Inverted Duty Structure: Proposed GST Refund Relief on Input Services and Capital Goods

Introduction: Could Your Business Recover More Accumulated GST Credit?

A business can pay GST on raw materials, professional services, machinery and other purchases but still struggle to use the entire input tax credit available to it. This becomes a particular concern when the GST rate on inputs is higher than the rate charged on the finished products. Credit may accumulate faster than the business can use it, leaving money tied up in the tax system.

This situation is commonly known as an inverted duty structure. It can affect manufacturers and other eligible businesses whose input tax rates are higher than the tax rates applicable to their outward supplies.

At present, the refund calculation under the relevant GST rules generally excludes input services and capital goods from the specified refund formula for inverted duty structure. The 57th GST Council Meeting, held on 8 October 2026, recommended expanding refund eligibility to include eligible input services and capital goods in specified cases.

Under the recommendation, eligible input service ITC availed on or after 1 November 2026 could be included in inverted duty structure refund calculations. Eligible capital goods ITC availed on or after 1 April 2027 could be considered for refunds relating to both inverted duty structure and specified zero-rated supplies, spread over 60 months.

These changes could help eligible businesses reduce the amount of credit remaining unused and improve working capital. However, the recommendations require the relevant amendments to the CGST Act and Rules. Businesses should verify the applicable legal provisions before making a refund claim. 

What Is an Inverted Duty Structure Under GST?

An inverted duty structure generally arises when the GST rate on inputs used by a business is higher than the GST rate on its outward supplies.

Inputs may include raw materials or other goods used in the production or supply process. If a business pays a higher rate of GST on eligible inputs than it charges on its finished products, the difference can result in accumulated input tax credit.

For example, imagine a manufacturer purchases raw materials taxed at 18% and sells finished products taxed at 5%. The manufacturer may accumulate eligible ITC because the tax paid on inputs is higher than the tax collected on outward supplies.

Subject to the applicable conditions, GST law provides a mechanism for refunding eligible accumulated ITC arising from an inverted duty structure.

However, not every situation involving unused ITC qualifies. The business must satisfy the legal requirements for the refund category, and the rate inversion must be established in the manner prescribed by law.

The proposed reform aims to expand the credit that may be included in the refund calculation once the underlying inverted duty structure has been established.

What Changes Did the 57th GST Council Recommend?

The Council recommended amendments to Section 54(3) of the CGST Act and the relevant CGST Rules to allow eligible input service and capital goods ITC to be included in specified refund calculations.

The main recommendations are summarised below.

These dates are important because the recommendation does not provide blanket retrospective relief for all credit accumulated in earlier periods. The applicable date depends on when the relevant ITC is availed and the conditions in the final provisions.

The Council also clarified that input services alone being taxed at a higher rate than outward supplies does not establish an inverted duty structure. The rate comparison between inputs and outward supplies remains necessary. 

How Could Input Service ITC Become Eligible for Refund?

Input services are services purchased by a business for its operations. Examples may include eligible professional services, maintenance services, consultancy and other business-related services, depending on the facts and applicable ITC rules.

Under the existing refund framework described in the official FAQ, ITC on input services is excluded from the prescribed net ITC calculation for inverted duty structure refunds.

The Council recommended allowing eligible input service ITC to be included in the relevant refund calculation for ITC availed on or after 1 November 2026.

Example: A Manufacturer With Higher Input Tax Rates

Suppose a manufacturer buys raw materials taxed at 18% and sells finished goods taxed at 5%. The manufacturer also purchases eligible professional services on which GST is charged at 18%.

Because the GST rate on the raw materials is higher than the rate on the finished goods, the business may meet the rate-inversion requirement, subject to the applicable law. Under the proposed change, eligible ITC on input services availed on or after 1 November 2026 could also be included in the refund calculation.

The result could be a larger eligible refund calculation than under the existing approach, depending on the actual figures and the final formula.

However, the business cannot claim a refund merely because it pays 18% GST on professional services. The inverted duty structure must first be established by comparing the tax rates on inputs and outward supplies.

What If Only Input Services Have a Higher GST Rate?

Consider a business that buys inputs taxed at 5% and sells finished goods taxed at 5%. It also pays GST at 18% on professional services.

