Summary: The 57th GST Council Meeting has proposed significant reforms to the GST refund framework, offering potential relief to the gems and jewellery (G&J) industry, which has historically faced substantial accumulation of unutilised input tax credit (ITC). The proposed measures seek to expand refund eligibility, improve working capital availability and accelerate refund processing, particularly for businesses operating under the inverted duty structure (IDS) and exporters making zero-rated supplies. One of the most important recommendations is to extend refund eligibility under the inverted duty structure to ITC on input services and capital goods, which are currently excluded from the refund mechanism. The benefit for input services is proposed to apply to ITC availed from 1 November 2026, while capital goods-related refunds under both IDS and zero-rated supplies are proposed from 1 April 2027, with refunds distributed over 60 months. These changes could substantially reduce accumulated credit and release working capital for domestic manufacturers and exporters. The Council has also recommended removing certain restrictions on blocked input tax credits, potentially reducing embedded tax costs. Additionally, automated provisional sanction of 90% of eligible refund claims, subject to risk evaluation, is proposed, with a longer-term objective of moving towards 100% provisional refunds. These measures could improve liquidity, simplify compliance and strengthen the competitiveness of the G&J sector. However, their practical implementation will depend on the relevant legislative amendments, notifications and circulars.
57th GST Council Reforms: Major Refund Relief for Gems and Jewellery Industry
The word “transformation” and Gems and Jewellery (G&J) industry appear to always go hand-in-hand. The G&J industry is at an interesting inflection point with market dynamics of Lab Grown Diamonds, trade tariffs, gold and silver fluctuations, rising share of e-commerce, increased regulatory scrutiny and greater focus on traceability and digitalisation being some of the major forces reshaping the industry.
Against this backdrop, the recent recommendations in the 57th GST Council Meeting come as a breath of fresh air for the industry. The recommendations cover wide-ranging reforms on input tax credit, refunds, return filing and ease of business. In this article, we have covered the reforms mainly related to the refunds as that would be, in our view, the single most important dimension that has a pervasive impact on the sector as a whole.
The refund related proposals are summarised as under:
Expanded Definition of Eligible Input Tax Credit for Refund Purposes
Undoubtedly, the most significant reform emanating from the Council Meeting for the G&J industry relates to the GST refund framework. For an industry where accumulation of input tax credit has been a legacy issue, these changes could have a far-reaching impact at least as far as the future is concerned.
For a context, the GST law presently provides for two principal categories of input tax credit (ITC) refunds: refunds in respect of zero-rated supplies (primarily exports undertaken under a Letter of Undertaking or bond without payment of tax) and refunds arising on account of an inverted duty structure (IDS), where the tax rate on inputs exceeds the rate applicable on outward supplies.
Under the existing regime, refund eligibility under the IDS mechanism is restricted to ITC attributable to inputs alone. Consequently, GST paid on input services and capital goods remains outside the refund net, often resulting in a build-up of unutilised credit. Similarly, in the case of exports, refund of ITC pertaining to capital goods has not been permissible.
Recognising these long-standing concerns, the GST Council has recommended a significant expansion in the scope of eligible refunds. The proposed changes would allow refund of ITC on input services and capital goods in inverted duty structure cases, while also extending refund eligibility to capital goods used in making zero-rated supplies. The benefit relating to input services in IDS cases is proposed to apply to ITC availed on or after 1 November 2026, while the capital goods benefit in both categories would apply to ITC availed on or after 1 April 2027, with the refund being distributed over a period of 60 months.
For the gems and jewellery sector, this reform addresses a concern that has persisted for years. In fact, the industry was, interestingly, one that successfully represented to the GST Council to increase the rate of GST on cut and polished diamonds from 0.25% to 1.5%, largely because of ITC accumulation due to a restricted definition of eligible refunds under inverted duty structure. The IDS reform is particularly significant for domestic players in the G&J industry. It is possible that while earlier, they were not applying for refunds, they should now consider this refund route to unlock more working capital.
Doing Away with the Concept of Certain Blocked Input Tax Credits
These are presently areas of blocked credit, subject to statutory exceptions and interpretative disputes (e.g. health and life insurance, outdoor catering, etc.) The GST Council recommends to remove certain restrictions. The precise scope, conditions and effective dates will depend on the amending legislation. The proposals may materially reduce embedded tax costs arising from inability to avail input tax credit on certain procurements.
Faster Processing of GST Refunds
In addition to the eligibility of input tax credit for refund purpose, the recent Council measures also indicate a shift to a more time-bound and automated refund framework. For zero-rated and inverted duty refund claims, relevant to the G&J industry, an automated provisional sanction of 90% of the claimed amount is proposed, subject to system-based risk evaluation. In Phase 2 of the reforms, there is a commitment to move to provisional sanction of 100% of the refund claims.
Conclusion
The recently announced reforms completely revolutionise the way refunds will be calculated and processed. The reforms related to IDS are in particular of great relevance to domestic G&J industry and can unlock tremendous working capital for this sector. Exporters also stand to gain from faster and automated refunds with capital goods also forming part of the refund. The industry must closely keep an eye on these reforms and act as soon as the notifications and circulars are in place.
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Author: Siddharth Surana, Director, Strategic Initiatives and Taxation, RSM Astute
(Note: Views expressed are personal. Further, the same is based on announcements made in the Press Release and actual implementation would be governed by issuance of relevant notifications and circulars. Readers are advised to consult tax advisors before acting on any references made in this article).
