In India’s GST system, an inverted duty structure occurs when the tax rate on a business’s inputs is higher than the rate on its taxable output supplies. The business may build up input tax credit (ITC) faster than it can use that credit to offset output tax. The balance is a tax asset, but it is not cash available to pay wages, suppliers or other bills. Some qualifying unutilized ITC may be refundable, but eligibility rules, exclusions, a formula and claim processing determine how much can be recovered and when.
How the rate mismatch ties up cash
A business generally pays GST on purchases and may claim eligible input tax credit against GST due on its taxable sales. If the tax rate on relevant inputs is higher than the rate on the output supply, the business can incur more input tax than it collects as output tax. After available ITC is set off against output liability, a balance may remain unused.
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That balance sits in the GST credit ledger rather than in the business’s bank account. The business has already paid tax to suppliers, but until it can use the credit or receives an approved refund, it cannot use that same money for ordinary operating needs. That is the working-capital effect: cash has gone out, while the corresponding tax value remains tied up as credit.
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The effect depends on the business’s actual rates, purchase and sales mix, output tax liability, eligible credits and claim circumstances. An inverted rate relationship can create an accumulation, but it does not by itself establish that a business is entitled to a cash refund or that the entire ledger balance will be returned.
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- The business buys inputs and pays GST to suppliers.
- It makes taxable output supplies at a lower applicable rate and incurs output tax liability.
- It uses available ITC to offset that liability, subject to the applicable GST rules.
- If eligible input credit remains unutilized because of the inversion, the business may explore a refund under the GST provisions.
The potential refund is a route to release some tied-up cash, not an automatic conversion of every unused credit balance into money.
What qualifies as an inverted-duty refund
Section 54(3) of India’s Central GST framework provides a refund route for qualifying unutilized ITC accumulated because the tax rate on inputs is higher than the rate on output supplies, subject to the governing rules and notifications. The GST Council’s explanatory material describes the refund as addressing credit that remains after available ITC has been set off against output tax liability.
Three separate questions matter: whether the relevant supplies and credits fall within the route, how the maximum refund is calculated for the claim period, and whether the claim is approved and paid. An accumulated balance alone answers none of these questions. Classification, applicable notifications, the claim period and the facts presented with a claim can affect the result.
Credits that are outside this calculation
For the inverted-duty refund route, input services and capital goods are outside the calculation described in the GST Council materials. The current formula reproduced in the Telangana Commercial Taxes Department’s January 2026 handbook defines Net ITC for this purpose as ITC availed on inputs during the relevant period. A business should therefore not assume that all credit shown in its ledger is included in Net ITC for this calculation.
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There is also a restriction effective from 18 July 2022 for specified goods falling under Chapters 15 and 27. The restriction applies to the specified goods identified by the relevant notification, not automatically to every product classified in either chapter. Product classification and the notification applicable to the claim period need to be checked before treating a credit as refundable.
How the Rule 89(5) maximum refund is calculated
The Telangana Commercial Taxes Department’s third-edition Handbook on Refunds under GST, dated January 2026, reproduces this amended Rule 89(5) formula:
Maximum Refund Amount = [(Turnover of inverted-rated supplies of goods and services × Net ITC) ÷ Adjusted Total Turnover] − [Tax payable on those inverted-rated supplies × (Net ITC ÷ ITC availed on inputs and input services)]
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In this formula, Net ITC means the input tax credit availed on inputs during the relevant period. “Adjusted Total Turnover” and “relevant period” have the meanings assigned under Rule 89(4). The second part of the formula adjusts the result for tax payable on the inverted-rated supplies; it is not simply a refund of all ITC attributable to purchases.
The formula is a maximum calculation, not a promise that the calculated amount will be sanctioned. Eligibility restrictions and the claim’s facts still matter. Because rules and notifications can change, the January 2026 handbook is a useful statement of the formula it reproduces, but a live claim should be checked against the rules and notifications applicable to that claim period.
Why the formula is not simply “input tax minus output tax”
The formula uses turnover of inverted-rated supplies, Net ITC, adjusted total turnover and an adjustment linked to tax payable. It also distinguishes Net ITC on inputs from the broader denominator of ITC availed on inputs and input services. A business therefore needs the relevant-period figures in the categories used by the rule; subtracting total output tax from the full credit-ledger balance will not reproduce the statutory calculation.
The practical implication is that a credit balance can be larger than the amount eligible under the formula. Some ledger credit may not be part of Net ITC for this purpose, and the formula’s turnover and tax adjustments may reduce the maximum further.
Official example: why an inversion does not return every rupee of credit
A GST Council agenda note from 2018 illustrates the calculation with input A taxed at 5%, input B taxed at 18% and output Y taxed at 12%. For ₹3,000 of output turnover, the example assumes purchases of ₹500 of A and ₹2,000 of B. The resulting Net ITC is ₹385: ₹25 on A and ₹360 on B. After subtracting ₹360 of output tax, the Council’s example arrives at a maximum refund of ₹25.
