When an inverted duty refund is available
An inverted duty structure arises when the GST rate on inputs is higher than the GST rate on output supplies and the difference causes eligible input tax credit (ITC) to accumulate. Section 54(3)(ii) of the Central Goods and Services Tax Act, 2017 is the statutory gateway. Nil-rated or fully exempt outputs and notified exclusions are outside this route. Verify the applicable rate, classification and notification for the actual supply and period. For example, yarn at an assumed 12% and apparel at 5%, or footwear inputs at an assumed 18% and finished footwear at 12%, illustrate the rate comparison; they are not rate guidance for a particular product.
Distinguish this route from the section 54(3)(i) route for eligible zero-rated supplies without payment of tax, such as eligible exports under a letter of undertaking (LUT). Rule 89(5) computes the inverted-duty ceiling. Eligibility under the Act, the credit balance, documentary support and other restrictions must still be checked. A higher rate on input services alone does not establish the statutory inversion, which refers to inputs (goods, excluding capital goods).
What VKC Footsteps decided
The Gujarat High Court in VKC Footsteps had rejected the earlier rule’s exclusion of input services; the Madras High Court in Tvl. Transtonnelstroy Afcons Joint Venture took the opposite position. In Union of India v. VKC Footsteps India Pvt. Ltd. (2021 INSC 469), the Supreme Court upheld the then applicable rule and affirmed the Madras High Court’s view on the statutory distinction between inputs and input services. The Court also identified an anomaly in the former formula and urged the GST Council to reconsider it. The decision concerns the text before the Court; later notified calculation rules need to be read on their own terms together with section 54(3).
Use the formula for the applicable period
For the table, T is turnover of inverted rated supplies of goods and services for the relevant period, A is Adjusted Total Turnover as defined in Rule 89(4), P is tax payable on those inverted supplies, I is eligible input-goods ITC in the historical formula, S is the input-services ITC used in the 2022 apportionment, and N is Net ITC under the substituted 2026 rule. Use the applicable statutory turnover definition, including its treatment of zero-rated turnover and exclusions; a company-wide sales figure is not a substitute.
| Applicable rule | Maximum refund formula | How it works |
|---|---|---|
| Earlier formula, before the 5 July 2022 change | (T × I ÷ A) − P | The full tax on inverted supplies is deducted from proportionate eligible inputs ITC. |
| Notification 14/2022–Central Tax | (T × I ÷ A) − [P × I ÷ (I + S)] | Net ITC in the first term still excludes services and capital goods. The deduction apportions output tax by the input credit share. Circular 181/13/2022-GST applies the amendment to applications filed on or after 5 July 2022. |
| Substituted Rule 89(5), effective 1 November 2026 under Notification 05/2026–Central Tax | (T × N ÷ A) − P | Net ITC includes inputs and eligible input services for the relevant period. Services qualify for this definition only if their ITC was availed on or after 1 November 2026. The rule also provides for attributable capital-goods credit, subject to the definition effective from 1 April 2027. |
For capital goods from 1 April 2027, the definition in Rule 89(4), used by Rule 89(5), covers eligible credit availed on or after that date. The computation takes one sixtieth of eligible ITC for each month of the relevant period within the 60 months starting with the month of availment, less attributable reversals. Check the rule’s 59-month lookback from the last month of the relevant period and the exact months in scope. Do not bring forward earlier asset credits into this computation.
The new rule changes the computation for an otherwise eligible claim. It does not by itself establish a refund for services-only inversion or remove the statutory exclusions. For a transitional claim, preserve both the application date and the period and dates of availment; do not assume a formula change reopens a claim or makes all old services or asset credit eligible.
Filing and verification in Form GST RFD-01
- Choose the period and check limitation. Reconcile the required GSTR-1 and GSTR-3B filings for the chosen period and filing frequency. Section 54(1) generally allows two years from the relevant date; for this route, Explanation 2(e) uses the due date of the section 39 return for the period in which the claim arises.
