Two new GST circulars from the Central Board of Indirect Taxes and Customs (CBIC), both dated 28 October 2026, settle two long-running questions that have cost businesses real money. Used-car dealers can now claim input tax credit (ITC) on their business inputs — spares, repairs, rent, technology and marketing — without losing the margin-scheme benefit on the cars themselves. And banks and NBFCs in co-lending arrangements finally have a straight answer: the NBFC's lending services to the bank are taxable under GST, valued at the figure in the contract between them.
In plain business-owner language: if you sell second-hand cars, the taxman can no longer treat your workshop bills and rent as blocked credit just because you sell on margin. And if you are an NBFC lending jointly with a bank, the fee you earn for sourcing and servicing those loans is a taxable service — price it, invoice it and pay GST on the contract value, instead of arguing that it is interest.
💡 In one line: Circular 265 confines the margin-scheme ITC block to the tax on the second-hand vehicle itself; Circular 266 taxes NBFC co-lending services to banks at the contract value. Both follow the 57th GST Council meeting of 8 October 2026.
What the two circulars are
Both circulars are issued under section 168(1) of the Central Goods and Services Tax Act, 2017 (CGST Act), on the recommendations of the GST Council in its 57th meeting held on 8 October 2026. They continue the batch of 26 October 2026 circulars (257 to 264) that this site has already covered, and they answer two items that were still marked pending in implementation trackers of that batch: the margin-scheme ITC question and the co-lending question.
Circular 265, section 3: the margin-scheme ITC block is now narrow
Start with how the margin scheme works, because the clarification only makes sense against it. A dealer in old and used motor vehicles does not pay GST on the full sale price. Under the margin-scheme notifications — Notification No. 8/2018-Central Tax (Rate), Notification No. 9/2018-Integrated Tax (Rate) and Notification No. 1/2018-Compensation Cess (Rate), all dated 25 January 2018 — GST (and compensation cess, where applicable) is charged only on the margin, that is, the difference between the selling price and the purchase price. The trade-off for that concessional treatment was a condition of non-availment of ITC.
The doubt was about the width of that condition. Representations asked whether the ITC block was restricted to the old and used motor vehicles themselves, or whether it swallowed every input good and input service used in the business of dealing in second-hand vehicles — spares, repair and maintenance services, technology services, rent, marketing and advertisement services, and everything else a dealership spends on. On the wide reading, a dealer who claimed ITC on its workshop's spare parts or its showroom rent risked the margin-scheme benefit itself. On the narrow reading, only the tax paid on the procured second-hand vehicle was blocked.
Circular 265 adopts the narrow reading, in terms. The restriction on ITC for availing the concessional GST and compensation cess rate under the margin-scheme notifications does not apply to ITC on inputs (other than the second-hand vehicles themselves) and input services. Suppliers of old and used motor vehicles under those notifications are therefore allowed to avail ITC on various inputs (other than the vehicles) and input services — the circular names spares, repair and maintenance services, technology services, rent, and marketing and advertisement services as examples — subject to the provisions of the CGST Act, 2017. The ITC restriction applies only on the tax paid on the procured second-hand vehicles.
Three practical consequences follow. First, a dealership's operating-cost ITC is no longer collateral damage of the margin scheme: GST paid on spares fitted during reconditioning, on repair services, on software and platform subscriptions, on rent and on advertising can be claimed, subject to the ordinary ITC conditions in the CGST Act (including the eligibility and blocking provisions that apply to every taxpayer). Second, the one hard block remains exactly where the scheme always put it: no ITC on the tax paid on the second-hand vehicle that is itself sold on margin. A dealer cannot have both the margin-only tax on the car and credit for the tax embedded in buying it. Third, section 3 of the circular states no past-period regularisation on an "as is where is" basis — unlike some other sections of the same circular. Whether credit wrongly forgone in earlier periods can be recovered is therefore a question for the dealer and its advisers on the facts, not something this clarification regularises by itself.
Circular 266, section 7: NBFC co-lending services are taxable, at the contract value
Co-lending is a model in which a bank and an NBFC jointly extend credit to a borrower in a pre-agreed proportion, combining the bank's lower cost of funds with the NBFC's wider reach. The borrower is generally charged a blended interest rate based on the respective lending rates of the participating entities. The Reserve Bank of India has recognised this model in the RBI (Commercial Banks — Transfer and Distribution of Credit Risk) Directions, 2025, under which an NBFC provides "lending services" to a bank in a co-lending arrangement.
