GST Refund on Input Services: What Has Been Recommended?
The 57th GST Council meeting, held on 8 October 2026, recommended an important change in the calculation of refunds of accumulated Input Tax Credit (ITC) under the inverted duty structure.
Under the existing framework described in the Council's FAQ, ITC on input services is excluded from the “Net ITC” calculation for refunds claimed under Rule 89(5) of the CGST Rules, 2017.
The Council has recommended amending the relevant provisions to include eligible ITC on input services in the Net ITC calculation for inverted duty structure refunds.
The proposed change is intended to reduce the accumulation of unutilised ITC and ease working capital pressure on eligible businesses.
What Is an Inverted Duty Structure?
An inverted duty structure arises where the rate of GST on inputs is higher than the rate of GST on the outward supplies made by a taxpayer.
For example, a manufacturer may purchase raw materials taxable at 18% GST but sell finished goods taxable at 5% GST.
As a result, the ITC accumulated on purchases may exceed the GST payable on outward supplies, leading to a build-up of unutilised credit.
Subject to the conditions prescribed under Section 54(3) of the CGST Act and Rule 89(5) of the CGST Rules, a taxpayer may claim a refund of eligible accumulated ITC arising from such an inverted duty structure.
What Is the Proposed Change in Rule 89(5)?
The GST Council recommended amending Rule 89(5) of the CGST Rules, 2017, to include eligible ITC on input services in the Net ITC calculation for inverted duty structure refunds.
The proposed change is expected to benefit businesses that incur GST on services such as professional fees, consultancy, accounting, technical services and other business-related services, where the ITC is otherwise eligible under GST law.
Proposed Applicability Date
The Council recommended that the benefit be available in respect of ITC on input services availed on or after 1 November 2026.
The recommendation does not mean that all accumulated ITC on input services from earlier periods automatically becomes refundable. The relevant date, eligibility conditions and final legal provisions must be considered.
Example: How Could the Proposed Change Benefit a Manufacturer?
Consider the following illustrative example:
| Particulars | GST rate |
|---|---|
| Raw materials purchased | 18% |
| Finished goods sold | 5% |
| Professional services received | 18% |
In this example, the manufacturer purchases raw materials taxed at 18% and sells finished goods taxed at 5%. The rate on inputs is higher than the rate on outward supplies, establishing an inverted duty structure, subject to the applicable legal requirements.
Under the proposed change, eligible ITC on input services availed on or after 1 November 2026 may also be included in the Net ITC calculation for the refund.
This may increase the refund amount available to an eligible taxpayer, depending on the applicable formula and the amount of eligible ITC.
The example is illustrative only. The actual refund must be calculated in accordance with the applicable provisions and prescribed formula.
Important Clarification: Higher GST on Input Services Alone Is Not Enough
The GST Council FAQ specifically clarifies that an inverted duty structure will continue to be determined by comparing the GST rate on inputs with the GST rate on outward supplies.
A taxpayer cannot claim an inverted duty structure refund merely because the GST rate on input services is higher than the rate on outward supplies.
For example, if a business purchases inputs taxed at 5% and sells goods taxed at 5%, it does not become eligible for an inverted duty structure refund merely because it receives professional services taxed at 18%.
The proposed inclusion of input services in Net ITC does not remove the requirement to establish an eligible inverted duty structure.
Who May Benefit from This Proposed Change?
The proposed change may be relevant to eligible manufacturers and other taxpayers who:
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Make outward supplies taxable at a lower rate than their inputs.
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Accumulate unutilised ITC because of an inverted duty structure.
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Incur GST on eligible input services.
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Meet the conditions prescribed for claiming a refund under Section 54(3) of the CGST Act and Rule 89(5) of the CGST Rules.
The actual benefit will depend on the taxpayer's business transactions, the applicable GST rates, eligible ITC and the final provisions governing the refund.
What Should Taxpayers Do Now?
Businesses expecting to benefit from the proposed change should review their GST records and prepare for the revised refund calculation.
They should:
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Maintain separate and accurate records of ITC on inputs and input services.
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Identify the ITC availed on input services on or after 1 November 2026.
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Verify whether the outward supplies qualify for an inverted duty structure refund.
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Check ITC eligibility and ensure that blocked or otherwise ineligible credit is excluded.
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Maintain invoices and supporting documents for input services.
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Monitor the relevant notifications and amendments to Section 54(3) and Rule 89(5) before filing refund claims under the revised mechanism.
Conclusion
The GST Council has recommended including eligible ITC on input services in the Net ITC calculation for inverted duty structure refunds under Rule 89(5) of the CGST Rules, 2017.
If implemented as recommended, the change may help eligible businesses recover a portion of accumulated ITC that is currently excluded from this refund calculation, thereby improving working capital availability.
However, the recommendation should not be treated as an implemented amendment without confirmation of the relevant legal provisions. Taxpayers should verify the applicable notification and implementation date before relying on the proposed benefit.
Source: Ministry of Finance, Government of India — FAQs on refund of ITC accumulated on account of inward supply of input services and capital goods, published on 9 October 2026.