- Prepare the applicable statements. Under the amended RFD-01 instructions, use Statement 1A for ordinary inversion and Statement 1B for concessional-notification inversion; file separately when both categories apply. Use the applicable invoice and item-level information, including Annexure-3 where prescribed. Reconcile the credit claimed to books, invoices, returns and GSTR-2B as applicable. Check the distinct evidence for credits such as imports or reverse-charge supplies.
- Compute the ceiling and reconcile available credit. Check the period, turnover, tax payable, eligibility, cutoff dates and all applicable restrictions. A positive ceiling is not a sanction. Reconcile the claim to eligible unutilised credit and applicable ledger limits.
- Check the ledger debit and filing record. Rule 89(3) requires an electronic credit ledger debit for the amount claimed. From 1 November 2026, apply the prescribed order: integrated tax credit first; the balance from central and state or union territory credits equally, with a shortfall taken from the other of those two ledgers as prescribed. Retain the filing reference and the actual debit.
- Track acknowledgment and deficiencies. From 1 November 2026, amended Rule 90 provides a ten-day window for RFD-02 or RFD-03. If neither is communicated within that period, the claim is deemed acknowledged and the 60-day statutory period runs from the filing date. If a deficiency memo requires a fresh application, consider the period excluded from limitation under Rule 90(3) and the corresponding recredit under Rule 93(1).
- Follow provisional and final orders. Section 54(6), as amended with effect from 1 November 2026, extends the 90% provisional refund mechanism to eligible inverted-duty claims, subject to prescribed conditions and safeguards. Under amended Rule 91 the portal uses risk evaluation and generates RFD-04 for qualifying provisional refunds within three working days from acknowledgment. Section 54(7) requires the final order within 60 days of receipt of the complete application, subject to the deemed-acknowledgment rule. Reconcile the final RFD-06, any RFD-05 payment order, bank receipt and ledger.
Seven worked case studies
The following facts, product rates and business results are illustrative. Figures show the calculation under the stated assumptions before applicable ledger caps and other eligibility checks.
1. The same turnover under three formulas
A garment manufacturer has ₹10 crore each in inverted and adjusted turnover, ₹80 lakh of eligible goods credit, ₹20 lakh of services credit and ₹50 lakh output tax at an assumed 5%. The pre-July 2022 ceiling is ₹80 lakh − ₹50 lakh = ₹30 lakh. The 2022 formula deducts ₹50 lakh × ₹80 lakh ÷ ₹100 lakh = ₹40 lakh, giving a ₹40 lakh ceiling: ₹10 lakh, or 33⅓%, above the first ceiling. For a separate example under the November 2026 rule, assume all ₹20 lakh of eligible services ITC was availed on or after 1 November and within the relevant period, with no attributable capital-goods credit. The ceiling is ₹100 lakh − ₹50 lakh = ₹50 lakh.
2. A trader sells the same fittings
A trader buys PVC fittings at an assumed 18%, resells them at an assumed 12% and prepares an ₹18 lakh claim. A privately negotiated price reduction does not change the GST rate. If the two rates only reflect a rate change at different points in time on the same goods, Circular 173/05/2022-GST confirms the exclusion under CBIC guidance. If the 12% rate instead applies under a genuine concessional notification at the same point in time, the circular recognises that a claim can qualify, subject to section 54(3)(ii), the notification conditions and all other restrictions. The ₹18 lakh cannot be confirmed from the rates alone.
3. Processing within the same tariff chapter
Assume an active pharmaceutical ingredient and a processed formulation both fall within Chapter 29, with correctly supported rates of 18% and 12% respectively. Verify the actual classifications, notification, invoices and cause of accumulation; a shared chapter does not settle eligibility. Separately, BMG Informatics concerned IT products and integration services, including supplies claimed to qualify for a concessional rate. The Gauhati High Court held that the circular could not override section 54(3)(ii) and sent the claim back for a reasoned decision on the actual rates and facts. It did not decide this pharmaceutical example or sanction a refund automatically.
4. Imported machinery and the calculation base
For a historical claim under the pre-July 2022 formula, assume inverted turnover equals adjusted turnover and tax payable is ₹20 lakh. The claimant included ₹12 lakh of IGST credit on a shoe-moulding machine in reported Net ITC of ₹65 lakh, claiming ₹45 lakh. After an RFD-08 notice, removing the machinery credit reduces eligible Net ITC to ₹53 lakh and the ceiling to ₹33 lakh. For a separate machine whose ₹12 lakh of eligible credit is first availed on or after 1 April 2027, the new rule gives ₹20,000 per qualifying month, or ₹60,000 for three qualifying months before reversals. It does not include the full asset credit at once.
