Legal Framework:
The Goods and Services Tax (GST) law allows refund of unutilised Input Tax Credit (ITC) only in limited cases under Section 54(3) of the CGST Act, 2017:
1. Zero-rated supplies (exports and supplies to SEZs).
2. Inverted Duty Structure – where the tax rate on inputs is higher than the tax rate on the output supply.
Refund under inverted duty structure is subject to exclusions. No refund is allowed if:
- The output supply is nil-rated or fully exempt; or
- The goods/services are specifically excluded by notification.
To calculate refunds, Rule 89(5) prescribes a formula. This was amended in July 2022 (Notification No. 14/2022) to give a more balanced computation by proportionately including ITC on both goods and services in the formula, though refunds themselves are still restricted to ITC on input goods only.
The Supreme Court (Union of India v. Ascent Meditech Ltd., 2025) and the Gujarat High Court (Filatex India Ltd., 2025) clarified that this amendment is curative and applies retrospectively. Thus, taxpayers can claim refunds even for past periods, provided claims are within limitation.
CBIC Circulars and Shifting Positions:
The Central Board of Indirect Taxes and Customs (CBIC) has issued several circulars shaping how inverted duty structure refunds are understood in practice:
Circular No. 135/05/2020 (31 March 2020):
Stated that no refund would be available where inverted duty structure arose only due to rate reduction on the same product (e.g., 18% reduced to 12%). This was challenged in multiple High Courts (Gauhati, Rajasthan, Calcutta), which held that such restrictions had no basis in law.
Circular No. 173/05/2022 (6 July 2022):
Revised the earlier position and clarified:
- If inversion arises due to a rate cut on the same product, refund is not allowed.
- If inversion arises due to a concessional notification (where inputs are taxed higher than outputs at the same point in time), refund is allowed.
This interpretation was upheld by the Telangana High Court in Micro Systems & Services (2022), which held the circular to be clarificatory and retrospective.
Key Takeaways for Businesses:
1. Inverted duty structure refunds are available only for input goods, not services or capital goods.
2. The amended Rule 89(5) applies retrospectively, making refund calculations fairer.
3. Refunds are not allowed where inversion arises due to tax rate reduction on the same product.
4. Refunds are permitted where lower output rates arise through concessional notifications.
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Disclaimer: The article is based on the relevant provisions and as per the information existing at the time of the preparation. In no event I shall be liable for any direct and indirect result from this article. This is only a knowledge sharing initiative. The article is intended as a news update and affluence advisory neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting because of any material contained in this article.
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