (ISD) is an office of a business that receives invoices for services on behalf of other branches under the same PAN, and passes on the credit to them. Circular No. 260/06/2026-GST, issued on 26 October 2026 by the Central Board of Indirect Taxes and Customs (CBIC), answers seven questions about how the system works. This article summarises them.
1. One ISD registration per vertical or place of business
Under section 25, separate registrations within a State, for separate business verticals or places of business, are treated as distinct persons. The circular says nothing in the law prevents more than one ISD registration for each business vertical or place of business in a State or Union territory. Each registrant that receives input service invoices for or on behalf of distinct persons must have an ISD registration. Under rule 39(1), the ISD distributes credit only to the distinct person to whom the credit is attributable.
2. Who must meet the conditions for credit?
The recipient of the credit is responsible for meeting the conditions for eligibility under sections 16 and 17 and the rules. The ISD is responsible for distributing in the manner in section 20.
If the ISD distributes credit in breach of section 20:
- the ISD is liable to penalty under section 122(1)(ix), which is Rs 10,000 or the amount of credit distributed irregularly, whichever is higher; and
- any excess credit that reached recipients is recovered from those recipients, with interest, under section 21.
3. “Distributed in the same month” means the month of ascertainment
Section 20(2) and rule 39(1)(a) require credit available in a month to be distributed in that month and reported in FORM GSTR-6. The circular explains that credit becomes “available for distribution” when the ISD has ascertained that the invoice, shown in FORM GSTR-6A, is prima facie eligible. The ISD distributes it in the month in which it makes that ascertainment. It must distribute eligible and ineligible credit separately, as rule 39(1)(g) requires, and report this in GSTR-6.
Although the ISD does not claim the credit, it receives the invoices centrally, and the circular says it is best placed to judge whether credit is eligible.
4. Who makes reversals under section 17?
The ISD should distribute the entire credit available to it to the recipients to whom it is attributable. It is the recipients who make the reversals under:
- section 17(1) and 17(2), read with rules 42 and 43 (exempt supplies and non-business use), or
- section 17(4), read with rule 38 (banks and financial institutions).
5. Rule 54(1A) invoices are not turnover
Rule 54(1A) lets a regular registrant with the same PAN and in the same State as the ISD issue an invoice, credit note or debit note to the ISD, to transfer credit on services, such as reverse charge services, that relate to other distinct persons. The circular calls this “merely a credit transferring mechanism”. It follows that:
- the amount in such a document is not the turnover in the State or Union territory of the issuer under section 2(112);
- it is not to be counted in the turnover used to work out credit distribution under section 20 and rule 39; and
- it is not part of “adjusted total turnover” for the refund limit under section 54(3) and rule 89.
The issuer may still need to report the document in its GSTR-1, so as to pass it to the ISD.
6. Not “Net ITC” for refunds
Credit transferred under rule 54(1A) is not input tax credit on the issuer’s own inward supply. It does not count as “Net ITC” in the refund formulas in rules 89(4) and 89(5).
7. No reversals by the transferring registrant
The registrant that transfers credit under rule 54(1A) does not make reversals under section 17(1), 17(2) or 17(4) on that transferred credit. It must transfer the whole of the credit available on tax it paid under reverse charge. The recipients make the reversals. A recipient may be the very registrant that made the transfer, if the credit relates to it.
Why it matters
Companies with a head office and many branches have disagreed with officers over where reversals belong and what counts as turnover. The circular gives a single answer: the ISD distributes everything that is prima facie eligible, in the month of ascertainment, and the branches that receive the credit carry the section 16 and 17 conditions.