5. Partial rejection and recredit
A textile business claims ₹24 lakh. An RFD-08 notice proposes rejecting ₹4 lakh connected with two unreconciled invoices. The applicant can respond in RFD-09 and must be given an opportunity to be heard before rejection. If the officer accepts ₹20 lakh and rejects ₹4 lakh in the final order, Rule 93(2) provides for recredit of the rejected debit in PMT-03 after the appeal is finally rejected or the claimant undertakes not to appeal. Recredit of a refund debit does not validate underlying ineligible ITC. Distinguish this from recredit following a deficiency memo.
6. Domestic inversion and exports under LUT
Assume a solar manufacturer has qualifying domestic inversion at illustrative rates of 18% on input goods and 5% on outputs. It exports 40% of its production under LUT; assume separately that exports are 40% of the relevant turnover and domestic supplies 60%. Use Rule 89(4) for qualifying exports and Rule 89(5) for otherwise eligible domestic inversion, each with its own turnover and credit definitions. Rule 89(4) includes eligible input and input-services credit; apply the notified date for attributable capital-goods credit. Reconcile the applications together so the same amount is not claimed twice. Production share alone does not establish turnover or refund entitlement.
7. Modelling cash recovery across factories
Assume a chemical manufacturer estimates ₹6 crore of accumulated credit across three factories. Build the reconciliation for each applicable GSTIN, including credit cutoffs, ledger balances, required statements and potential deficiencies. A planning assumption that collection time drops from 180 to 28 days implies a reduction of 152 days (about 84.4%). It is neither a statutory timeline nor evidence of a software result. Automated matching can help identify differences; review the supporting evidence before filing.
Frequently asked questions
1. Can job work or rent be included?
Under the substituted rule, otherwise eligible input-services ITC availed on or after 1 November 2026 can enter Net ITC in the relevant period. The statutory gateway still requires inversion from inputs; the historical formulas treated services differently.
2. What did the 2022 formula change?
It apportioned the deduction for output tax between inputs and input services by their respective credit shares, without adding services credit to the historical Net ITC term.
3. Are identical input and output goods always excluded?
No. Circular 173 distinguishes a tax-rate change over time from a genuine contemporaneous concessional notification. Verify the factual basis and all statutory and notified conditions.
4. How long do I have to file?
Generally two years from the relevant date. For an inverted-duty claim, use the section 39 return due date for the period in which the claim arises under Explanation 2(e) to section 54. Check any applicable exclusions from the limitation calculation.
5. Is rejected credit automatically available again?
No. Reconcile the debit and any PMT-03 recredit under Rule 93, including the appeal or undertaking condition after rejection. Correct any independently ineligible credit separately.
6. What can financial systems help with?
Use them to reconcile invoice, return and ledger data, identify unmatched items, apply the proper formula and prepare the relevant statement. Review the applicable rate, eligibility and actual portal output before filing.
Sources
- CGST Act, sections 2 and 54
- Finance Act, 2026, section 155
- Gazette: Notification 03/2026–Central Tax, commencement of section 155
- Gazette: Notification 05/2026–Central Tax, G.S.R. 919(E), rules and RFD-01 amendments
- Notification 14/2022–Central Tax, 5 July 2022
- CBIC Circular 181/13/2022-GST, application of the 2022 formula
- CBIC Circular 135/05/2020-GST, read with the 2022 clarification
- CBIC Circular 173/05/2022-GST, concessional supplies
- Supreme Court: Union of India v. VKC Footsteps India Pvt. Ltd., 2021 INSC 469
- Gauhati High Court: BMG Informatics Pvt. Ltd. v. Union of India, WP(C) 3878/2021, court judgment copy
- CGST Rules, including Rules 89, 90, 92 and 93; read with later amendments
- IGST Act, section 16 on zero-rated supplies; read with amendments