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This is the Council’s illustrative example, not a typical result or a guaranteed refund. It shows why the presence of a higher-rate input does not mean all input tax is refunded: the calculation accounts for the relevant turnover, credit and output-tax figures. A business’s own answer will depend on its actual claim-period data and applicable rules.
Which rules changed, and when
Claim dates matter because the formula and restrictions did not take effect for all applications at the same time. CBIC Circular 181/13/2022-GST explains the prospective application of the 2022 changes.
| Issue | Effective date or application rule | What it means for a claim |
|---|---|---|
| Amended Rule 89(5) formula under Notification 14/2022-Central Tax | Applications filed on or after 5 July 2022 | Applications filed before 5 July 2022 were to be handled under the preceding formula; the amended formula applies prospectively to applications filed from that date. |
| Restriction for specified goods in Chapters 15 and 27 | Prospective from 18 July 2022 | Check whether the goods are among those specified in the relevant notification. The restriction is not a blanket exclusion of every good in those chapters. |
These dates concern the application of the cited changes; they do not resolve every eligibility question for an individual claim. The relevant supply, product classification, claim period and notification still need to be assessed together.
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A written answer to Rajya Sabha Starred Question No. 25, dated 2 December 2025, reported a further development. It said the GST Council’s 56th meeting, held on 3 September 2025, recommended an amendment to provide a provisional refund of 90% for inverted-duty claims. Pending the required Central and State GST Act amendments, the answer said CBIC had issued instructions to field formations for risk-based provisional refunds of 90% from 1 October 2025.
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This is the status reported in that parliamentary answer, not a statement that the Council recommendation itself amended the Acts or that every claim automatically receives 90% provisionally. The answer describes the measure as intended to ensure working capital is not blocked for businesses with input rates above output rates. For a current or proposed claim, check the instructions and implementation applicable to the taxpayer and filing date.
The same answer stated: “The Council has not recommended any blockage of input tax credit on supply of goods.” That statement is policy context; it does not replace the eligibility rules, calculation or claim process for a particular refund.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.How a business can assess whether credit is tied up
A useful first assessment separates the commercial cash-flow question from the tax-refund question. The first is whether the business is paying more GST on its input mix than it owes on its output supplies over the relevant periods. The second is whether any resulting unused credit falls within the statutory refund route and what maximum the Rule 89(5) calculation produces.
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- Map the rate relationship. Identify the taxable output supplies at issue and the rates applicable to them, then compare those with the rates on the business’s inputs. Do not infer an inversion solely from a large ledger balance.
- Separate credit categories. Distinguish input credits from input-service and capital-goods credits for this calculation, and check whether a specified-goods restriction applies to any relevant goods.
- Fix the claim period and filing date. The applicable version of the formula can depend on when the application was filed, and restrictions may have prospective effective dates.
- Assemble the formula inputs. The calculation requires turnover of inverted-rated supplies, Net ITC on inputs for the relevant period, adjusted total turnover, tax payable on those supplies and ITC availed on inputs and input services.
- Check current rules and instructions. Confirm the rules, notifications, product classification and any provisional-refund instructions that apply to the actual claim. A published formula or policy statement does not establish an individual entitlement.
This is a screening framework, not a claim filing checklist or a determination of eligibility. Businesses with mixed supplies, complex classifications or multiple claim periods may need tax advice to validate the underlying figures and applicable rules.
What the blocked-working-capital description does—and does not—mean
“Blocked working capital” describes the cash-flow consequence of paying tax on purchases while the resulting credit remains unused. It does not mean the credit has necessarily been denied, nor does it mean that the government has permanently blocked all ITC on goods. Conversely, describing ITC as an asset does not mean it can be spent like cash or that a refund will be paid in full.
The official sources cited here explain the refund mechanism and provide an illustrative calculation, but they do not establish an economy-wide total for working capital tied up by inverted duty structures. The Council’s ₹25 example is a rules illustration, and the 90% figure in the 2025 parliamentary answer concerns a reported provisional-refund measure; neither should be used as an estimate of aggregate business impact.
For a particular business, the useful number is not simply the total unused credit. It is the eligible maximum under the applicable rule, assessed against the claim-period facts and then distinguished from any amount that has actually been approved or paid.
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Sources for checking the applicable framework
- Telangana Commercial Taxes Department, Handbook on Refunds under GST, third edition, January 2026: formula and definitions.
- CBIC, Circular 181/13/2022-GST, 10 November 2022: application dates for the amended formula and specified-goods restriction.
- GST Council, Detailed Agenda Note – 31st GSTCM, Volume 3, 2018: explanation of the refund route and the worked example.
- Ministry of Finance / Rajya Sabha, answer to Starred Question No. 25, 2 December 2025: reported provisional-refund instructions and policy context.
- CBIC refund rules page: procedural context; current Rule 89(5) details should be checked against the amended handbook and applicable notifications.
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