Inverted Duty Structure GST Refund
The inverted duty structure under GST is a situation where the GST rate on inputs (purchases) is higher than the GST rate on the output supply (sales or services provided). This mismatch creates a problem: the registered taxpayer pays GST at a higher rate on what it buys but collects GST at a lower rate on what it sells. The net effect is that Input Tax Credit (ITC) accumulates in the taxpayer's electronic credit ledger and cannot be fully utilised by being set off against the output GST liability — because the output GST is too low to absorb the input credit. This accumulated ITC is a blocked resource that affects working capital and business cash flow. To address this, Section 54(3) of the CGST Act, 2017 specifically allows a registered taxpayer to claim a GST refund of the accumulated ITC that builds up due to an inverted duty structure. Without this mechanism, the taxpayer effectively bears the excess GST on inputs as a permanent cost, reducing their margins and competitiveness.
N D Savla & Associates, Chartered Accountants in Mumbai, processes inverted duty structure GST refund claims for manufacturers, traders, and service providers whose input GST rates exceed their output GST rates. Our practice under Section 54(3) covers: identification of the inverted duty structure in the taxpayer's supply chain; computation of the eligible accumulated ITC using the Rule 89(5) formula; preparation and filing of Form RFD-01 on the GST portal at gst.gov.in; follow-up with the proper officer for RFD-04 (provisional refund) and RFD-06 (final refund order); and representation where refund claims are rejected or deficiency memos are issued. For other categories of GST refund, see our GST Refund Services guide.
What Is an Inverted Duty Structure?
An inverted duty structure exists when the GST rate applicable to the inputs (raw materials, components, or services procured) is higher than the GST rate applicable to the output supply made by the taxpayer. Common examples across Indian industries:
| Industry | Input / Raw Material (Higher GST Rate) | Output / Finished Product (Lower GST Rate) |
|---|
| Footwear | Leather, rubber soles, fabric, adhesives — 18% GST | Footwear priced up to Rs. 1,000 per pair — 5% GST |
| Textile / Apparel | Yarn, fabric, zips, buttons, dyes — 12% or 18% GST | Garments priced below Rs. 1,000 — 5% GST |
| Solar Energy | Steel structures, copper cables, inverters, batteries — 18% GST | Solar panels and photovoltaic modules — 12% GST |
| Fertilisers (certain) | Sulphur, phosphoric acid, natural gas (for urea) — 5–18% GST | Fertilisers (certain grades) — 5% GST |
| Construction (specific) | Steel, cement, tiles, fixtures — 18% or 28% GST | Affordable housing construction — 1% or 5% GST |
Legal Basis — Section 54(3) of the CGST Act and Rule 89(5)
Section 54(3) of the CGST Act, 2017 states that a registered person may claim a GST refund of accumulated ITC at the end of a tax period if the credit has accumulated on account of: (a) zero-rated supplies (exports); OR (b) the inverted duty structure — where the applicable rate of tax on inputs is higher than the rate of tax on output supplies. The refund of accumulated ITC under the inverted duty structure is governed by Rule 89(5) of the CGST Rules, 2017, which provides the formula for computing the maximum eligible refund amount:
Maximum GST Refund (Inverted Duty Structure) = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} MINUS {Tax payable on such inverted rated supply of goods and services}
- Net ITC: total ITC availed on inputs and input services during the tax period, EXCLUDING ITC availed on capital goods and ITC availed on inputs and input services used for making zero-rated supplies and exempt supplies
- Turnover of inverted rated supply of goods and services: the value of supplies made where the output GST rate is lower than the input GST rate
- Adjusted Total Turnover: total turnover in the state during the tax period, excluding the value of exempt supplies other than zero-rated supplies
- Tax payable on inverted rated supply: the output GST actually payable on the inverted duty structure supplies (which reduces the refund as these amounts can be set off)
?? Important: The Supreme Court in Union of India vs VKC Footsteps India Private Limited (2022) held that the Rule 89(5) formula for inverted duty structure GST refund is ONLY for ITC accumulated on INPUT GOODS and INPUT SERVICES — ITC on capital goods is expressly excluded from the accumulated ITC eligible for inverted duty structure refund under Section 54(3). This is an important limitation that affects the computation of the eligible GST refund.
