ITC Refund on Input Services and Capital Goods: What Changes for Sellers

A seller who pays 18% GST on Amazon logistics fees, referral fees and sponsored ad spend, but sells goods at 5% GST, has been sitting on input tax credit that the refund formula simply refused to count. That is about to change, but only for credit availed from 1 November 2026 onward, not for what is already stuck in the electronic credit ledger.

Key takeaways

• Rule 89 of the CGST Rules, 2017 currently excludes ITC on input services entirely, and ITC on capital goods entirely, when computing the refund of unutilised credit under the inverted duty structure.
• The GST Council has recommended including ITC on input services availed on or after 1 November 2026 in the "Net ITC" used for this refund, as stated in the Press Information Bureau FAQ dated 9 October 2026.
• ITC on capital goods availed on or after 1 April 2027 will also be included, but spread over sixty months at one-sixtieth per month, and for both the zero-rated supply refund and the inverted duty structure refund.
• The change is prospective. ITC already accumulated before these dates is not covered and will continue to be governed by the existing formula.
• Inverted duty structure continues to be tested only by comparing the input goods rate against the output goods rate. A higher rate on input services alone does not, by itself, create eligibility.

Why this matters to ecommerce sellers specifically

Most multi-channel sellers on Amazon and Flipkart pay GST at 18% on a cluster of platform charges: referral fee, closing fee, weight handling or fulfilment fee, and advertising spend on sponsored products. For a seller whose finished goods attract 5% GST, or even 18% where the inputs used are taxed higher, these platform charges are frequently among the largest input service costs in the business, often larger than raw material cost for private label sellers running heavy ad spend to compete on search rank.

Under the formula that has applied since Rule 89(5) was substituted with effect from 18 April 2018, "Net ITC" for an inverted duty structure refund meant ITC availed on inputs only. Input services were carved out of the definition entirely. A seller could be paying lakhs of rupees in GST on Amazon fees every quarter, see that credit sit correctly in GSTR-2B, and still have no route to get it back as cash, because the refund formula did not recognise it as part of Net ITC in the first place. The credit did not vanish. It accumulated in the electronic credit ledger, available only to offset future output tax liability, which for a business already structurally short on output tax (because the output rate is lower than the input rate) meant it simply kept growing.

This is not a new complaint. In Union of India v. VKC Footsteps India Pvt. Ltd., decided on 13 September 2021, the Supreme Court upheld the formula in Rule 89(5) as constitutionally valid but also observed that the exclusion of input services produced an anomaly, and that the GST Council had the authority to revisit the formula if it considered the policy unsatisfactory. That observation has sat unaddressed for roughly five years. The recommendation reported in the PIB FAQ of 9 October 2026 is the first concrete move toward correcting it.

What exactly has been recommended

The PIB FAQ, published by the Research Unit of the Press Information Bureau on 9 October 2026 under the title "Frequently Asked Questions (FAQs) on refund of ITC accumulated on account of inward supply of input services and capital goods," sets out two changes recommended by the GST Council.

Input services. ITC availed on input services on or after 1 November 2026 will be included in Net ITC for the purpose of computing refund on account of inverted duty structure under Rule 89(5) of the CGST Rules, 2017.

Capital goods. ITC availed on capital goods on or after 1 April 2027, to the extent attributable to the relevant refund period, will be included in Net ITC for both the zero-rated supply refund under Rule 89(4) and the inverted duty structure refund under Rule 89(5).

Both dates matter and they are different. A seller cannot assume capital goods ITC becomes refundable from the same date as input services ITC.

As of the date this article was written, the change is a Council recommendation reported through a PIB FAQ, not yet a notified amendment to the CGST Rules. A formal notification amending Rule 89 should follow before 1 November 2026 for the input services change to take legal effect on that date. Sellers should track CBIC's gazette notifications directly rather than treating the FAQ alone as the operative legal text.

Capital goods: why sixty months, and why it is not a one-time refund

Capital goods are used over an extended life, so the FAQ clarifies that ITC on capital goods will not be refunded in full in the month it is availed. It will be considered for refund in equal monthly instalments of one-sixtieth, spread over sixty months starting from the month the credit is availed. "Capital goods attributable to the relevant period" means capital goods on which ITC was availed on or after 1 April 2027, in any month not earlier than fifty-nine months before the last month of the refund period being claimed.

Two further restrictions apply. ITC blocked under the provision governing ineligible credit, commonly referenced as Section 17(5) of the CGST Act, 2017, cannot be claimed as part of this refund regardless of the capital goods involved. And any reversal required for the relevant months, including reversal under Rule 43 of the CGST Rules, 2017 for capital goods used partly for exempt supplies, must be deducted before arriving at the refundable amount.

