Connect with us 
Under the Goods and Serxlvices Tax (GST) framework, registered taxpayers pay tax on their purchases (inputs) and offset that against the tax collected on their sales (output). This mechanism — known as the Input Tax Credit (ITC) chain — is designed to eliminate the cascading effect of taxes across the supply chain. However, there are situations where the credit paid on inputs consistently exceeds the output tax liability, leading to an accumulation of unutilized ITC in the taxpayer’s Electronic Credit Ledger.
The CGST Act, 2017 recognizes this situation and provides a statutory mechanism under Section 54(3) for claiming a refund of such accumulated, unutilized ITC. This article provides a structured overview of the eligibility conditions, applicable formulas, documentation requirements, the step-by-step refund process, and the key legislative updates that are relevant as of 2026.
When can you claim a refund of unutilized ITC?
Section 54(3) of the CGST Act, 2017 permits a registered person to claim a refund of unutilized ITC at the end of any tax period. However, this right is available only in two specific circumstances:
1. Zero-Rated Supplies Made Without Payment of Tax
Exports of goods and services, and supplies to Special Economic Zones (SEZs), are classified as “zero-rated supplies” under Section 16 of the IGST Act, 2017. Since no output GST is charged on such supplies, the ITC paid on inputs cannot be offset and accumulates over time.
Under Section 16(3) of the IGST Act, a registered person making zero-rated supplies may choose either of the following options:
- Supply under Bond or Letter of Undertaking (LUT) without payment of IGST:
The registered person exports or supplies to an SEZ without paying Integrated Tax, and thereafter claims a refund of the accumulated unutilized ITC. This route is governed by Rule 89(4) of the CGST Rules, 2017, read with Rule 96A (which prescribes the LUT/bond mechanism via Form GST RFD-11). - Supply with payment of IGST:
The registered person pays IGST on the export or SEZ supply and subsequently claims a refund of the IGST so paid. This route is governed by Rule 96 of the CGST Rules, 2017.
Both categories of refund are claimed under Section 54 of the CGST Act, 2017. Most exporters prefer Option A as it avoids upfront tax outflow and preserves working capital.
Important (FY 2026-27): The Letter of Undertaking filed for FY 2025-26 expired on 31st March 2026. A fresh LUT must be filed in Form GST RFD-11 on the GST portal before raising the first export invoice for FY 2026-27. Failure to do so requires payment of IGST on exports, which can then only be recovered through a subsequent refund — resulting in avoidable cash flow blockage.
2. Inverted Duty Structure
An inverted duty structure arises where the rate of GST applicable on inputs is higher than the rate applicable on the output supplies. This is expressly provided for under clause (ii) of the proviso to Section 54(3) of the CGST Act, 2017.
For instance, a manufacturer purchasing raw materials at 18% GST but selling finished goods at 5% GST will continuously accumulate ITC that cannot be fully utilized. The law permits a refund of such accumulated ITC under Section 54(3) read with Rule 89(5) of the CGST Rules, 2017.
Important statutory exclusions for inverted duty refunds:
- Construction services [as specified under Item 5(b) of Schedule II of the CGST Act] are excluded from refund eligibility, as notified vide Notification No. 15/2017-Central Tax (Rate) dated 28th June 2017.
- Certain notified goods are also excluded, as listed in Notification No. 5/2017-Central Tax (Rate) dated 28th June 2017.
- Refund is not available on nil-rated or wholly exempt supplies.
When is a Refund of GST not allowed?
Even where the above conditions are satisfied, a refund of unutilized ITC is specifically not permitted in the following circumstances:
– Where the goods exported out of India are subject to export duty;
– Where the supplier has availed duty drawback in respect of central tax on the same supply; or
– Where the supplier has already claimed a refund of IGST paid on the same supply.
How Is the Refund Amount Calculated?
Formula for Zero-Rated Supplies [Rule 89(4)]
For refund claims on account of zero-rated supplies (Option A — Without payment of IGST), the maximum refund is determined as follows:
Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover, where:
- “Refund amount” means the maximum refund that is allowable;
- “Net ITC” means ITC availed on inputs and input services during the relevant period (excluding ITC on capital goods and ITC availed for which separate refund claims have been made);
- “Turnover of zero-rated supply of goods” means Value of zero-rated goods supplied without payment of IGST under LUT/bond during the relevant period;
- “Turnover of zero-rated supply of services” means Payments received for zero-rated services during the relevant period, including the completed supplies for which advances were received earlier, reduced by advances for services not yet completed;
- Adjusted Total Turnover means Total turnover in the state/UT (as defined under Section 2(112) of CGST Act), excluding value of exempt supplies other than zero-rated supplies, during the relevant period;
- Relevant Period means The tax period for which the refund application is filed.
In simple words the government asks, “What percentage of your total sales was for exports?” They then allow you to take that same percentage of your total Input Tax Credit (ITC) as a cash refund. If 40% of your business is exports, you get 40% of your Net ITC back.
Formula for Inverted Duty Structure [Rule 89(5)]
For refund claims arising from inverted duty structure, the maximum refund is determined as follows:
Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} − {Tax payable on such inverted rated supply × (Net ITC ÷ ITC availed on inputs and input services)}
Note: “Net ITC” for IDS claims now strictly excludes tax paid on input services and capital goods. It only includes ITC on raw materials (inputs). Miscalculating this is a major reason for Inverted duty structure claims being rejected.
