Amongst the recommendations, the proposal signaling the refund allowance of Input Tax Credit (‘ITC’) on account of input services and capital goods, under inverted duty structure (“IDS”) and zero-rated supplies, is one of the most taxpayer friendly advancements.
The intent to broaden the refund base is a welcome move, but it comes with some caveats. It is pertinent to note that the recommendations do not envisage upfront refund of the entire ITC on capital goods nor unrestricted refund of accumulated input service credits. Rather, the effort has been made to recalibrate the refund framework by enlarging the scope of credit basket for the refund computation and moderating the credit accumulation pain of the taxpayers, subject to the prescribed eligibility conditions.
The recommendation
| Credit Component |
Recommendations |
Relevant Date |
|
Input services
|
To be included in “Net ITC” for computing refund under the IDS in Rule 89(5).
|
ITC availed on or after 1 November 2026
|
|
Capital goods
|
To be included, to the extent attributable to the relevant period, in “Net ITC” for computing refund of zero-rated supplies made without payment under rule 89(4) AND under the IDS in Rule 89(5).
|
ITC availed on or after 1 April 2027
|
* For capital goods, the refund of eligible credit would be spread over 60 months, with 1/60th being attributed to each month beginning with the month in which the credit is availed. This is an attribution mechanism, and not a full refund of ITC availed on capital goods in the month of procurement.
The aforesaid recommendations are far more than procedural amendments. They address the substantial limitation embedded within the existing refund framework, which, since inception of GST, has resulted in accumulation of credits, adversely impacting the liquidity and increasing working capital requirements.
Existing statutory framework: The source of accumulation
Section 54(3) of the CGST Act permits refund of unutilised ITC in two principal situations: (i) zero-rated supplies made without payment of tax under a bond or Letter of Undertaking, and (ii) accumulation arising because the tax rate on inputs is higher than the rate on output supplies, commonly called an inverted duty structure (“IDS”).
GST law separately recognises “inputs” (i.e., goods other than capital goods)), “input services”, and “capital goods” (i.e., goods capitalised in the books). The refund under IDS cases has been confined to “inputs” only. In contract, the refund for zero-rated supplies made without payment of tax presently covers “inputs” and “input services” but excludes “capital goods”.
The exclusion of input services from IDS refunds has been subject to litigation since the inception of GST. Finally, the Hon’ble Supreme Court, in the case of Union of India v. VKC Footsteps India Pvt. Ltd. 1 , upheld the validity of Rule 89(5) and recognised the statutory distinction between input goods and input services. Further, the Apex Court declined to expand the refund entitlement through judicial interpretation.
Practically, while businesses were eligible to avail the credit of input services such as logistics, warehousing, maintenance, security, engineering, professional consultancy, and IT support as well as on capital assets such as laptops, equipment, plant and machinery and others, they were restricted from claiming the refund of such accumulated credits. This resulted in accumulating the ITC balances for extended periods and substantially impacted the cashflows. The Council’s recommendation seeks to address these two pockets of accumulation.
Input service ITC joins the refund pool, but not the source of inversion under IDS refund
Many businesses may incur input services taxable at a rate higher than the rate applicable to their outward supplies, resulting in accumulation of ITC. However, such a rate differential, by itself, would not qualify as an inverted duty structure for refund purposes. The FAQ issued following the 57th GST Council clarifies that IDS shall continue to be determined by comparing the rate of tax on inputs (i.e. goods, and not input services) with the rate of tax on output supplies only.
The following illustrations clearly demonstrate the distinction:
Scenario 1: A manufacturing company procures inputs taxed at 18% and makes output supplies taxed at 5%. They also avail ITC on input services such as consulting or professional services taxed at 18%. As the rate of tax on inputs is higher than the rate of tax on output supplies, inverted duty structure exists. ITC on input services availed on or after 1 st November, 2026 shall be included in "Net ITC" for computation of refund.
Scenario 2: A company procures inputs taxed at 5% and makes output supplies taxed at 5%, but avails input services taxed at 18%. As there is no inversion between the rate of tax on inputs and the rate of tax on output supplies, the supplier is not eligible for refund on account of inverted duty structure merely because the rate of tax on input services is higher.
From the above illustrations and the FAQs, it is clear that the scope of credit pool has been enlarged but the eligibility criteria for IDS remain the same. This distinction is particularly relevant for service-intensive businesses, where credit accumulation is driven largely by input services rather than by rate inversion on inputs.
Capital goods ITC joins the refund pool but the fine print will be crucial
The proposed inclusion of capital goods credit in the refund framework is a significant development for the capital-intensive industries. Under the existing framework, the credit remained accumulated at substantial levels, even though the underlying supplies were zero-rated without payment of tax or subject to inverted duty structure. The proposed attribution mechanism over a period of 60 months (i.e. 5 years) appears to be aligned with the statutorily recognised useful life considered in the GST law for capital goods.
Further, it is worth noting from compliance perspective, that its implementation is likely to necessitate robust tracking and documentation at the asset level, including credit availment, eligible credit, reversals made under Rule 43 and the attributable portion for each period.
Further, it is pertinent to mention that the said recommendation does not alter the refund mechanism already in place for zero-rated supplies made “with payment of Integrated Tax” wherein there is no restriction on ITC relating to capital goods.
Key questions awaiting legislative and procedural clarifications
The recommendations are yet to be notified, and businesses will be able to realise the intended benefits only once the changes are brought into effect. However, certain questions/ points still remain unanswered, specifically for the transitional phase and further clarity from the government would be useful on the following aspects:
- How will opening balances and credits availed around the cut-off dates be identified and treated?
- Will eligibility be linked to the date of invoice, receipt of supply, availment of ITC, capitalisation of goods or the relevant refund period?
- In case of an IDS refund, will invoice-level or document-level tagging be required for each input service?
- What will be the operational mechanism for 60 month attribution where the capital goods are sold, transferred, written off, or subjected to reversal under Rule 43?
- Will the revised forms and system validations permit the correction of bona fide classification or attribution errors?
Our take
The Council’s step genuinely addresses the long-standing issue and marks a paradigm shift under refund framework, but its real impact will lie in fine print of the amended provisions, refund formula and IT processes, without inviting any new legal ramifications for the taxpayers.
Since the changes are not yet notified, businesses must continue to file refund claims as per the current methodology. However, going forward, they should nevertheless put in place systems to identify the eligible input services credit and maintain capital goods credit records. They may also plan the procurement of major capital goods and input services in line with the proposed effective dates, wherever commercially possible.
Overall, this proposed refund-related recommendations coupled with other recommendations of the 57th Council Meeting truly reflects the intent to move towards a seamless credit flow through the robust use of technology, increasing reliance on the taxpayer filings, and greater standardisation of filings and processes.
Sachin Jain, Executive Director, Grant Thornton Bharat, Aamir Zarif, Manager, Grant Thornton Bharat and Jay Jain, Consultant, Grant Thornton Bharat, have also contributed to this article.
This article first appeared in the Taxmann on 14 October 2026.
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