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When a business pays a higher GST rate on eligible inputs than it charges on its taxable output, input tax credit (ITC) can build up faster than the business can use it to pay output tax. The unused credit is a tax asset, but it does not put back the cash the business has already paid its suppliers. A refund may release some of that value for an eligible claim; it is not automatic, and the amount is limited by the rules and formula that apply to the claim.
This explainer concerns India’s GST regime. It explains the cash-flow effect, the inverted-duty refund calculation, the credits and supplies that may fall outside the route, and a provisional-refund instruction reported by the Ministry of Finance in December 2025. A business’s actual eligibility and refund depend on its claim period, product classification, records, applicable notifications, and current implementation of the rules.
What an inverted duty structure means for cash flow
An inverted duty structure exists when the GST rate on relevant business inputs is higher than the rate on the taxable output supply made using them. For example, a business may pay tax at different rates on materials it purchases, then charge a lower rate on the finished goods it sells. If the input credits generated exceed the output tax payable, some ITC can remain unused.
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The cash-flow problem is the difference between a credit balance and cash. The business has already paid GST to suppliers as part of its purchasing cycle. It can use eligible ITC to offset output tax, but any credit left over after that set-off cannot be spent on wages, rent, inventory, or other operating costs while it remains an unused tax credit. The balance therefore ties up value that could otherwise support day-to-day operations.
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This is a timing and liquidity issue, not proof that the credit has been lost or that a refund is due. Section 54(3) provides a refund route for qualifying unutilized ITC arising from an inverted duty structure, subject to the statutory conditions, Rule 89(5), applicable notifications, and the facts of the claim. An accumulated ledger balance alone does not establish entitlement to a cash refund.
How credit accumulates
Rates affect the balance, but turnover and tax payable matter too
Suppose a manufacturer buys inputs carrying higher GST rates than the rate on its output. Tax charged on purchases can generate ITC, while sales at the lower output rate generate a smaller amount of output tax against which to use that credit. Over a relevant period, purchases and their tax may thus generate more credit than sales consume.
The inversion is a rate relationship, but the amount of credit that accumulates also depends on the business’s actual input purchases, output sales, tax payable, and available credits. A rate comparison by itself cannot tell a business how much it may claim. The refund calculation is capped, and it does not simply return every rupee of unused credit.
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Why a ledger balance is not the same as refundable working capital
ITC is used to reduce tax liabilities where the rules permit. If credit accumulates because output tax is too small to absorb it, the balance can persist. A refund application is a separate route with eligibility conditions and a prescribed calculation. Until an amount is approved and paid, it remains incorrect to treat the entire credit balance as cash available to the business.
The official material discussed here does not quantify the total working capital blocked across Indian businesses. The GST Council’s worked example, explained below, illustrates the calculation for one hypothetical case; it is not an economy-wide impact figure or a typical refund outcome.
How to calculate the maximum refund under Rule 89(5)
The Telangana Commercial Taxes Department’s Handbook on Refunds under GST, third edition, dated January 2026, reproduces the amended Rule 89(5) calculation as follows:
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)]
In this rule’s calculation, “Net ITC” means ITC availed on inputs during the relevant period. “Adjusted Total Turnover” and “relevant period” have the meanings assigned to them in Rule 89(4). Those terms are part of the calculation, not interchangeable labels for a business’s entire sales or credit balance.
What the formula does
- It takes account of turnover from inverted-rated supplies and relates that turnover to adjusted total turnover.
- It applies Net ITC for the relevant period; under the handbook’s definition for this rule, Net ITC is input credit, not all credits appearing in the ledger.
- It subtracts an amount linked to tax payable on the inverted-rated supplies and the ratio of Net ITC to ITC availed on inputs and input services.
The result is a maximum under the formula, not a guarantee that the business will receive that amount. A live claim should use the law, notifications, classifications, and formula applicable to its claim period. The January 2026 handbook is a useful current reference for the formula reproduced in it, but claim-specific calculations should be checked against current rules and official instructions.
GST Council example: ₹25 maximum refund
A 2018 GST Council agenda note gives a simplified illustration. Input A is taxed at 5%, input B at 18%, and output Y at 12%. For output turnover of ₹3,000, the example assumes purchases of ₹500 of A and ₹2,000 of B. Those purchases generate Net ITC of ₹385: ₹25 on A and ₹360 on B. After subtracting ₹360 of output tax, the example gives a maximum refund of ₹25.
This is the Council’s example, not a forecast or a typical result. It shows why the existence of higher-rate inputs does not mean all input tax will be refunded: the calculation also accounts for the output supply, turnover, and tax payable. A business’s own figures and applicable rule details can produce a different maximum.
Which credits and goods may be outside the refund route
Input services and capital goods
The GST Council’s agenda note explains that the inverted-duty refund route excludes input services and capital goods from its calculation. The current handbook’s definition of Net ITC for Rule 89(5) is credit on inputs during the relevant period. Consequently, a business should not assume that every amount in its ITC balance is part of the Net ITC used in this refund formula.
