GST Refund on Capital Goods: What Has Been Recommended?
The 57th GST Council meeting, held on 8 October 2026, recommended changes to the GST refund mechanism to allow eligible Input Tax Credit (ITC) on capital goods to be considered in specified refund calculations.
Under the existing framework described in the Council's FAQ, ITC on capital goods is excluded from the Net ITC calculation for refunds of accumulated credit relating to zero-rated supplies and inverted duty structure.
The Council has recommended amending the relevant provisions to include eligible ITC on capital goods in these refund calculations, subject to a prescribed apportionment mechanism.
The proposed change is intended to reduce the blockage of working capital, particularly for businesses making substantial investments in plant, machinery and other capital assets.
Which GST Refund Categories Would Be Covered?
The proposed change would cover the following categories:
1. Refund on Zero-Rated Supplies
Eligible ITC on capital goods would be considered for refunds relating to zero-rated supplies made without payment of integrated tax under a bond or Letter of Undertaking (LUT), subject to Rule 89(4) and the applicable conditions.
This may benefit eligible exporters and other suppliers making qualifying zero-rated supplies.
The proposal does not change the treatment of zero-rated supplies made on payment of integrated tax, as explained in the Council's FAQ.
2. Refund Under Inverted Duty Structure
The proposed change would also allow eligible ITC on capital goods to be included in the Net ITC calculation for refunds under Rule 89(5) of the CGST Rules, 2017.
An inverted duty structure generally arises when the GST rate on inputs is higher than the GST rate on outward supplies, resulting in an accumulation of unutilised ITC.
The usual statutory eligibility conditions and restrictions would continue to apply.
When Would the Proposed Benefit Apply?
The Council recommended that the change apply to eligible ITC on capital goods availed on or after 1 April 2027.
This is a prospective proposal. It should not be interpreted as making all ITC on capital goods purchased before that date refundable.
The final legal amendments and applicable implementation instructions should be checked before filing a refund claim under the revised mechanism.
How Would the 60-Month Apportionment Work?
The Council's FAQ explains that capital goods are used over an extended period. Therefore, the proposed mechanism would consider eligible ITC on capital goods in equal proportions over 60 months, beginning with the month in which the ITC is availed.
This means one-sixtieth of the eligible ITC would be attributable to each month for the relevant refund calculation, subject to the prescribed formula and conditions.
Illustrative Example
Suppose a business purchases eligible machinery in April 2027 and avails ITC of ₹6,00,000 on that machinery.
For illustration, the monthly proportion under the proposed 60-month mechanism would be:
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Total eligible ITC: ₹6,00,000
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Apportionment period: 60 months
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Monthly proportion: ₹6,00,000 ÷ 60 = ₹10,000
Accordingly, ₹10,000 would represent one month's proportion of the eligible ITC for the relevant calculation.
Important: This is only an illustration of the apportionment method. It does not mean that ₹10,000 will automatically be refunded every month. The actual refund depends on the applicable refund formula, the relevant period, the nature of supplies and the taxpayer's eligibility.
Which Capital Goods ITC Would Be Eligible?
The proposal does not make every amount of ITC on capital goods refundable.
Only eligible ITC may be considered. The Council's FAQ clarifies that:
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ITC blocked under Section 17(5) of the CGST Act cannot be included.
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ITC that is otherwise inadmissible cannot be included.
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Required reversals under the CGST Act and Rules must be taken into account.
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Reversals attributable to the relevant period, including those under Rule 43 where applicable, must be deducted in accordance with the prescribed provisions.
Businesses should therefore review their capital goods register, ITC records and reversal calculations before preparing refund claims.
What Should Businesses Do Before April 2027?
Businesses likely to benefit from the proposed change should:
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Maintain a detailed register of capital goods and the ITC availed on each asset.
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Record the month in which the relevant ITC was availed.
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Separate eligible ITC from blocked or otherwise inadmissible credit.
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Track ITC reversals and adjustments relating to capital goods.
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Identify whether their outward supplies qualify for refunds under Rule 89(4) or Rule 89(5).
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Monitor the relevant notifications and amendments before applying the revised mechanism.
Conclusion
The GST Council has recommended a broader refund mechanism under which eligible ITC on capital goods may be included in refund calculations for zero-rated supplies made without payment of tax and for inverted duty structure.
The proposed mechanism would apply to eligible ITC availed on or after 1 April 2027, with the credit apportioned equally over 60 months.
If implemented as recommended, the change could improve working capital availability for eligible businesses with significant capital investments. However, the recommendation should not be treated as an implemented amendment until the relevant legal provisions and implementation instructions are confirmed.
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.