The Goods and Services Tax (GST) regime in India allows for refund of unutilized Input Tax Credit (ITC) in limited circumstances. One such situation is when a registered taxpayer faces an Inverted Duty Structure (IDS) – i.e., when the GST rate on inputs is higher than the rate applicable on the outward supply (output).

However, the refund framework under GST is restrictive and has undergone multiple amendments, clarifications, and judicial scrutiny. The issue has gained renewed significance in the context of ongoing GST rate rationalization, where several products have shifted tax brackets, creating new instances of inverted duty structures.

Legal Framework

Section 54(3) of the CGST Act, 2017

• Main Provision:
  Section 54(3) provides that a registered person may claim refund of any unutilised ITC at the end of any tax period.
• Eligible Cases:
  Refund of ITC is permitted only in two situations:
  1. Zero-rated supplies (exports and supplies to SEZs);
  2. Inverted Duty Structure – where the credit accumulation arises because the rate of tax on inputs is higher than the rate of tax on output supplies.
• Exclusions under Proviso to Section 54(3):
  Refund is not permitted where:

• The output supply is nil-rated or fully exempt;
• ITC relates to input services or capital goods (restricted by Rule 89(5));
• Specific goods or services are notified by the Government.

Rule 89(5) of the CGST Rules, 2017

Rule 89(5) prescribes the formula for calculating refunds in cases of inverted duty structure:

Refund Amount = (Turnover of inverted rated supply × Net ITC ÷ Adjusted Total Turnover) – Tax payable on such inverted rated supply

• Net ITC = ITC on inputs (goods) only.
• Input services and capital goods are excluded from refund eligibility, though they may be included in the computation base after the 2022 amendment.

Evolution of Rule 89(5) and Key Amendments

Pre-2022 Position

• Refunds were restricted only to ITC on input goods.
• ITC on input services and capital goods was not refundable.
• This often led to disproportionate refund denials.

Notification No. 14/2022-CT (5 July 2022)

• Amended Rule 89(5) with retrospective effect.
• Impact: Allowed a more balanced calculation by proportionately including ITC of both goods and services in the turnover ratio.
• However, the refund itself continues to be restricted to ITC on input goods.

Judicial Position on Retrospectivity

• Supreme Court in Union of India v. Ascent Meditech Ltd. (2025): Held the 2022 amendment to Rule 89(5) is curative and applies retrospectively.
• Gujarat High Court in Filatex India Ltd. (2025): Echoed the same, confirming taxpayers can seek refund for past periods (subject to limitation under Section 54(1)).

CBIC Circulars and Clarifications

Circular No. 135/05/2020-GST (31 March 2020)

• Clarified that no refund is available where inversion arises due to a rate reduction on the same product (e.g., GST reduced from 18% to 12%).
• Widely litigated – several High Courts (Gauhati, Rajasthan, Calcutta) struck this down as ultra vires, since the statute itself did not impose such restriction.

Circular No. 173/05/2022-GST (6 July 2022)

• Reconsidered the 2020 stance.
• Clarified that:
  1. If inversion is due to tax rate cut on the same product, refund is not permitted.
  2. If inversion is due to concessional notification (where inputs are taxed at a higher rate and output is given a lower concessional rate at the same point in time), refund is permitted.
• Judicial Endorsement: Telangana High Court in Micro Systems & Services v. Union of India (2022) upheld this interpretation, holding that the circular is clarificatory and retrospective.

Case Law Landscape

• VKC Footsteps India Pvt. Ltd. v. Union of India (2021, SC): Held that exclusion of input services from refund under Rule 89(5) is valid; refund is confined to ITC on input goods only.
• Ascent Meditech Ltd. (2025, SC): Amendment to Rule 89(5) is curative, retrospective.
• Filatex India Ltd. (2025, Gujarat HC): Reinforced retrospective applicability of the 2022 amendment.
• High Courts (Gauhati, Rajasthan, Calcutta): Struck down restrictions based on Circular 135/2020, holding refund restrictions cannot override statutory provisions.
• Micro Systems & Services (2022, Telangana HC): Supported Circular 173/2022 and confirmed its retrospective effect.

Practical Impact of GST Rate Rationalization

Current Position on IDS Refunds:

1. Refund Allowed
   • Where inputs are taxed higher than outputs due to concessional notification.
   • E.g., Input at 18%, output at 5% (pharma, fertilizers, textiles in certain cases).
2. Refund Not Allowed
   • Where inversion arises due to GST rate reduction on the same product (e.g., GST reduced from 12% to 5%).
   • Output supplies that are nil-rated or exempt.
   • Input services and capital goods – excluded by law.
3. Refund Calculation
   • Post-2022 formula (retrospective) gives a fairer allocation of ITC between inverted and non-inverted supplies.

Key Takeaways for Businesses

1. Refund of IDS is limited to input goods only.
2. Input services and capital goods ITC, though eligible for utilization, are not refundable.
3. Refunds are not permitted where inversion is a result of GST rate cut on the same product.
4. Refunds are permitted where inversion arises due to concessional notifications.
5. The 2022 amendment to Rule 89(5) applies retrospectively, ensuring a more balanced refund computation.
6. Circulars 135/2020 and 173/2022, along with SC rulings, provide the administrative framework businesses must navigate.
7. Taxpayers should keep track of notifications and GST Council decisions on rate rationalization, as these may impact IDS eligibility.

✅Conclusion:
While GST refunds under inverted duty structure remain a critical relief for industries like textiles, pharma, fertilizers, and renewable energy, they are still constrained by statutory restrictions and evolving jurisprudence. Businesses must carefully evaluate whether their inversion arises from a concessional notification (eligible) or mere rate cut (ineligible), maintain robust documentation, and file refund claims within the statutory time limits under Section 54(1).