What Is an Inverted Duty Structure Under GST?
- An inverted duty structure arises when the GST rate on input goods is higher than the rate on output supplies.
- Eligible accumulated ITC may be refunded under Section 54(3), subject to prescribed conditions and notified restrictions.
- Net ITC under Rule 89(5) includes eligible ITC on input goods, not input services or capital goods.
- The refund is calculated using the amended Rule 89(5) formula and claimed through Form GST RFD-01.
- Low-risk applications may receive a 90% provisional sanction, but this is not automatic.
This guide is for GST-registered manufacturers, traders, accountants, and business owners whose ITC continues to accumulate because input goods are taxed at a higher rate than their outward supplies.
How an Inverted Duty Structure Arises
An inverted duty structure exists when the GST rate on input goods is higher than the GST rate on the resulting output supplies.
For example, assume a manufacturer purchases eligible input goods taxed at 18% and sells the finished product at 5%. The GST paid on purchases may be higher than the GST payable on sales. After adjusting the output tax liability, part of the input tax credit may remain unused.
Section 54(3)(ii) of the CGST Act permits a registered taxpayer to claim a refund where eligible credit accumulates because of this rate difference. However, the output supplies must be taxable. The refund is not available for outputs that are nil-rated, fully exempt, or subject to a specific restriction.
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Who Can Claim an Inverted Duty Structure Refund?
Conditions for Claiming the Refund
A taxpayer should check the following conditions before filing:
- The applicant is registered under GST.
- Eligible ITC has accumulated because input goods carried a higher GST rate than the relevant output supplies.
- The output supplies are taxable and are not covered by a notified restriction.
- The ITC is eligible, supported by valid invoices and reflected in GSTR-2B where required.
- Applicable returns have been filed, including the latest required GSTR-3B for the refund period.
- No conflicting refund or central-tax drawback has been claimed on the same supplies.
For refund periods from January 2022 onwards, eligible invoices should be reflected in GSTR-2B for the refund period or an earlier period.
When the Refund Is Not Available
A rate difference alone is not enough. The business must establish that the eligible ITC was accumulated due to the qualifying rate inversion . The refund is not available where:
- Accumulation arose only because the value of purchases exceeded the value of sales, without a qualifying difference in GST rates.
- The claim includes blocked, reversed, unsupported, or otherwise ineligible ITC.
- The output supply is nil-rated, fully exempt, or specifically restricted by notification.
- The taxpayer has claimed a conflicting central-tax drawback or refund of IGST paid on the same supplies.
ITC Included in and Excluded from Net ITC
Rule 89(5) of the CGST Rules limits Net ITC to eligible credit availed on input goods .
ITC Included in Net ITC
- Eligible ITC on input goods availed during the relevant period
- ITC on inputs carrying a higher rate than the output
- ITC on inputs carrying the same or a lower rate, where the credit is otherwise eligible
All inputs used in the business do not need to be subject to a higher GST rate. Where the conditions for the refund are met, eligible ITC on all input goods used during the relevant period may be included in Net ITC.
ITC Excluded from Net ITC
- Input-service ITC
- Capital-goods ITC
- Blocked credit under Section 17(5)
- Reversed or otherwise ineligible ITC
- ITC unsupported by valid documents
- Invoice-level ITC not reflected in GSTR-2B, where the restriction applies.
Supplies Excluded from Inverted Duty Structure Refunds
Notification No. 5/2017-Central Tax (Rate), as amended, restricts refunds for specified goods. The main notified restrictions relevant to commonly affected businesses include:
| Restricted Supply | Relevant Classification |
|---|---|
| Specified railway locomotives, coaches, wagons, parts, and railway equipment | Headings 8601 to 8608 |
| Specified vegetable fats and oils | Headings 1507 to 1518 |
| Coal | Heading 2701 |
| Lignite | Heading 2702 |
| Peat | Heading 2703 |
| Imitation zari thread or yarn made from metallised polyester or plastic film | HSN 5605, with the restriction applying specifically to ITC on the polyester or plastic film. |
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Specified construction services intended for sale to a buyer are separately restricted under Notification No. 15/2017-Central Tax (Rate), as amended by Notification No. 15/2023-Central Tax (Rate).
Earlier restrictions on specified fabrics were removed prospectively for input supplies received on or after 1 August 2018. Businesses should therefore not treat the entire textile sector as ineligible.
Eligibility must be checked using the exact HSN and description in the latest notification. Broad descriptions such as textile, edible oil, or railway product are not precise enough.
