Last reviewed: 13 November 2026. When the GST rate on what you buy is higher than the rate on what you sell, credit accumulates every month and cannot be used up. Section 54(3)(ii) allows that credit to be refunded. Until October 2026 this was the slowest refund in the system, processed only after full verification. From 1 November 2026 it gets the same 90% provisional refund as exporters, and the formula in rule 89(5) now counts input services availed from that date.
Part of our GST refund series. For every refund category, the common process, time limits and interest, start with the complete GST refund guide.
When does an inverted duty structure exist?
The refund is allowed where credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, other than nil-rated or fully exempt supplies. In VKC Footsteps (2021), the Supreme Court upheld the rule that read "inputs" as input goods. The 2026 amendment to rule 89(5) brings input services into the arithmetic, but it does not widen eligibility. Section 54(3)(ii), as read in VKC Footsteps, still requires the accumulation to arise because input goods carry a higher rate than the output.
| Situation | Refund under 54(3)(ii)? |
|---|---|
| Inputs at 18%, finished goods at 5% | Yes |
| Only input services (rent, professional fees) at 18%, output at 5% | No: no inversion on input goods |
| Same goods bought at 12% and sold at 5% after the rate cut of 22 September 2025 | No: Circular 135/05/2020, read with Circular 173/05/2022, excludes accumulation caused only by a rate change on the same goods |
| Output goods notified as ineligible (for example, under Notification 5/2017-CT(R) as amended) | No |
| Construction services at the concessional rates notified with a refund bar | No |
| Output exempt or nil-rated | No: credit is not available in the first place |
The rate rationalisation from 22 September 2025 corrected several inversions, for example man-made fibre and yarn moved to 5%, and some fertiliser inputs were cut to 5%. Businesses in those chains should check whether a claim still arises after that date, and claim earlier periods before they go out of time.
The formula after 1 November 2026
Maximum refund = (Turnover of inverted rated supply × Net ITC ÷ Adjusted total turnover) − Tax payable on such inverted rated supply
- Net ITC: credit on inputs availed in the relevant period, plus eligible credit on input services availed on or after 1 November 2026. Credit on capital goods availed on or after 1 April 2027 will be added at one-sixtieth per month.
- Tax payable: the tax payable on the inverted rated supply is deducted from the proportionate credit. The substituted rule revises how this deduction works where Net ITC includes input services, so compute each claim on the rule text in force for its period.
- Adjusted total turnover: turnover in the State for the period, excluding exempt supplies other than zero-rated supplies.
Worked example
A manufacturer of footwear (output 5%) buys synthetic materials and components at 18%. For December 2026 to February 2027, all its sales are domestic and inverted, and all its credit is on input goods.
| Item | ₹ |
|---|---|
| Turnover of inverted rated supply = adjusted total turnover | 2,00,00,000 |
| Net ITC on inputs | 24,00,000 |
| Tax payable on the outward supply at 5% | 10,00,000 |
| Maximum refund = 2,00,00,000 × 24,00,000 ÷ 2,00,00,000 − 10,00,000 | 14,00,000 |
Because all the credit here is on input goods, the deduction of tax payable works out the same under the old and the substituted rule. The portal can generate a provisional refund of ₹12,60,000 (90%) within three working days of acknowledgement, subject to its risk checks. Where the business also has eligible input services availed on or after 1 November 2026 (freight, job work at 5% or 18%, professional fees), those raise Net ITC, and the substituted formula must be applied line by line.
Documents
- Computation under rule 89(5) for the relevant period.
- Statement of outward inverted supplies and statement of input invoices with credit details (substituted RFD-01 from 1 December 2026).
- Rate analysis showing that input goods carry a higher rate than the output.
- Reconciliation of credit with GSTR-2B and GSTR-3B.
- Declaration on prosecution under rule 89(2) from 1 December 2026, and the standard declarations on drawback and duplicate claims.
Who does not get the provisional refund
The provisional refund is risk-based. The proviso to section 54(6) excludes a person who has been prosecuted for tax evasion above ₹2.5 crore in the preceding five years, and claims that the system flags as higher risk are routed to the proper officer for full examination instead of an automatic RFD-04. Such claims still get a final order within 60 days of a complete application.
Frequently asked questions
What is inverted duty structure refund under GST?
It is a refund of input tax credit that accumulates because the GST rate on input goods is higher than the rate on output supplies. Section 54(3)(ii) of the CGST Act allows it, and rule 89(5) prescribes the maximum refund.
Is ITC on input services refundable under inverted duty structure?
From 1 November 2026, eligible credit on input services availed on or after that date is included in Net ITC under the amended rule 89(5). The inversion itself must still be caused by input goods carrying a higher rate than the output.
Is the 90% provisional refund available for inverted duty claims?
Yes, from 1 November 2026. Section 155 of the Finance Act, 2026 amended section 54(6), and rule 91(2) now has the portal generate the provisional order in RFD-04 within three working days of acknowledgement, based on system risk evaluation.
Can I claim inverted duty refund on old stock after the GST rate cut?
Generally no. Circular 135/05/2020, read with Circular 173/05/2022, clarifies that accumulation caused only by a change in the rate on the same goods is not an inverted duty structure for refund purposes.
What is the time limit for an inverted duty refund?
Two years from the due date for furnishing the return under section 39 for the period in which the claim arises.
Is ITC on capital goods refundable under inverted duty?
Not at present. For capital goods credit availed on or after 1 April 2027, the amended rule includes it in the computation at one-sixtieth per month.
We review eligibility, build the computation and reconciliations from your books and returns, file the RFD-01, and handle deficiency memos, show cause notices and appeals until the claim is closed. The outcome rests with the proper officer; our work is to put a complete, defensible claim in front of them.
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This article is for general information and does not constitute advice on any specific case. Sources: sections 54 to 56 and 77 of the CGST Act, 2017; rules 89 to 97 of the CGST Rules, 2017 as amended by Notification No. 05/2026-Central Tax dated 26 October 2026; Notification No. 03/2026-Central Tax; CBIC circulars cited in the text. Rules, forms and portal functionality change; confirm the current position on the CBIC tax repository and the GST portal before filing. Firm details: Somesh Chandak & Associates, Chartered Accountants, Unit 119, 1st Floor, Centura Square IT Park, SG Barve Road, Wagle Estate, Thane West 400604. FRN 158694W.