50% ITC Rules and GSTR-3B Reporting for Banking Sector Standardized

[Circular No. 261/07/2026-GST dated October 26, 2026]

The Central Board of Indirect Taxes & Customs (CBIC) has issued Circular No. 261/07/2026-GST dated October 26, 2026. This circular unifies the implementation of Section 17(4) of the CGST Act. It clarifies how banks, financial institutions, and Non-Banking Financial Companies (NBFCs) must split, claim, and reverse their Input Tax Credit (ITC).

Key Highlights & Clarifications

· Selective Mandate for Section 17(4) Option:

o Core Banking Units: The 50% fixed ITC option applies strictly to distinct business registrations (under the same PAN) directly engaged in core financial activities like accepting deposits or extending loans and advances. If one core branch opts for this mechanism, all core registrations of that financial institution must comply.

o Non-Core Branches Exempt: Separate registrations under the same financial institution that are entirely decoupled from banking transactions (e.g., dedicated bullion trading units) are ineligible for the Section 17(4) option and must follow regular proportionate credit splits under Section 17(2).

· Inter-Branch Relaxations Restricted: The second proviso to Section 17(4)—which waives the 50% restriction on internal asset transfers between branches—is conditional. This 100% credit allowance is available only if both the transferring branch and the receiving branch have opted for the Section 17(4) compliance track.

· Standardised GSTR-3B Reporting Protocols: The circular defines distinct reporting channels for banks based on their deployment of the Invoice Management System (IMS):

o Without IMS: Ineligible non-business credit and blocked assets under Section 17(5) must be permanently reversed in Table 4(B)(1). From the remaining pool, inter-branch credits are claimed in full, and 50% of the balance is retained while the remaining half is permanently dropped in Table 4(B)(1). Unfulfilled Section 16 conditions require a temporary reversal in Table 4(B)(2).

o With IMS Deployment: Taxpayers are directed to actively transition to IMS. Invoices missing baseline compliance conditions under Section 16 should be marked "Pending" directly on the IMS dashboard. This blocks them from auto-populating into FORM GSTR-2B, bypassing the need for temporary manual loop reversals in GSTR-3B.

· Protection Against Past Discrepancies: Acknowledging the historic variation in data entries across financial institutions, field offices are strictly advised not to take an adverse view of differing methodologies used for past tax periods, provided the overall net credit claimed aligns with the legal 50% ceiling framework.