That distinction matters when a business buys both goods and services, or invests in equipment. Credits may be relevant to the business’s broader GST position while still not counting as Net ITC for this particular inverted-duty refund calculation. Classification of a purchase and its treatment for the claim should be checked rather than inferred from the ledger total.
Specified goods in Chapters 15 and 27
CBIC Circular 181/13/2022-GST states that a restriction on refunds for specified goods falling under Chapters 15 and 27 applies prospectively from 18 July 2022. It does not say that every product in those chapters is restricted. A business must check the relevant notification and the classification of its goods for the period of its claim.
Do not apply this restriction based only on a broad chapter heading, nor assume that a later change automatically governs an earlier claim period. The product description, classification, notification wording, and effective date all matter.
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The amended Rule 89(5) formula was introduced by Notification 14/2022-Central Tax. In Circular 181/13/2022-GST, dated 10 November 2022, CBIC said the amended formula applies prospectively to refund applications filed on or after 5 July 2022. Applications filed before that date were to be dealt with under the preceding formula.
This makes the filing date material to the formula, while the claim period and applicable notifications remain important to eligibility and calculation. A business should not assume that the latest formula can be applied to every historical application, or that one formula applies to all periods simply because the balance is still visible in its records.
- Identify the refund application’s filing date and the period it covers.
- Check whether the application is governed by the formula that CBIC said applies to that filing date.
- Verify whether any restriction or notification relevant to the goods was in force for the period and classification involved.
What the reported 90% provisional-refund measure means
A written answer to Rajya Sabha Starred Question No. 25, dated 2 December 2025 and attributed to Finance Minister Nirmala Sitharaman, reports a provisional-refund development for inverted-duty claims. It says the GST Council’s 56th meeting, held on 3 September 2025, recommended an amendment to provide a provisional refund of 90% for such claims.
The parliamentary answer also says that, pending the required amendments to the Central and State GST Acts, CBIC issued instructions to field formations for risk-based provisional refunds of 90% from 1 October 2025. It describes the measure as intended to help ensure working capital is not blocked for businesses whose input rates exceed their output rates.
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In the same answer, the Ministry of Finance stated: “The Council has not recommended any blockage of input tax credit on supply of goods.” That statement addresses the policy question described in the answer; it does not remove the need to meet the conditions for a refund under the applicable law.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How a business can prepare a defensible claim
The calculation depends on more than spotting a rate mismatch. A business preparing to assess a claim should organize the facts needed to verify classification, period, credit composition, turnover, tax payable, and the applicable formula. The checklist below is a practical way to structure that review, not a substitute for the prescribed filing process or a determination of eligibility.
- Define the claim period and application date. Record the relevant period and intended or actual filing date, then determine which version of Rule 89(5) applies in light of CBIC’s prospective-date guidance.
- Identify the inverted-rated supplies. Map the taxable output supplies for which the input-rate relationship is being asserted. Confirm the applicable output rates and product classifications for the period.
- Separate inputs from other credits. Reconcile the credit included in the calculation with input purchases for the relevant period. Do not use the full ITC ledger balance as Net ITC without checking the rule definition; input services and capital goods are outside this refund route.
- Review notified exclusions or restrictions. Check relevant notifications and classifications, including the restriction described for specified goods in Chapters 15 and 27 effective 18 July 2022. Do not treat an entire chapter as restricted without checking the actual scope.
- Assemble the formula inputs. Determine turnover of inverted-rated supplies, adjusted total turnover, Net ITC, tax payable on the relevant supplies, and ITC availed on inputs and input services as required by the formula. Ensure the figures use consistent claim-period records and definitions.
- Calculate the maximum and reconcile it. Apply the formula applicable to the claim, retain a trace from each input figure to the business records, and compare the result with the amount being claimed. A formula maximum does not by itself establish that a claim is payable.
- Check the current refund instructions and filing requirements. Confirm current central and state implementation, the applicable process, and any requirements for the claim before filing or relying on a provisional payment expectation.
Where the classification, period, or formula treatment is uncertain, resolve that point before treating the balance as expected cash. A defensible claim rests on traceable transactions and the legal treatment applicable to them, rather than an estimate based only on headline rates.
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An inverted duty structure can leave a business with a real ITC asset but less deployable cash than its purchases would otherwise allow. India’s GST regime offers a conditional refund route for qualifying unutilized ITC, yet Rule 89(5) caps the amount and excludes credits that do not fit its definition of Net ITC. Product restrictions, claim dates, classifications, and the relevant period can change the result.
The 90% provisional-refund instruction reported by the Ministry of Finance in December 2025 may affect the timing of relief for risk-screened claims, but it should not be read as an automatic payout or final approval. Businesses should distinguish the balance they hold, the maximum amount the formula permits, and the amount actually sanctioned and paid.
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