In this case, the higher rate on services alone does not establish an inverted duty structure under the proposed clarification. The business cannot qualify for an inverted duty structure refund merely because the GST rate on its input services exceeds the rate on its outward supplies.

This distinction is important because the proposed reform expands the ITC that may be considered after an eligible inverted duty structure exists; it does not remove the underlying eligibility test. 

Proposed GST Refund Relief on Capital Goods

Capital goods are assets used by a business in its operations, such as qualifying machinery, production equipment and other eligible business assets.

These purchases can involve substantial GST amounts. Under the existing framework described in the official FAQ, capital goods ITC is excluded from the specified refund calculations for inverted duty structure and zero-rated supplies.

The Council recommended allowing eligible capital goods ITC to be considered in these refund calculations for ITC availed on or after 1 April 2027.

Unlike the proposed treatment for input services, the capital goods credit would not be included entirely in the refund calculation in the month it is availed. Instead, the eligible amount would be spread over 60 months.

Why Is the 60-Month Period Important?

Capital goods are generally used over several years rather than consumed immediately. The proposed 60-month approach spreads the relevant credit across the period of use for refund-calculation purposes.

The official FAQ explains that the amount attributable to a month would be calculated at one-sixtieth of the eligible ITC, beginning with the month in which the credit is availed, subject to the prescribed formula and conditions.

For example, suppose a business avails ₹6 lakh of eligible ITC on qualifying capital goods on or after 1 April 2027.

The illustrative monthly portion would be:

₹6,00,000 ÷ 60 = ₹10,000 per month.

This is an illustration of the proposed allocation method, not a guarantee that the business will receive ₹10,000 every month. The actual refund depends on the applicable refund formula, eligibility, the relevant period and other prescribed adjustments.

The reform could be particularly relevant for businesses investing in machinery and production equipment because it may allow a portion of qualifying capital goods ITC to be considered in specified refund claims over time. 

Which Refund Categories Could Include Capital Goods ITC?

The recommendation covers two specified refund categories.

1. Refunds Relating to Zero-Rated Supplies

Zero-rated supplies include qualifying exports and specified supplies to Special Economic Zone units or developers, subject to the applicable legal conditions.

The proposed capital goods ITC treatment relates to eligible accumulated credit associated with zero-rated supplies made without payment of tax under a bond or Letter of Undertaking (LUT), under the relevant refund provisions.

The change is not intended to alter the treatment of zero-rated supplies made on payment of integrated tax in the same way. The official FAQ explains that the restriction on using capital goods ITC for payment of tax on such supplies does not apply in the same manner. Businesses should follow the refund route applicable to their transactions. 

2. Refunds Relating to an Inverted Duty Structure

The second category is the refund of accumulated eligible ITC arising from an inverted duty structure.

Under the proposed change, qualifying capital goods ITC could be included in the prescribed calculation, with the eligible amount spread over 60 months.

Businesses should not assume that all machinery purchases will automatically qualify. The credit must be legally admissible, the relevant date condition must be met, and any required reversals or adjustments must be taken into account.

Which Businesses Could Benefit From These Recommendations?

The proposed changes could be relevant to manufacturers, exporters and other businesses that accumulate eligible ITC under the specified refund categories.

Manufacturers using raw materials taxed at higher rates than their finished products may benefit from the proposed inclusion of eligible input service ITC where a qualifying inverted duty structure exists.

Businesses investing in qualifying machinery or other capital goods may be able to include a portion of eligible capital goods ITC in specified refund calculations from the proposed effective date.

Exporters making eligible zero-rated supplies without payment of tax under LUT or bond may also be affected by the proposed capital goods change.

The actual benefit will depend on the business's supply structure, GST rates, eligible ITC, relevant period and compliance history. It is therefore important to calculate the likely impact using the business's own records rather than relying on a general example.

What Credit Will Still Be Excluded?

The recommendations do not make all ITC refundable.

The official FAQ clarifies that only eligible ITC on capital goods can be included. Credit blocked under Section 17(5) of the CGST Act, or credit that is otherwise inadmissible, cannot form part of the refund claim.

Any ITC reversal required under the Act or Rules, including relevant reversals under Rule 43, must also be taken into account.

This means businesses should first determine whether the credit is legally available and then assess whether it can be included in the applicable refund formula.

A purchase invoice alone does not establish that the associated ITC is eligible for refund. Businesses should maintain records supporting the purchase, use of the asset or service, tax payment and relevant ITC treatment.

