CBIC: Clarifies banks’ 50 per cent input-tax-credit option

The Central Board of Indirect Taxes and Customs (CBIC) has clarified that when one eligible registration of a bank or financial institution chooses the 50 per cent input-tax-credit option, all its other eligible registrations must follow that method. Circular No. 261/07/2026-GST, dated 26 October 2026 and reproduced by A2Z Taxcorp, also excludes registrations engaged exclusively in activities such as bullion trading from the option.

The clarification concerns Section 17(4) of the Central Goods and Services Tax (CGST) Act, 2017. It covers banking companies and financial institutions, including non-banking financial companies (NBFCs), engaged in accepting deposits or extending loans or advances. CBIC said it had received representations about differing practices in how these businesses apportioned input tax credit.

Input tax credit, or ITC, allows businesses to offset eligible tax paid on purchases against tax liability. A2Z Taxcorp’s account explains that Section 17(4) offers qualifying institutions a method of taking 50 per cent of eligible credit on inputs, input services and capital goods instead of proportionate credit under Section 17(2).

The circular addresses which registrations qualify, when supplies between registrations receive special treatment, and how credit must be reported in GST returns. It also tells tax officers not to take an adverse view of different reporting methods used in earlier periods, provided the amount of credit taken follows the clarified principles.

Which registrations must follow the option

CBIC draws the eligibility boundary at the level of the individual GST registration, described in the circular as a “distinct person”. A registration that does not accept deposits or extend loans or advances neither has the option nor is required to follow Section 17(4). The circular gives a registration engaged exclusively in bullion trading as an example.

A registration carrying on the qualifying financial services can choose the option even if it also supplies other services, CBIC said. Having additional activities therefore does not, by itself, exclude that registration.

The choice is not independent for every qualifying registration within the same institution. Once one eligible registration opts for Section 17(4), the circular says all other registrations of that banking company or financial institution carrying on the qualifying services must also follow it. The requirement is confined to eligible registrations; it does not bring an exclusively bullion-trading registration within the mechanism.

CBIC separately limits the relaxation for supplies received from another registration with the same Permanent Account Number, or PAN. Under the circular, the relaxation in the second proviso to Section 17(4) is available only where the supplying registration has also opted for that provision.

CNBC-TV18 reported that this relaxation permits full ITC on qualifying supplies between registrations only when both have chosen the mechanism. Sharing a PAN alone is therefore not sufficient to establish entitlement to that treatment.

How eligible credit is calculated and reported

The circular sets out the reporting procedure under Section 17(4), read with Rule 38 of the CGST Rules, which deals with credit for banks and financial institutions using this method.

CBIC says eligibility must first be established under Section 16, the provision governing entitlement to ITC. This assessment covers credit automatically populated in Form GSTR-3B from Form GSTR-2B, as well as credit claimed on purchases subject to reverse charge, where the recipient accounts for the tax.

GSTR-3B is the return in which the credit is reported. GSTR-2B is the auto-generated statement containing purchase-side credit information. CBIC’s earlier Circular No. 170/02/2022-GST, dated 6 July 2022, explained that automatic population does not remove the registered person’s responsibility to identify ineligible credit and make the required reductions.

For credit assessed as eligible under Section 16, the new circular prescribes a sequence. Credit on inputs and input services used for non-business purposes, together with credit blocked under Section 17(5), must be permanently reversed in Table 4(B)(1) of GSTR-3B. A permanent reversal removes credit that cannot subsequently be reclaimed.

Credit on inputs and input services covered by the same-PAN relaxation is then available under that exception. Of the remaining ITC, CBIC says 50 per cent is admissible and the balance must be permanently reversed in Table 4(B)(1) for the same tax period.

The procedure is thus not a direction to halve every amount appearing in the return. The circular requires eligibility checks and separate treatment of blocked credit and qualifying same-PAN supplies before applying the percentage to the remaining amount.

CBIC also distinguishes credit that is permanently unavailable from credit awaiting fulfilment of statutory conditions. Where Section 16 conditions have not yet been met but may be satisfied later, the circular requires a temporary reversal in Table 4(B)(2).

Once those conditions are fulfilled, the credit may be reclaimed in Table 4(A)(5) in a later tax period, subject to the time limit in Section 16(4). CBIC says the reclaimed amount must also appear in Table 4(D)(1) and undergo the same eligibility and percentage-based treatment. Reclaiming temporarily reversed credit does not bypass the Section 17(4) calculation.

The distinction between permanent and temporary reversals builds on CBIC’s July 2022 circular. That document placed non-reclaimable reversals, including those under Rule 38, in Table 4(B)(1), while identifying Table 4(B)(2) for credit that could become reclaimable after specified conditions were met.

Invoice handling and earlier reporting practices

The October circular separately describes treatment through the Invoice Management System (IMS), where taxpayers can accept, reject or keep pending invoices and other purchase documents.

CBIC frames this part of the clarification around notification of amendments to the CGST Rules relating to IMS, while expressly including cases where IMS was used before those amendments. The wording should not be read as establishing a notification date for the rule changes.

Under that procedure, documents relating to credit that is temporarily ineligible under Section 16 must be kept pending on IMS, the circular says. That credit would consequently remain outside GSTR-2B and would not automatically enter GSTR-3B.

Credit relating to accepted or deemed-accepted documents would flow into GSTR-2B and then GSTR-3B. CBIC says that amount, together with credit claimed on reverse-charge purchases, must undergo the prescribed eligibility, exclusion and 50 per cent calculation.

Manoj Mishra, Partner and Tax Controversy Management Leader at Grant Thornton Bharat, said the clarification addressed longstanding uncertainty over the option’s scope, inter-branch supplies and reporting, according to CNBC-TV18. He said the treatment of historical reporting could help reduce disputes over methods where the credit actually taken followed the prescribed principles.

For earlier periods, CBIC’s instruction to tax officers is conditional: a different reporting methodology should not attract an adverse view as long as the amount of ITC availed under Section 17(4) is consistent with the principles in the circular.