The Central Goods and Services Tax (CGST) (Amendment) Rules, 2026, have revised the framework for calculating refunds under the inverted duty structure, with eligible input services to be included in Net Input Tax Credit (ITC) from November 1, 2026. The changes could affect refund claims and working capital for businesses whose inputs attract higher GST rates than their outward supplies.
The amendments were notified through Notification No. 05/2026–Central Tax dated October 26, 2026. The revised provisions also provide for the inclusion of eligible capital goods credit from April 1, 2027, subject to the applicable conditions.
What is an inverted duty structure?
An inverted duty structure arises when the GST rate on inputs used in producing goods or services is higher than the rate applicable to the final supply. This can result in an accumulation of unutilised input tax credit because the tax paid on purchases exceeds the tax liability on sales.
For instance, a manufacturer may pay 18% GST on eligible inputs and input services but charge 5% GST on the finished product. The difference can lead to credit accumulation, tying up funds that could otherwise be used for business operations.
GST law allows refunds of eligible unutilised ITC in specified inverted-duty cases, subject to statutory restrictions and prescribed calculations.
What changes in the refund calculation?
Under the amended rules, eligible input services will be included in Net ITC for calculating inverted-duty refunds from November 1, 2026. The change could expand the credit base used in the formula for eligible businesses, although the actual refund will depend on the taxpayer’s input credit, turnover and tax liability.
GST inverted duty refunds: Key changes under the new rules
| Particulars | Existing framework | Amended provisions |
| Input services | Subject to the existing Net ITC calculation rules | Eligible input services included in Net ITC from November 1, 2026 |
| Capital goods | Credit treatment governed by existing refund provisions | Eligible capital goods credit included from April 1, 2027, subject to prescribed conditions |
| Refund calculation | Based on eligible Net ITC, turnover and tax payable | Formula continues, with changes to the eligible credit base |
| Refund formula | Inverted-rated supply turnover × Net ITC ÷ Adjusted total turnover – tax payable | Same broad formula, with Net ITC determined under the amended rules |
| Businesses affected | Eligible taxpayers facing an inverted duty structure | Eligible businesses that meet the revised conditions |
| Key action | Maintain eligible ITC and turnover records | Review credit classification, effective dates and refund calculations before filing |
The refund formula is based on the inverted-rated supply turnover multiplied by Net ITC, divided by adjusted total turnover, minus the tax payable on the inverted-rated supply.
Maximum refund = (Turnover of inverted-rated supply × Net ITC ÷ Adjusted total turnover) − Tax payable on inverted-rated supply
Net ITC will be determined in accordance with the amended rules and the applicable eligibility conditions. Businesses will need to distinguish between eligible input services and other expenses, ensuring that the credit claimed meets GST requirements.
Capital goods credit to follow from April 2027
The amendments provide for eligible input tax credit on capital goods to be included from April 1, 2027, subject to the prescribed provisions. This introduces a separate implementation timeline for businesses that invest in machinery, equipment and other qualifying assets.
The distinction between input services and capital goods is important because the two categories become relevant at different stages. Businesses should therefore review their accounting systems and refund calculations to ensure that credits are classified correctly and claimed only from the applicable effective dates.
What should businesses do now?
Manufacturers and other eligible taxpayers should assess how the revised calculation affects their potential refund claims, particularly where input services account for a substantial share of production or operating costs. They should also review tax invoices, input credit records and turnover calculations before filing claims under the amended provisions.
The changes could improve access to working capital for eligible businesses, but they do not mean that every taxpayer operating under an inverted duty structure will automatically receive a larger refund. Eligibility restrictions, documentation requirements and the prescribed formula will continue to apply.
Businesses should verify the final notified provisions and applicable conditions with a tax professional before revising refund claims or accounting practices.
