Inverted Duty Refund 2026: Rule 89(5) a Year After Rate Cuts

Last updated: 22 September 2026. If a rate cut left you paying more GST on inputs than you collect on your output, Section 54(3)(ii) of the CGST Act lets you claim the accumulated credit as a refund, using the Rule 89(5) formula. That formula counts only credit on inputs. Credit on input services and capital goods stays in your ledger. And where you bought the same goods before a rate cut and sold them after it, CBIC's position is that there is no refund at all.

Applicability Note: This guide reflects the CGST Act, the CGST Rules and CBIC's instructions as they stood on 22 September 2026. The 57th GST Council meeting is reported to be scheduled for 7 October 2026, and refund rules are a frequent Council subject. Always verify the current position on gst.gov.in or with a GST professional before filing a claim.

Who Should Care?

This guide applies to:

• Manufacturers whose finished goods moved to a lower rate on 22 September 2025 while their raw materials did not
• Traders who were holding stock on the day the rates changed and are now looking at a credit balance they cannot use up
• Finance teams preparing RFD-01 claims, which now go through a new Annexure-B utility
• Anyone whose output became exempt on 22 September 2025, because that is a different problem with a different answer

1. What an Inverted Duty Refund Is

Section 54(3) allows a registered person to claim refund of unutilised input tax credit at the end of any tax period, but its first proviso shuts that door in all but two cases. One is zero-rated supply made without payment of tax. The other, clause (ii), is where "the credit has accumulated on account of rate of tax on inputs being higher than the rate of tax on output supplies".

Clause (ii) carries two exclusions of its own. It does not apply where the output is nil-rated or fully exempt. And it does not apply to supplies the Government has notified on the Council's recommendation. For goods, that list is Notification No. 5/2017-Central Tax (Rate) dated 28 June 2017, as amended several times since. Check whether your goods are on its current version before you do any other work.

A year on from the GST 2.0 rate changes, which took effect on 22 September 2025, this refund matters to a wider group of businesses. The 56th Council's own release (PIB, 3 September 2025) described part of its package as a correction of "long-pending inverted duty structure" in manmade textiles and fertilisers, recommending lower rates on manmade fibre and yarn and on sulphuric acid, nitric acid and ammonia. Businesses in those chains may find their inversion has shrunk. Others went the other way: where a finished product dropped to a lower slab and the materials going into it did not, the credit now builds up month after month.

2. The Rule 89(5) Formula, Term by Term

Rule 89(5) sets a maximum refund:

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} − {tax payable on such inverted rated supply of goods and services × (Net ITC ÷ ITC availed on inputs and input services)}

The second bracket took its present form under Notification No. 14/2022-Central Tax dated 5 July 2022. Before that, the full tax payable on the inverted supply was deducted. Now only the share attributable to inputs is.

Capital goods fall outside Net ITC for a plain reason: Explanation (a) says "inputs", and Section 2(59) defines inputs as goods other than capital goods. Input services are a different story, and they were litigated all the way up.

Why input services stay out

In Union of India v. VKC Footsteps India Pvt. Ltd. (Supreme Court, Civil Appeal No. 4810 of 2021, decided 13 September 2021), the Court upheld Explanation (a) to Rule 89(5). It read Section 54(3)(ii) as speaking of credit accumulated because of the rate on inputs, so a rule excluding input services is consistent with the Act rather than ultra vires. That settled a split between the Gujarat and Madras High Courts. Five years later it is still the law: if your inversion comes mostly from services (job work, freight, professional fees), the refund route will return very little of it.

3. A Worked Example

Take a manufacturer with one month's figures. The rates are assumed for illustration: output at 5%, inputs and input services at 18%.

1. First bracket: 1,00,00,000 × 9,00,000 ÷ 1,00,00,000 = ₹9,00,000
2. Second bracket: 5,00,000 × (9,00,000 ÷ 10,80,000) = ₹4,16,667 (rounded)
3. Maximum refund: 9,00,000 − 4,16,667 = ₹4,83,333

The ledger has built up ₹5,80,000 that month (₹10,80,000 of credit against ₹5,00,000 of output tax). The refund gives back ₹4,83,333. The remaining ₹96,667 is the input-service share of the accumulation, and it stays in the ledger for future output tax. Under the pre-July 2022 formula the same facts produced ₹4,00,000, so the 2022 change is worth ₹83,333 here.

When you file, Rule 89(3) requires your electronic credit ledger to be debited by the amount you claim. Claim what the formula supports, not the whole balance.

4. The Rate-Cut Stock Trap

This is where most confusion about the 22 September 2025 changes sits, and where commentary often compresses the position too far.

Suppose you are a trader. You bought goods at 12% in August 2025 and sold the same goods at 5% in October 2025. Your credit exceeds your output tax. Is that an inverted duty structure?

CBIC says no. Circular No. 135/05/2020-GST dated 31 March 2020 used almost exactly this example in para 3.1 (goods bought at 18%, rate later cut to 12%) and answered it in para 3.2: where input and output are the same goods, "though attracting different tax rates at different points in time", the case is not covered by clause (ii).

Circular No. 173/05/2022-GST dated 6 July 2022 rewrote para 3.2. What it removed was the original closing sentence, which barred refund wherever input and output supplies were the same. What it kept was the sentence about different rates at different points in time. It then added para 3.3: where the same goods are sold under a concessional notification, so that the output rate is below the input rate at the same point of time, the refund is allowed, unless the output is nil-rated or fully exempt or the goods are notified for exclusion.