Refund Formula Under Rule 89(5)
The maximum refund is calculated using the formula prescribed under Rule 89(5).
Maximum Refund Amount = (Turnover of inverted-rated supplies × Net ITC ÷ Adjusted Total Turnover) - [Tax payable on inverted-rated supplies × (Net ITC ÷ ITC availed on inputs and input services)]
This formula applies to refund applications filed on or after 5 July 2022.
Meaning of Each Term
| Term | Meaning |
|---|---|
| Turnover of inverted-rated supplies | Value of taxable output supplies for which the qualifying rate inversion exists. |
| Net ITC | Eligible ITC availed on input goods, subject to the exclusions prescribed under Rule 89(5). |
| Adjusted Total Turnover | Turnover calculated under Rule 89(4), including relevant taxable turnover and excluding exempt supplies other than zero-rated supplies. |
| Tax payable on inverted-rated supplies | GST payable on the relevant inverted-rated output supplies. |
| ITC availed on inputs and input services | Total eligible ITC availed on input goods and input services. |
| Relevant period | The period for which the refund application is filed. |
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Why Input-Service ITC Appears in the Formula
Input-service ITC is not included in Net ITC and is not refunded directly. However, the total ITC on inputs and input services is used in the formula's second part to calculate the proportionate output tax to be deducted from the first component.
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Worked Example
Assume the following figures for one refund period:
| Particular | Amount |
|---|---|
| Turnover of inverted-rated supplies | ₹14,00,000 |
| Adjusted total turnover | ₹14,00,000 |
| Net ITC on input goods only | ₹1,20,000 |
| Input-service ITC | ₹30,000 |
| Total ITC on inputs and input services | ₹1,50,000 |
| Tax payable on inverted-rated supplies | ₹70,000 |
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The first component of the formula is:
₹14,00,000 × ₹1,20,000 ÷ ₹14,00,000 = ₹1,20,000
The proportionate tax reduction is:
₹70,000 × (₹1,20,000 ÷ ₹1,50,000) = ₹56,000
Therefore:
Maximum refund = ₹1,20,000 minus ₹56,000 = ₹64,000
Only the ₹1,20,000 relating to input goods is treated as Net ITC . The ₹30,000 input-service ITC is not directly refundable, but it is included in the total ITC figure used to calculate the proportionate tax reduction.
The maximum refund under Rule 89(5) is ₹64,000. The amount that can finally be claimed cannot exceed the formula amount, the eligible balance available under each tax head in the electronic credit ledger, or the aggregate ledger balance at the end of the refund period.
Note: The rates and figures in this example are hypothetical and are used only to explain the calculation.
Checks Before Filing Form GST RFD-01
Before filing the refund application, verify that the tax rates, turnover, and ITC figures used in the claim match your books and GST returns .
| Check | What to Review |
|---|---|
| Rate inversion | Confirm the exact HSN classification and GST rates of the input goods and output supplies. Do not rely only on broad product or industry descriptions. |
| Turnover | Match the sales register with GSTR-1, GSTR-3B, credit notes, debit notes, and the taxable turnover used in the refund calculation. |
| Input invoices | Reconcile the purchase register with GSTR-2B. Identify missing, duplicate, reversed, or ineligible invoices, including invoices relating to input services and capital goods. |
| Eligible Net ITC | Exclude input-service ITC, capital-goods ITC, blocked credit, reversed credit, and any unsupported or otherwise ineligible amount. |
| Refund formula | Use the amended Rule 89(5) formula applicable from 5 July 2022. Do not deduct the full output tax without applying the prescribed proportion. |
| Electronic credit ledger | Ensure that the amount claimed does not exceed either the maximum refund calculated under Rule 89(5) or the eligible balance available under the relevant tax heads. |
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A CA certificate for unjust enrichment is not required, only because the refund claim is above ₹2 lakh. Refunds of unutilized ITC under Section 54(3) are exempt from this requirement. However, the required declarations and undertakings in Form GST RFD-01 must still be submitted.
How to File an Inverted Duty Refund
Once the records have been reconciled, confirm that all applicable returns due by the filing date have been filed. The latest required GSTR-3B for the refund period or invoices must also be filed, even if its normal due date has not yet expired.
1. Select the Refund Category
Log in to the GST portal and go to: Services > Refunds > Application for Refund
Select Refund on account of ITC accumulated due to Inverted Tax Structure.
2. Choose the Refund Period
Select the tax period for which the refund is being claimed and create the application.