The Doctrine of Unjust Enrichment
An important principle governing GST refunds is the Doctrine of Unjust Enrichment. Under Section 54(3) read with Section 54(4) of the CGST Act, refunds are ordinarily subject to the condition that the incidence of tax has not been passed on to any other person (i.e., the customer).
However, in the context of ITC refunds arising from zero-rated supplies or inverted duty structure, the law recognizes that such credit represents tax already borne by the applicant and not collected from any recipient. Accordingly, the doctrine applies differently in these cases, and the required declarations are built into the standard refund application form.
- Where the refund claimed is less than ₹2 lakh, the applicant may file a self-declaration in lieu of documentary evidence (under Section 54(4) of the CGST Act), affirming that the tax burden has not been passed on to any other person.
- Where the refund claimed is more than ₹2 lakh, A mandatory CA/CMA Certificate is required.
- The Exporter’s Advantage: If you are an exporter, the law assumes you haven’t passed the tax on to the foreign buyer. This means you can bypass the certificate requirement entirely for zero-rated supplies, regardless of the claim amount.
Step-by-Step Refund Filing Process
Step 1: File or renew your LUT (for exporters under Option A)
Log in to the GST portal → Services → Refunds → Furnish Letter of Undertaking (LUT) → Submit Form GST RFD-11. This must be done before the first export invoice of each financial year.
Step 2: File GSTR-1 and GSTR-3B
Ensure all return filings are up to date. Refund applications cannot be filed if there are pending return obligations for the relevant period.
Step 3: File the Refund Application in Form GST RFD-01
This is the primary application form for all ITC refunds. It is filed online on the GST portal at the end of any tax period in which the refund claim arises. For zero-rated supplies, refund applications may be filed at the end of any tax period; for inverted duty structure, the application must be filed within two years from the due date of furnishing the return under Section 39 (i.e., GSTR-3B) for the period in which the refund arises.
Step 4: Prepare and upload Annexure-B (Invoice-Wise Statement)
Annexure-B is the mandatory invoice-level statement that accompanies the refund application under Circular No. 125/44/2019-GST. As of May 2026, the GSTN has migrated Annexure-B to a revised standardized offline utility that generates a JSON file for upload. This updated utility incorporates:
- Invoice-wise and HSN/SAC-wise reporting
- Mandatory reconciliation with GSTR-2B data
- In-built duplicate validation and GSTR-3B matching
This is a material change from the earlier format. The refund right under law remains unchanged; however, the evidentiary standard has become substantially more rigorous. Discrepancies between the uploaded data and GSTR-2B can result in rejection or delay of the claim.
Step 5: Attach supporting documents as per Rule 89(2)
– Statement of invoices (received and issued) during the tax period [Rule 89(2)(h)]
– Self-declaration or documentary evidence regarding non-passing of tax incidence
– For service exports: Bank Realisation Certificates (BRC) or Foreign Inward Remittance Certificates (FIRC), as applicable
– For claims above ₹2 lakh: Relevant documentary evidence as required under Section 33 of the CGST Act
Processing Timeline and Interest on Delay
- Provisional refund (up to 90% of claim): Within 7 days of issue of acknowledgement in Form RFD-02
- Final order of sanction or rejection: Within 60 days of receipt of a complete application
- Interest on delayed refund: 6% per annum under Section 56, if refund is not paid within 60 days
- Credit to bank account: Directly to the registered bank account linked on the GST portal
Key 2026 Updates Related to Refund of Unutilized Input Tax Credit (ITC) under GST
1. Removal of ₹1,000 minimum threshold for export refunds (from April 1, 2026)
The earlier restriction that prevented processing of export refund applications below ₹1,000 has been removed. All valid refund claims — irrespective of amount — are now eligible for processing. This is a beneficial change particularly for small exporters and MSMEs.
2. Revised Annexure-B — Mandatory JSON-based filing (from May 2026)
The GSTN has implemented a structural overhaul of Annexure-B through a new standardized offline utility. All refund applications for accumulated ITC must now be prepared using this revised tool and uploaded in JSON format. Taxpayers using older manual formats will encounter validation failures. Adequate time should be allocated for preparation, especially for businesses with large invoice volumes.
3. LUT for FY 2026-27 — mandatory before first export invoice
The LUT filed for FY 2025-26 expired on 31st March 2026. Exporters supplying without payment of IGST must furnish a fresh LUT in Form GST RFD-11 on the portal before raising any export invoice for the current financial year. Non-compliance necessitates payment of IGST on exports, with recovery only through a subsequent refund — causing unnecessary working capital blockage.
Conclusion
The GST refund mechanism for unutilized ITC — whether on account of zero-rated supplies or an inverted duty structure — is a well-defined statutory right under Section 54(3) of the CGST Act, 2017. The process is fully online, with defined timelines and interest liability on delayed refunds to ensure accountability on the part of the tax administration.
That said, the refund ecosystem has become significantly more data-intensive in 2025-26, with mandatory GSTR-2B matching, the revised JSON-based Annexure-B utility, and a risk-based provisional refund framework. Taxpayers and their advisors would be well-served to maintain rigorous monthly reconciliations, ensure timely LUT filings, and align documentation practices with the updated procedural requirements before filing refund claims.
As always, given the complexity and the amount of ITC typically at stake, professional guidance from a qualified GST practitioner is advisable — particularly for businesses filing under the inverted duty structure or dealing with large-volume export refund claims.
At Mercurius, we assist our clients with various GST matters (GST registration, GST advisory, GST assessments, filing of GST returns, claiming GST audits) by providing them with adequate support and guidance from our end. If you have any questions or wish to know more about the Refund of unutilized ITC, kindly contact us.
