What is Inverted duty structure?

Why credit builds up

A business pays GST on what it buys and claims that tax back as input tax credit (ITC) against the GST on what it sells. When the inputs carry a higher GST rate than the finished product, the credit coming in is more than the tax going out. The extra credit piles up in the electronic credit ledger, which is cash the business has paid but cannot use.

For an ecommerce seller this is common where the finished product is taxed at a lower rate than its materials and packaging. The GST rate changes from 22 September 2025 corrected some long-standing inversions, such as in man-made textiles, but changed the rates on many other goods. Check every product's rate against its main inputs whenever rates change.

The refund

The law allows a refund of unutilised ITC where it builds up because the rate on inputs is higher than the rate on output supplies. Points to know:

• Only ITC on inputs (goods) counts, for now. The formula leaves out credit on input services, such as marketplace commission, advertising, courier and warehousing, and on capital goods. The Supreme Court upheld this in 2021. A seller whose excess credit comes mostly from services gets a much smaller refund than the ledger balance suggests. Changes are coming: see below.
• Same goods in and out do not qualify. If the input and the output are the same goods, the difference is not treated as an inverted duty structure, for example when a trader buys stock at one rate and the rate on the same goods is later cut.
• Some goods and services are notified as not eligible for this refund, even when their rates are inverted.
• Time limit. The claim is filed in Form RFD-01 on the GST portal within the time limit from the relevant date set by section 54, which is the due date of the GSTR-3B return for the period in which the claim arises. One claim can cover a single tax period or several successive ones, including periods in different financial years.
• Provisional refunds. Since 1 October 2025, claims filed on the portal are risk-assessed by the system, and most of the amount can be sanctioned provisionally within days. The rest follows after the officer's review.

The formula

Maximum refund = (turnover of inverted rated supplies × Net ITC ÷ adjusted total turnover) − (tax payable on inverted rated supplies × Net ITC ÷ ITC availed on inputs and input services)

• Net ITC is ITC on inputs claimed in the period, other than credit that has its own refund route. Once the change below is in force, it also includes ITC on input services availed on or after the date it takes effect.
• The second part of the formula was changed in July 2022, so that the tax on sales is treated as paid partly from credit on input services.
• Adjusted total turnover is the turnover in the state for the period, excluding exempt supplies other than zero-rated ones.

Changes recommended in October 2026

At its 57th meeting on 8 October 2026, the GST Council recommended widening the refund:

• Input services: ITC on input services availed from a future date to count towards the refund. Credit on services availed before that date would stay outside the formula.
• Capital goods: ITC on capital goods to be refunded too, spread over several years.

These are recommendations. They take effect only when the proviso to section 54(3) of the CGST Act and rule 89(5) of the CGST Rules are amended and notified, and the final wording may differ. For a period that spans the start date, the credit on input services will need to be split by the date it was availed.

Before you claim

1. Map each product's HSN code and rate against the HSN codes and rates of its inputs.
2. Split ITC into inputs, input services and capital goods in your books, because only the first counts today. Record the date each input service credit was availed too, so credit from the start date onwards can be identified if the recommended change is notified.
3. Reconcile the credit claimed with GSTR-2B and your purchase register.
4. Keep the invoices and a statement of the calculation ready. The officer may ask for them before sanctioning the refund.

The refund is a working-capital matter as much as a tax one. Credit stuck in the ledger lengthens the cash cycle, so it is worth claiming regularly, not once a year.