3. Prepare and Upload Statement 1A
Download the Statement 1A offline utility and enter the required inward and outward document details. Validate the file, generate the upload file and submit it through the refund application.
For refund periods from January 2022 onwards, include only eligible inward invoices reflected in GSTR-2B for the refund period or an earlier period.
4. Enter the Rule 89(5) Details
Enter the turnover of inverted-rated supplies, tax payable on those supplies and adjusted total turnover.
Net ITC is auto-populated from the electronic credit ledger and can be reduced where the eligible amount supported by the records is lower. Review the system calculation before entering the final refund amount.
5. Upload Supporting Documents
Upload the documents applicable to the claim. Upload Annexure-B where applicable, along with the refund calculation, reconciliation working, and applicable declarations.
Annexure-B records inward-invoice information such as the HSN or SAC, whether the supply relates to inputs, input services, or capital goods, and the amount of eligible ITC. It supports the claim but does not replace Statement 1A on the GST portal.
6. Review and File Form GST RFD-01
Select the bank account, review the application, and complete the applicable declarations, undertakings, and self-declaration.
Submit Form GST RFD-01 using DSC or EVC. The electronic credit ledger is debited by the ITC refund amount claimed, and an ARN is generated after successful filing.
7. Track the Application
To check the application status, go to: Services > Refunds > Track Application Status
The following forms may be issued during processing:
| Form | Purpose |
|---|---|
| RFD-02 | Acknowledgement of a complete application. |
| RFD-03 | Deficiency memo. |
| RFD-04 | Provisional refund sanction order. |
| RFD-05 | Payment order. |
| RFD-06 | Final sanction or rejection order. |
| RFD-08 | Notice proposing rejection of the claim. |
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Time Limit for Filing
The refund application should generally be filed within two years of the relevant date. For this refund category, the relevant date is the due date for furnishing the Section 39 return for the period in which the claim arises. In practical terms, this usually refers to the due date of the relevant GSTR-3B.
The GST portal does not validate the two-year deadline. The taxpayer must check it before filing. No refund is paid where the amount is less than ₹1,000.
What Happens After an RFD-03 Deficiency Memo?
The proper officer checks the application for completeness within 15 days of filing. If deficiencies are identified, they are communicated through Form GST RFD-03. The applicant must correct them and file a fresh refund application.
The 15-day period applies to the officer’s completeness review. There is no general 15-day deadline for the taxpayer to resubmit the claim.
For limitation purposes, the period between filing the original RFD-01 and communication of RFD-03 is excluded when calculating the two-year deadline for the corrected application.
How the 90% Provisional Refund Works in 2026
From 1 October 2025, provisional processing of inverted-duty refund claims became risk-based under Instruction No. 06/2025-GST.
After acknowledging a complete application in Form GST RFD-02, the proper officer may issue Form GST RFD-04 for 90% of the claimed amount where the system identifies the application as suitable for provisional sanction. The process generally involves:
- Checking the application for completeness
- Issuing Form GST RFD-02
- System-based risk evaluation
- Provisional sanction of 90% in qualifying low-risk cases
- Verification of the final admissible amount
- Adjustment or payment of the balance based on the final order
The officer may decline provisional sanction for reasons recorded in writing and proceed with detailed examination. Rule 91 provides a period not exceeding seven days from the RFD-02 acknowledgement for issuing Form GST RFD-04 in qualifying cases.
Note that the seven-day period applies to issuing the provisional sanction order. It does not guarantee that the amount will reach the applicant’s bank account within seven days.
How BUSY Can Help with Record Preparation
BUSY accounting software can help businesses maintain organised records of purchase and sales invoices , GST ledgers, HSN classifications, credit notes, debit notes, input tax credit, and output tax liability.
Its GST reports and GSTR-2B reconciliation features can help identify invoice and ITC mismatches before the refund calculation is prepared. Businesses should still verify the Rule 89(5) calculation and file Form GST RFD-01 through the GST portal.
Conclusion
An inverted duty structure can create working capital pressure when GST on input goods is consistently higher than GST on output supplies.
The refund can release eligible credit, but businesses must first establish that the accumulation arose from a qualifying rate difference. They must also verify the product classification , remove ineligible credit, use the current Rule 89(5) formula, and reconcile the claim with GSTR-1, GSTR-3B, and GSTR-2B.
The provisional refund mechanism introduced in October 2025 may provide earlier relief to qualifying low-risk applicants. However, the 90% sanction is risk-based and should not be treated as automatic.