Those lending services are hands-on work: customer sourcing, KYC, credit appraisal, underwriting, servicing, monitoring, collection of repayments and recovery. The NBFC is typically the primary interface with the borrower, which is why it is best placed to perform them. Under the RBI Directions, the regulated entities in the arrangement decide the objective criteria for determining the fees or charges payable for such services.
The tax dispute was whether that NBFC earning was interest — exempt — or a fee for a taxable service. Industry bodies had argued that the "excess interest spread", the difference between the blended rate charged to the borrower and the interest paid to the bank on the co-lent loans, was merely interest income and not a service fee. Circular 266 settles it the other way: the lending services provided by an NBFC to a bank under a co-lending arrangement are taxable under GST, and the value of such services is the value specified in the contractual agreement entered into between the NBFC and the bank.
Two points of precision matter here. First, the clarification taxes the service, not the loan: the interest on the underlying loan itself is a different component, and the circular's answer is about the NBFC's lending services to the bank. Second, section 7 states no rate and no exemption for this clarification, and no past-period regularisation. The valuation rule it gives is the contract value — which is why the drafting of the co-lending agreement now does double duty: it fixes the commercial fee and, at the same time, fixes the GST value. An agreement that leaves the NBFC's service fee vague, or buries it inside an interest spread with no separately specified value, is now a GST problem as well as a commercial one.
Old position vs new clarification
Also in these two circulars
Both circulars are omnibus clarifications, and readers in other sectors should know what else they contain — briefly, because the two headline sections above are the ones with the widest business impact.
Circular 265 also clarifies: sublimation paper is classifiable under heading 4809 of the Customs Tariff Act, attracting 18% GST; the scope of the toy entries (S. No. 497 of Schedule I and S. No. 616 of Schedule II of Notification No. 9/2025-Central Tax (Rate)) is not restricted to tricycles, scooters, pedal cars and similar wheeled toys; and sea-weed extract based bio-stimulants registered under Schedule VI to the Fertiliser (Inorganic, Organic or Mixed) (Control) Order, 1985, are classifiable under heading 3101.
Circular 266 also clarifies: the distinction between research and development and consultancy services based on a self-certification mechanism; regularisation, for 1 July 2017 to 31 October 2026 on an "as is where is" basis, of GST on import of services by an Indian establishment of a foreign shipping company from a related person or its establishment outside India when made without consideration; that statutory and ancillary recoveries in addition to lease rent in motor-vehicle leasing form part of the value of the composite leasing supply and are taxed at the leasing-service rate; that TRAI, a statutory regulatory authority, is not "Government" under section 2(53) of the CGST Act; and that notional interest under the Fund Transfer Pricing mechanism is covered by the definition of "interest" for exemption under Notification No. 12/2017-Central Tax (Rate) dated 28 June 2017.
Who is affected
Circular 265 matters most to dealers and platforms in second-hand motor vehicles — organised pre-owned car businesses, dealer groups and marketplaces that recondition and resell — and to their accountants, who must now separate two ITC buckets that were previously blurred: credit on the vehicles themselves (blocked) and credit on everything else (allowed, subject to the Act). Businesses that had been forgoing ITC on rent, software, advertising or workshop inputs out of caution have the clearest immediate gain, though the size of that gain depends on how much credit they left unclaimed and whether past periods can be revisited.
Circular 266 matters to NBFCs and banks in co-lending arrangements, to co-lending platforms and loan service providers, and to the tax teams that price these partnerships. The clarification removes the "is it interest?" argument, but it puts weight on the contract: the GST value is whatever value the agreement specifies for the NBFC's services. Finance teams should expect this to become a diligence item in every new co-lending agreement and a review item in every existing one.
What to do next
For used-vehicle dealers — split the ITC buckets now. Rework the ITC workings so that tax on procured second-hand vehicles stays blocked while ITC on spares, repairs, maintenance, technology, rent and marketing is claimed, subject to the ordinary CGST Act conditions. Check that invoicing and accounting actually separate the two buckets — a single blended ITC reversal will now over-reverse credit the circular allows.