Industries That Benefit Most from Inverted Duty Structure GST Refund Claims
Footwear and Leather Goods
The footwear sector in India has one of the most significant inverted duty structure exposures. Leather, synthetic uppers, rubber and EVA soles, metal eyelets, adhesives, and other components attract GST at 12–18%, while footwear priced at up to Rs. 1,000 per pair is taxed at only 5% (footwear above Rs. 1,000 is at 18%, which reduces the inverted duty structure problem for the premium segment). For footwear manufacturers producing the mass-market segment, the accumulated ITC from the inverted duty structure can be a very significant working capital drain. Monthly or quarterly GST refund claims under Section 54(3) are the primary mechanism to recover this accumulated ITC.
Textile and Apparel
The textile value chain has multiple stages where the inverted duty structure applies: at the garment manufacturing stage, where fabric (taxed at 5–12% depending on value) is converted into garments (taxed at 5% for value below Rs. 1,000), the GST paid on fabric inputs exceeds the GST collected on cheap garment output. The accumulated ITC from the inverted duty structure in the textile sector runs to substantial amounts for medium and large garment manufacturers. The GST refund under Section 54(3) provides periodic liquidity recovery for these businesses.
Filing a GST Refund Claim for Inverted Duty Structure — Form RFD-01
- File on the GST portal — navigate to Services ? Refunds ? Application for Refund ? Refund on account of ITC accumulated due to Inverted Tax Structure
- Filing frequency — monthly GST refund claims are allowed (each claim covers one tax period); the taxpayer does not have to wait for an annual refund
- Time limit — claims must be filed within 2 years from the relevant date (typically, within 2 years from the end of the financial year in which the claim arises)
- Documents required — Form RFD-01; statement of invoices (Statement 1 for IDS); details of Net ITC; CA certificate in some cases where the department requires it
- After filing RFD-01 — ARN generated; if in order, provisional refund in Form RFD-04 within 7 days; final refund order in Form RFD-06 within 60 days
- If deficiency found — officer issues RFD-03 (deficiency memo); the taxpayer must respond with the required clarification or additional documents
?? Note: GST refund under inverted duty structure is subject to the restriction that the refund shall not exceed the excess accumulated ITC over and above the accumulated ITC attributed to zero-rated supplies. If the taxpayer is also making zero-rated supplies (exports), the ITC attribution between the two categories must be carefully computed to avoid cross-contamination of GST refund claims.
GST Refund Rejection — Common Reasons and How to Avoid Them
- Mismatch between GSTR-2B and RFD-01: the ITC claimed in the inverted duty structure GST refund must be reflected in GSTR-2B. If suppliers have not filed their GSTR-1, the corresponding ITC does not appear in GSTR-2B and cannot be included in the claim
- Inclusion of capital goods ITC: the Rule 89(5) computation must exclude ITC on capital goods. Including capital goods ITC in the Net ITC figure inflates the claim and is the most common technical rejection ground
- Inverted duty structure not properly established: the proper officer may query whether the output supply genuinely has a lower GST rate than the inputs. The taxpayer must demonstrate the rate differential clearly with HSN codes for inputs and outputs
- Accumulated ITC already used for other set-offs: if the accumulated ITC has been partially used to pay output GST on other supplies, the Net ITC available for the claim is reduced correspondingly
Frequently Asked Questions — Inverted Duty Structure GST Refund
Can we claim the inverted duty structure GST refund every month?
Yes. Section 54(3) allows GST refund claims for accumulated ITC at the end of each tax period (i.e., each month for monthly filers). Monthly claims are permitted and recommended for businesses with significant accumulated ITC, as they help maintain cash flow rather than waiting for quarterly or annual claims. Each monthly claim covers the ITC accumulated in that specific month (subject to the Rule 89(5) formula).
Is ITC on capital goods included in the inverted duty structure GST refund?
No. The Supreme Court in the VKC Footsteps case (2022) and the CBIC's subsequent circular have both confirmed that ITC on capital goods is specifically excluded from the accumulated ITC eligible for the inverted duty structure GST refund under Section 54(3) read with Rule 89(5). Only ITC on input goods and input services (used for making the inverted duty structure supplies) is included in the Net ITC computation. Capital goods ITC is also excluded from the denominator computation.
Our services are also subject to an inverted duty structure. Can we claim GST refund?
GST refund under inverted duty structure for services was a contested issue. The Supreme Court's judgment in VKC Footsteps confirmed that inverted duty structure GST refund is available for both goods AND services (the Court upheld the inclusion of input services in the Net ITC computation for the Rule 89(5) formula). However, the exact scope for service-to-service inversions continues to be a subject of interpretation and litigation. Consult our
GST Consultancy Services practice for a specific assessment of your situation.