The inversion test does not change

This is the part sellers are most likely to misread, so it deserves a plain statement. Whether an inverted duty structure exists at all continues to be decided purely by comparing the GST rate on inputs (goods) against the GST rate on output supplies. A higher rate on input services does not, on its own, create an inverted duty structure. The FAQ illustrates this with two scenarios.

In the first, a manufacturer buys inputs taxed at 18% and sells output taxed at 5%, while also paying 18% GST on professional services. Because the input goods rate exceeds the output rate, inversion exists, and from 1 November 2026 the ITC on those professional services can be folded into Net ITC for the refund calculation.

In the second, a supplier buys inputs taxed at 5% and sells output also taxed at 5%, but pays 18% GST on input services. There is no inversion between input and output goods rates here, so no refund arises under this provision, even though the input services carry a higher rate than the output supply. The FAQ states explicitly that the amendment does not expand who is eligible for refund under the relevant proviso to Section 54(3) of the CGST Act, 2017; it only changes what counts once eligibility is already established.

A worked example

Consider a private label seller on Amazon selling a product that attracts 5% GST. In a given month, taxable turnover is ₹20,00,000, generating output tax of ₹1,00,000. Raw material purchases taxed at 18% generate input ITC of ₹1,20,000. Amazon platform charges, referral fee, fulfilment and logistics fee and sponsored ad spend, taxable value ₹3,00,000, taxed at 18%, generate input service ITC of ₹54,000.

Under the present formula, Net ITC for the Rule 89(5) refund computation is ₹1,20,000. The ₹54,000 paid on Amazon fees sits in the credit ledger but plays no role in the refund calculation.

For ITC availed from 1 November 2026, Net ITC becomes ₹1,20,000 plus ₹54,000, that is ₹1,74,000. Applying the standard Rule 89(5) formula, where the maximum refund amount equals turnover of inverted rated supply multiplied by Net ITC divided by adjusted total turnover, minus tax payable on the inverted rated supply, a higher Net ITC base directly increases the refund ceiling. The precise refund figure still depends on adjusted total turnover and tax payable for that period, so sellers should run this through their own numbers rather than apply the ₹54,000 figure mechanically.

What to actually do

Sellers carrying significant ad spend and logistics fees on marketplaces should start separating input service ITC from input goods ITC in their monthly reconciliation now, rather than waiting until November 2026. Reconcile every month's Amazon or Flipkart tax invoice against GSTR-2B line by line, since platform-issued invoices sometimes post with a lag that affects which month's credit a seller can rely on. Keep a clean month-wise register of capital goods additions and the GST paid on them, because the sixty-month attribution calculation from April 2027 will require that history. Most importantly, do not assume credit already sitting in the ledger before these cut-off dates becomes refundable under this change; it does not, under the FAQ as published.

Where this is unsettled

The source for everything above is a PIB FAQ, which explains a Council recommendation. It is not itself the amended Rule 89 text. Until CBIC issues the formal notification, the exact drafting, including how "attributable to the relevant period" will be computed in the amended rule and whether any transitional provision will be added for credit availed just before the cut-off dates, is not finally settled. Sellers should treat the dates and mechanics above as the direction of travel confirmed by the GST Council, and confirm the final rule text once notified before filing a refund claim relying on it.

FAQ

Will my ITC on Amazon fees from last year now become refundable? No. Only ITC on input services availed on or after 1 November 2026 is included in Net ITC for the inverted duty structure refund. Credit availed before that date continues under the existing Rule 89(5) formula, which excludes input services.

Does paying 18% GST on ad spend automatically mean I qualify for a refund? No. Eligibility depends on comparing the GST rate on your input goods against the rate on your output goods. If there is no inversion there, a higher rate on input services alone does not create refund eligibility.

When can capital goods ITC be claimed as refund? ITC on capital goods availed on or after 1 April 2027 can be included, but only one-sixtieth of it per month over sixty months, and only to the extent attributable to the refund period being claimed.

Is this change already in force as on 16 October 2026? No. It is a GST Council recommendation reported through a Press Information Bureau FAQ dated 9 October 2026. The input services change is stated to take effect for credit availed from 1 November 2026, subject to a formal notification amending Rule 89 of the CGST Rules, 2017.

Does this affect export refunds too? Capital goods ITC will also be included in the refund for zero-rated supplies made under bond or letter of undertaking, under Rule 89(4), from 1 April 2027. It does not affect zero-rated supplies made on payment of integrated tax, since there is no restriction on using capital goods ITC against that tax.

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This post is for general information and does not constitute professional advice. It reflects the position of law as on 16 October 2026 and may not account for subsequent amendments, notifications or judicial developments. Tax and regulatory outcomes depend on the specific facts of each case. Readers should obtain advice appropriate to their own circumstances before acting on anything stated here.