For dealers — take advice on past periods before filing anything retrospective. Section 3 of Circular 265 states no "as is where is" regularisation. Whether unclaimed credit from earlier periods can be recovered, and for which periods, needs a case-by-case view; do not assume the clarification automatically reopens them.
For NBFCs and banks — put a clear service value in every co-lending agreement. The GST value is the value specified in the contractual agreement. Agreements should state the NBFC's lending-service fee distinctly from interest flows, with the objective criteria the RBI Directions require for determining those fees. Vague spreads with no specified service value invite disputes about what the taxable value even is.
For NBFCs and banks — invoice and pay GST on the service, and align the rate separately. Section 7 confirms taxability and valuation; it does not state a rate. Confirm the applicable rate for the service from the rate schedule with advisers rather than reading a rate into this clarification.
For everyone else in these circulars — check the secondary sections. The sublimation-paper, toys and bio-stimulant classifications in Circular 265, and the R&D, shipping, leasing, TRAI and fund-transfer-pricing points in Circular 266, each resolve a specific dispute; if any of them touches your business, read that section in full rather than relying on this summary.
⚠️ Traps to avoid: (1) Dealers — claiming ITC on the second-hand vehicle itself as well as the margin benefit is still blocked; the relief is for other inputs only. (2) NBFCs — burying the service fee inside an interest spread does not make it interest; Circular 266 taxes the service at the contract value, so an unspecified fee is now the risk, not the shield. (3) Everyone — neither headline clarification states a past-period regularisation, so do not book retrospective recoveries or refunds on the strength of these sections alone.
What is NOT covered
These circulars are clarifications under section 168(1); they do not amend the CGST Act, the margin-scheme notifications or the rate schedules. Circular 265 does not change the margin-scheme tax itself — GST remains payable on the margin, not the full price — and it does not open ITC on the vehicles. Circular 266 does not prescribe a GST rate for co-lending services, does not exempt them, and does not regularise past periods for this issue. Neither circular changes any GST rate. Readers who need the full text of any section should read the official circular PDFs linked below, not rely on summaries — including this one — for filing positions.
Frequently asked questions
Can a used-car dealer claim ITC on spares and repairs and still sell on the margin scheme?
Yes. Under Circular 265, the ITC restriction for the margin-scheme benefit applies only to the tax paid on the procured second-hand vehicles. ITC on other inputs and input services — spares, repair and maintenance, technology, rent, marketing and advertising, among others — is allowed, subject to the provisions of the CGST Act, 2017.
Can the dealer also claim ITC on the second-hand car it buys?
No. The restriction continues to apply to the tax paid on the procured second-hand vehicle itself. That is the one ITC block the circular preserves.
Are NBFC co-lending services to banks taxable under GST?
Yes. Circular 266 clarifies that lending services provided by an NBFC to a bank under a co-lending arrangement are taxable under GST.
What value is GST charged on for co-lending services?
The value specified in the contractual agreement entered into between the NBFC and the bank.
Does Circular 266 fix an 18% rate for co-lending services?
No. Section 7 of the circular states the taxability and the valuation rule; it states no rate. The applicable rate must be confirmed from the rate schedule.
Do these clarifications regularise past periods?
Not for these two issues. Neither section 3 of Circular 265 nor section 7 of Circular 266 states an "as is where is" regularisation for past periods.
Which GST Council meeting do these circulars implement?
The 57th GST Council meeting, held on 8 October 2026. Both circulars are dated 28 October 2026.
Sources
Primary sources: CBIC Circular No. 265/11/2026-GST dated 28 October 2026 (F. No. CBIC-190354/142/2026-TRU), official CBIC Tax Information Portal — https://taxinformation.cbic.gov.in/view-pdf/1003357/ENG/Circulars; CBIC Circular No. 266/12/2026-GST dated 28 October 2026 (F. No. CBIC-190354/142/2026-TRU Section-CBIC), official CBIC Tax Information Portal — https://taxinformation.cbic.gov.in/view-pdf/1003358/ENG/Circulars. Margin-scheme notifications discussed: Notification No. 8/2018-Central Tax (Rate), No. 9/2018-Integrated Tax (Rate) and No. 1/2018-Compensation Cess (Rate), dated 25 January 2018.
