In this guide
Input tax credit (ITC) can accumulate when the GST rate on a business’s taxable output supplies is lower than the rate on its inputs. If eligible credit remains unutilised after payment of output tax, a registered business may claim a refund under Section 54(3) of the CGST Act by filing Form GST RFD-01.
An inverted rate does not guarantee a refund. The claim is subject to statutory exclusions, valid ITC, the prescribed calculation and the available credit balance.
Who Can Claim the Refund?
The refund route is generally available to a registered supplier whose eligible ITC has accumulated because the tax rate on its inputs is higher than the rate on its taxable outward supplies. It is separate from refunds for exports or supplies to an SEZ.
Before applying, check that:
- The outward supplies are taxable and qualify under the inverted-duty rules.
- The ITC was validly availed and is supported by records.
- Credit remains unutilised after available ITC is set off against output tax.
- No statutory or notified exclusion applies. Supplies that are nil-rated or fully exempt do not qualify under this route, and certain goods are specifically excluded by notification.
A reduction in the output tax rate on the same goods over time is generally not, by itself, an inverted duty structure. A concessional-rate supply of the same goods may need a separate review of the applicable notification and conditions.
How Is the Refund Calculated?
Rule 89(5) prescribes this maximum refund formula:
Maximum refund = (Turnover of inverted-rated supplies × Net ITC ÷ Adjusted Total Turnover) − tax payable on inverted-rated supplies
“Net ITC” for this calculation generally includes eligible ITC on inputs availed during the relevant period. Under the current formula, it excludes input services and capital goods. Eligible credit on inputs is not limited only to inputs taxed at a higher rate; the formula and applicable clarifications govern the calculation.
For example, selling a product at 5% after buying inputs taxed at 18% does not automatically establish the refund amount. The business must calculate the claim using its eligible ITC, turnover and output tax, and remain within the applicable credit-ledger limit.
Keep the calculation with your return and purchase records. TaxClear’s GST reconciliation guide can help organise the ITC and turnover information.
Deadline and Records
A refund application is generally subject to a two-year limitation period from the relevant date under Section 54. For an unutilised ITC claim, the relevant date is linked to the due date for the Section 39 return for the period in which the claim arises. Check the deadline for your claim period and any applicable relief. Do not assume the period runs from the invoice date or the end of the financial year.
Reconcile and prepare:
- Purchase invoices and eligible ITC calculations for the claim period;
- Sales invoices and turnover workings;
- GSTR-1 and GSTR-3B details;
- Electronic credit ledger balance and previous refund claims; and
- Bank account information and required declarations or supporting documents.
Returns due on or before the application date must be filed. GST Portal guidance also requires the relevant GSTR-3B for the claim period to be filed before applying.
How to File RFD-01
- Log in to the GST Portal and open Services → Refunds → Application for Refund.
- Select ITC accumulated due to inverted tax structure.
- Choose the relevant period and enter or verify the turnover and ITC details requested.
- Review the calculation, credit-ledger balance and declarations. Attach supporting documents where required.
- Submit using the permitted verification method and save the application reference number (ARN).
Track the application on the portal and respond to any deficiency memo or notice within the stated time. An ARN confirms submission; it does not mean the refund has been sanctioned.
Provisional Refunds and Recent GST Council Recommendations
CBIC Instruction 06/2025-GST provides for provisional sanction of up to 90% of certain inverted-duty refund claims filed on or after 1 October 2025, subject to risk-based assessment and other eligibility conditions. Final scrutiny and an order still follow; a provisional payment is not final approval.
On 8 October 2026, the GST Council recommended extending inverted-duty refunds to eligible input-service ITC from 1 November 2026. As of 23 October 2026, this was a recommendation; check for the required legal changes and portal implementation before including input-service credit in a claim. The current Rule 89(5) formula excludes it.
For help with eligibility, reconciliation and filing, contact TaxClear’s GST services team.
Frequently Asked Questions
Can I claim all unutilised ITC as a refund?
Not necessarily. The refund is calculated under Rule 89(5), subject to the available credit balance and statutory exclusions.
Are input-service credits included in Net ITC?
Under the current Rule 89(5) formula, input-service and capital-goods ITC are excluded. Check for operative amendments before filing.
Does a rate reduction on the same product qualify?
Generally, a rate reduction over time on the same goods is different from inputs being taxed at a higher rate than outputs. Specific concessional-rate situations may have separate treatment.
Does filing RFD-01 mean the refund is approved?
No. The tax authority reviews the application and may seek information or issue an order. A provisional sanction, if available, is not final approval.