So it is only half right to say Circular 173 "removed the same-goods bar". The blanket sentence went. The bar on a rate change over time stayed. The CBIC/PIB FAQ on the 56th Council's decisions, posted 3 September 2025, quotes that surviving sentence as its answer to the refund question for the rate change.

Two things follow. This is CBIC's reading, issued under Section 168(1), and it binds departmental officers. Expect a claim built on pre-cut stock to be rejected at the officer's level. But the credit is not lost. The same FAQ confirms that credit already availed can be used against any output tax under Section 49(4). It stays in the ledger and gets used as you pay tax on later sales.

If your output became exempt instead

Clause (ii) never covered nil-rated or fully exempt output, so there is no inverted duty refund here. The FAQ goes further: for exempt supplies made on or after 22 September 2025, "ITC will have to be reversed as per provisions of CGST Act, 2017". That is a reversal question, not a refund one. Our guide to the Rule 42 and 43 annual true-up covers it for businesses that still make taxable supplies too.

5. The 90% Provisional Refund: What the Law Says Today

This is the second place where a lot of writing runs ahead of the law.

The interim measure comes with conditions:

• Low-risk only. The 90% is sanctioned where the system scores the application low-risk. Other applications go to detailed scrutiny.
• Zero-rated conditions apply equally. That means the categories excluded under Notification No. 14/2025-Central Tax dated 17 September 2025, the Rule 91(1) non-prosecution condition, and provisional refund may be withheld where an issue from an earlier refund claim is pending in appeal, under a show cause notice, or not yet final.
• Central Tax officers. The Instruction is addressed to Central Tax field formations. If a State officer handles your refund, you are covered only if your State has issued a similar instruction.
• Administrative, not statutory. It runs "till this amendment in the Act is effected". The trigger is the date you file, not the tax period, so a pre-October 2025 period filed after 1 October 2025 is eligible.

6. Filing the Claim

1. Pick the period. Refund is claimed "at the end of any tax period", and you can club successive periods. Circular 135, para 2.5, removed the restriction on bunching claims across financial years.
2. Check the clock. Section 54(1) allows two years from the relevant date. For inverted duty refunds, Explanation (2)(e) to Section 54 makes that the due date for the Section 39 return of the period in which the claim arises. Before 1 February 2019 it was the end of the financial year, and older guides still say so.
3. Prepare the invoice statement. Rule 89(2)(h) requires a statement of invoices received and issued. Under the GSTN advisory dated 18 May 2026, Annexure-B for inverted duty claims now goes through an offline utility. It is reported HSN/SAC-wise, with each invoice split into inputs, input services and capital goods, and uploaded as JSON on the RFD-01 screen. Invoices from November 2024 onward are validated against GSTR-2B, so anything missing from 2B will show up in an invalid-documents report.
4. Compute and debit. Work out the Rule 89(5) maximum, then file RFD-01 under the inverted tax structure category. The claimed amount is debited from your credit ledger.

Every invoice in that statement still has to meet the Section 16 conditions for input tax credit. The refund cannot be bigger than the credit you were entitled to take.

Key Takeaways

• Section 54(3)(ii) refunds credit accumulated because inputs are taxed higher than output, but not where output is nil-rated or exempt, and not for goods notified under Notification No. 5/2017-Central Tax (Rate).
• Rule 89(5) counts only credit on inputs. Input-service credit stays in the ledger, as upheld in VKC Footsteps (Supreme Court, 13 September 2021).
• On CBIC's reading, the same goods bought before the 22 September 2025 cut and sold after it are not an inverted duty case. The credit remains usable under Section 49(4).
• The 90% provisional refund for inverted duty claims rests on Instruction No. 06/2025-GST for low-risk applications filed on or after 1 October 2025. The Finance Act, 2026 amendment is not yet in force.
• The two-year limit runs from the due date of the Section 39 return for the claim period, not from the end of the financial year.
• Annexure-B now goes through GSTN's offline utility and is matched against GSTR-2B.

Frequently Asked Questions

Can I claim an inverted duty refund on input services?

No, not through the formula. Net ITC in Rule 89(5) is credit on inputs only, and the Supreme Court upheld that exclusion in Union of India v. VKC Footsteps India Pvt. Ltd. (13 September 2021). Input-service credit stays in your ledger for future output tax.

Is refund available when the GST rate on the same goods was reduced?

Not on CBIC's position. Para 3.2 of Circular No. 135/05/2020-GST, as substituted by Circular No. 173/05/2022-GST dated 6 July 2022, says the same goods taxed at different rates at different points in time are not covered by Section 54(3)(ii). The exception is same-goods supply under a concessional notification at the same point in time.

Is the 90% provisional refund available for inverted duty claims?

Administratively, yes, for low-risk applications filed on or after 1 October 2025, under CBIC Instruction No. 06/2025-GST dated 3 October 2025, and subject to the same conditions as zero-rated claims. The statutory amendment to Section 54(6) in the Finance Act, 2026 has not yet been brought into force.

What is the time limit for an inverted duty refund?

Two years from the relevant date under Section 54(1). Explanation (2)(e) to Section 54 fixes that date as the due date for furnishing the Section 39 return for the period in which the claim arises.

Disclaimer: This article is for informational purposes only and does not constitute professional tax advice. GST rules are subject to frequent changes through notifications and circulars. Please consult a qualified tax professional or verify the current provisions on the official GST portal (gst.gov.in) before making any compliance decisions.

Have a specific question about your inverted duty refund? Our GST experts can help → gstconsultancy.com