On October 26, 2026, the Central Board of Indirect Taxes and Customs (CBIC) issued CBIC Circular 261/07/2026-GST, addressing critical operational ambiguities faced by banking companies, financial institutions, and non-banking financial companies (NBFCs) engaged in accepting deposits, extending loans, or advancing credit.
The circular clarifies the application of Section 17(4) of the CGST Act, 2017, inter-branch supplies, Invoice Management System (IMS) integration, and standardized GSTR-3B reporting protocols.
Below is an expert summary prepared by Sagar S Gupta & Co to assist financial institutions in aligning their GST compliance frameworks.
This guidance is essential for compliance with the CBIC Circular 261/07/2026-GST and ensures that institutions are well-prepared for the upcoming changes in GST regulations.
1. Applicability of Section 17(4) Option across “Distinct Persons”
Under Section 17(4), financial institutions can opt to avail 50% of eligible Input Tax Credit (ITC) on inputs, input services, and capital goods every month, foregoing the standard proportionate reversal rules under Section 17(2).
- Exclusive Non-Financial Registrants: A distinct person (registration) under the same PAN that is not engaged in accepting deposits or extending loans/advances (such as a unit engaged exclusively in bullion trading) neither has the option nor is required to comply with Section 17(4).
- Mixed / Financial Registrants: Registrants engaged in financial services (and potentially other services) have the option to adopt Section 17(4).
- Mandatory Uniform Adoption: If one registrant of a banking company or financial institution opted for Section 17(4) exercises this option, all other registrants of the company engaged in financial services across States/UTs must necessarily comply with Section 17(4).
2. Scope of the Second Proviso to Section 17(4) (Inter-Branch Supplies)
- The Rule: The second proviso to Section 17(4) relaxes the 50% ITC restriction on supplies received from another registered person.
- Clarification: This relaxation—allowing full ITC transfer instead of the 50 cap—applies only in respect of supplies received from another registered person under the same PAN who has also opted to comply with Section 17(4).
3. Standardized GSTR-3B Reporting & IMS Integration
The circular outlines precise steps for reporting ITC availment and permanent/temporary reversals in FORM GSTR-3B (read with Rule 38 and the Invoice Management System introduced in October 2024):
A. Step-by-Step ITC Calculation & Reversal Flow:
- Ascertain Eligibility: Review auto-populated ITC from GSTR-2B (excluding RCM) and add RCM liabilities.
- Permanent Reversal (Non-Business / Blocked Credits): Reverse 100% of ITC used for non-business purposes or blocked under Section 17(5) in Table 4(B)(1).
- Second Proviso Credit: Avail full eligible ITC received from Section 17(4)-compliant branches under the second proviso.
- The 50% Rule: Take 50% of the remaining eligible ITC, and permanently reverse the balance 50% in Table 4(B)(1).
- Temporary Reversals (IMS / Section 16 non-compliance): Temporarily reverse unfulfilled Section 16 conditions in Table 4(B)(2), reclaiming them later in Table 4(A)(5) and disclosing them in Table 4(D)(1) upon fulfillment.
B. Relief for Past Reporting Methodologies:
Acknowledging that various banks and NBFCs followed diverse reporting practices in past tax periods, the circular directs field formations not to take an adverse view of past reporting methodologies, provided the final net ITC availed aligns with the core principles of Section 17(4).
Summary Matrix: Section 17(4) Compliance Framework
| Operational Aspect | CBIC Clarification (Circular No. 261/07/2026-GST) |
| Bullion / Non-Financial Units | Excluded from Section 17(4); follow standard Section 17(2) rules. |
| Pan-India Uniformity | Mandatory for all financial-service-providing distinct persons under the same PAN once opted. |
| Inter-Branch Relaxation | Applies exclusively between branches that have both opted for Section 17(4). |
| GSTR-3B Table 4(B)(1) | Used for permanent 50% reversals and blocked/non-business reversals. |
| Past Period Audits | Field officers instructed not to penalize past reporting discrepancies if net ITC matches statutory limits. |
Contact Sagar S Gupta & Co today to ensure your financial institution’s GST compliance is robust, audit-ready, and fully aligned with the latest CBIC directives.
On October 26, 2026, the Central Board of Indirect Taxes and Customs (CBIC) issued a series of eight pivotal circulars (Circular Nos. 257/03/2026-GST to 264/10/2026-GST). These circulars operationalize key recommendations from the 57th GST Council Meeting, bringing much-needed uniformity, procedural clarity, and taxpayer relief across registration, adjudication, pre-deposits, Input Service Distributor (ISD) mechanisms, banking sector compliance, motor vehicle credits, and export refunds.
Below is a consolidated executive summary prepared by Sagar S Gupta & Co outlining the core takeaways from each circular.
| Number | Date | Category |
| 264/10/2026-GST | 26-Oct-2026 | Clarification in respect of the omission of rule 96(10) of the Central Goods and Services Tax Rules, 2017. |
| 263/09/2026-GST | 26-Oct-2026 | Clarification in respect of receipt of payment for export of goods or services. |
| 262/08/2026-GST | 26-Oct-2026 | Clarification on Input Tax Credit admissibility to authorised agents appointed by manufacturers for sale of motor vehicles, pursuant to Circular No. 231/25/2024-GST dated 10.09.2024. |
| 261/07/2026-GST | 26-Oct-2026 | Clarification on issues related to provisions of section 17(4) of the Central Goods and Services Tax Act, 2017. |
| 260/06/2026-GST | 26-Oct-2026 | Clarification on issues pertaining to Input Service Distributor. |
| 259/05/2026-GST | 26-Oct-2026 | Clarification on various issues pertaining to the amount paid as pre-deposit as per sub-section (6) of section 107 or sub-section (8) of section 112 of the CGST Act |
| 258/04/2026-GST | 26-Oct-2026 | Clarification on issues related to demand, adjudication and appeal proceedings under the CGST Act, 2017. |
| 257/03/2026-GST | 26-Oct-2026 | Guidelines for the handling of applications for GST registration. |
Disclaimer
This article is published for general informational and educational purposes based on CBIC Circular No. 261/07/2026-GST dated October 26, 2026. Readers and financial institutions are advised to consult tax professionals at Sagar S Gupta & Co for customized advisory.