What Should Businesses Do Before Claiming a Refund?

Businesses can prepare for the proposed changes by reviewing their existing GST records and refund calculations.

First, identify whether the business qualifies for an inverted duty structure refund or a zero-rated supply refund. The two categories have different eligibility conditions and calculation methods.

Second, separate ITC on inputs, input services and capital goods in the accounting records. This will help identify which credit may be relevant to the proposed changes and when it was availed.

Third, verify the relevant dates. Input service ITC and capital goods ITC have different proposed eligibility dates. Earlier credit should not automatically be included on the assumption that the new treatment applies retrospectively.

Fourth, review blocked or otherwise ineligible credit and identify any required reversals. This is particularly important for capital goods because the proposed calculation may require adjustments over the relevant period.

Finally, monitor the applicable notifications and updated GST portal instructions. The final rules will determine how businesses calculate and submit claims after the recommendations are implemented.

For businesses in Delhi NCR, including Delhi, Noida and Ghaziabad, reviewing these records early can help make future refund applications more organised and reduce the risk of avoidable errors.

Common Mistakes to Avoid

One common mistake is assuming that a higher GST rate on input services automatically creates an inverted duty structure. The rate comparison between inputs and outward supplies remains essential.

Another mistake is claiming the entire capital goods ITC as refundable in the month of purchase. Under the recommendation, qualifying capital goods ITC would be spread over 60 months for the specified refund calculations.

Businesses should also avoid treating the proposed effective dates as permission to include all earlier credit. The Council recommended specific date conditions for input services and capital goods.

Finally, the proposed changes should not be confused with automatic approval of every refund claim. Businesses must continue to satisfy the relevant legal conditions and use the applicable calculation method.

Frequently Asked Questions

1. What is an inverted duty structure under GST?

An inverted duty structure generally arises when the GST rate on inputs is higher than the GST rate on outward supplies. Subject to the applicable conditions, eligible accumulated ITC may qualify for a refund.

2. What did the 57th GST Council recommend about input services?

The Council recommended including eligible ITC on input services in inverted duty structure refund calculations for ITC availed on or after 1 November 2026, subject to the required amendments and conditions.

3. When could capital goods ITC become eligible for these refunds?

The recommendation covers eligible capital goods ITC availed on or after 1 April 2027 for specified zero-rated supply and inverted duty structure refund calculations.

4. Why is capital goods ITC spread over 60 months?

The proposed method recognises that capital goods are used over an extended period. The eligible credit would be allocated in equal monthly portions for refund-calculation purposes, subject to the prescribed formula and conditions.

5. Can I claim an inverted duty structure refund if only my input services have a higher GST rate?

No. The official clarification states that the inverted duty structure must be established by comparing the tax rate on inputs with the rate on outward supplies. A higher rate on input services alone does not establish eligibility.

6. Will all capital goods ITC become refundable?

No. Only eligible ITC covered by the applicable refund provisions may be considered. Blocked or inadmissible credit and required reversals must be excluded or adjusted as prescribed.

7. Do these recommendations apply to all exporters?

The proposed capital goods treatment relates to specified zero-rated supply refunds, particularly qualifying supplies made without payment of tax under bond or LUT. The applicable refund route and conditions must be checked for each transaction.

8. Are the changes already in force?

The 57th GST Council recommended amendments to the CGST Act and Rules. Businesses should verify the relevant notifications and final provisions before applying the proposed treatment to refund claims.

How FilingSuvidha Can Help ?

Refund calculations involving inverted duty structure, input services and capital goods can require careful review of GST rates, invoice records, ITC eligibility and the relevant refund formula.

FilingSuvidha can help businesses understand GST refund requirements, organise supporting documentation and review the compliance steps relevant to their circumstances.

Our focus is on transparent pricing and on-time delivery.

Website: https://filingsuvidha.com/
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Disclaimer

This article is for general informational and educational purposes only. It discusses recommendations announced at the 57th GST Council Meeting held on 8 October 2026. Council recommendations should not be treated as implemented law unless the required amendments and notifications have taken effect. Refund eligibility depends on the applicable provisions, the nature of the supplies, the admissibility of ITC, the relevant period and other prescribed conditions. Verify the latest official GST guidance or consult a qualified tax professional before making a refund claim.