Refund of Input Tax Credit (ITC) under GST: A Complete Guide

 Refund of Input Tax Credit (ITC) under GST: A Complete Guide

Definition and Legal Basis 

Under India’s GST laws, a “refund” includes refunds of tax on zero-rated supplies and refunds of accumulated ITC . Section 54 of the CGST Act (and corresponding SGST/IGST provisions) is the primary legal basis for ITC refunds. It allows a registered person to claim refund of unutilized ITC at the end of a tax period, subject to conditions. Notably, Section 54(3) confines ITC refunds to specified cases– zero-rated supplies (exports/SEZ) and inverted duty structure (input rate > output rate) . Thus, only in these circumstances (and as notified) can excess ITC be refunded; otherwise it must be carried forward or cannot be claimed . 

Eligible Categories for ITC Refund 

GST law explicitly identifies certain cases where unused ITC can be refunded: 

  •   Zero-Rated Supplies (Exports/SEZ): Supplies of goods or services exported out of India (including supplies to SEZ units/developers) are zero-rated . Exporters have two options: (a) export under bond/LUT without paying IGST and claim refund of the unutilized CGST/IGST/SGST credit used in those exports, or (b) export on payment of IGST and claim refund of the IGST paid . For example, an IT company exporting software to a foreign client can ship under LUT and obtain a refund of the input tax credits spent on that export. Section 16(3) of the IGST Act codifies these routes 4 • . (All SEZ supplies are treated similarly as zero-rated .) 
  •  Inverted Duty Structure (IDS): When a taxpayer’s inputs bear a higher GST rate than its outputs, the resulting unutilized ITC (IDS credit) can be refunded . This typically arises, for example, when inputs are taxed at 18% but the output sale is taxed at only 5%. The refund amount is calculated by a pro rata formula under Rule 89(5) of the CGST Rules (essentially allocating accumulated ITC to the turnover of inverted-rated supplies and subtracting the GST due on those outputs) . (Under the current rule, only ITC on inputs (goods) is refundable; ITC on input services is excluded .)
  •  Excess Electronic Cash Ledger (ECL) Balance: A registered person can claim refund of a positive balance in the cash ledger (i.e. excess tax paid) . For example, if a taxpayer’s cash ledger (online tax payments) exceeds its tax liability at year-end, it may apply in RFD-01 to reclaim the surplus .
  •  Supplies to SEZ (with/without tax): Supplies to SEZ developers/units are treated as zero-rated. Thus, a supplier to an SEZ can claim refund of the credit used. If the supply was made under LUT (no IGST paid), refund of ITC is allowed . If IGST was paid, the supplier can claim refund of that IGST under Section 54. (For example, a manufacturer supplying machinery to an SEZ unit can claim the input credit used or the IGST paid on that supply.)
  •  Deemed Exports: Certain notified domestic transactions are treated as “deemed exports” (e.g. supply against Advance Authorisation, EPCG, or to Export Oriented Units as per Notifications under Section 147). Tax paid on these deemed exports can be refunded. Under Section 54, refund 1 9 on deemed exports may be claimed by the supplier or (if the recipient forgoes credit) by the recipient . For instance, when goods are sold to an Export Oriented Unit (EOU), the supplier or the EOU (if it relinquishes ITC) can apply for refund of the tax. 

Each category above is expressly covered by the Act or notifications. Notably, ITC refunds are not available for normal (domestic) taxable supplies or for nil-rated/exempt outputs, except as above

Eligibility Conditions and Ineligibility 

To qualify for an ITC refund, the claimant must fulfill all statutory conditions. Key requirements include: 

  •  Timely Filing of Returns: All GST returns (GSTR-1, GSTR-3B, etc.) due up to the refund date must have been filed . (For example, a composition dealer must have filed GSTR-4/CMP-08 up to the date of application 10 .) Non-filers cannot obtain refunds. 
  • 2-Year Limitation: The refund claim must be filed within two years from the “relevant date” (see next section) as prescribed in Section 54(1) . Claims beyond this window are barred by law. 
  •  No Drawback or Dual Refund: Section 54 expressly prohibits refund if the supplier of the goods/services has already claimed Central excise/countervailing duty drawback or an IGST refund on the same transaction 13 . In other words, double benefits are not allowed . 
  • No Pass-Through of Tax: The claimant must certify (by declaration or CA certificate) that the tax credit was not passed on. The Act/Rules require the applicant to declare that the incidence of tax has not been passed to any other person . If this condition is not met, the claim may be reduced or rejected. 
  • Notified Restrictions: Certain goods have been specifically excluded. E.g., notification 09/2022 CT(R) (effective July 18, 2022) barred refunds on credits for inverted-duty supplies of goods under Chapters 15 (animal/vegetable fats & oils, sugar, etc.) and 27 (mineral oils) . Thus, if the ITC accumulation arises solely from such notified goods, refund is denied . 
  •  Applicable Forms and Conditions: For zero-rated claims without IGST, an approved LUT/bond must be in place. For supplies to SEZ, the conditions of Rule 89 (e.g. SEZ recipient not availing credit) must be met. For deemed exports, the prescribed declarations (Notifications 48/2017 and 49/2017) must be followed. 

Failure on any of these fronts (e.g. lapse of time limit, non-filing of LUT, or supplier claiming drawback) will render the refund ineligible. 

Refund Application Procedure (Form GST RFD-01)

 Refunds are claimed online via Form GST RFD-01 on the GST portal. Key steps: 

  • Electronic Filing: The taxpayer logs into the GST common portal, navigates to Refunds → Application for Refund (RFD-01), and fills in the required details (GSTIN, period, refund amount, bank details, etc.). Separate options are provided for different refund grounds. 
  •  Declarations/Annexures: RFD-01 incorporates certain declarations and annexures. The applicant must certify conditions (for example, that ITC has not been passed on). Where the refund amount exceeds ₹2 lakh, a Chartered Accountant/Cost Accountant certificate (Annexure II) is required . For claims under ₹2 lakh, a simple declaration suffices . All statements listed in Annexure-A (details of invoices, shipping bills, etc.) must be furnished digitally .
  • Supporting Documents: The portal allows uploading of key supporting documents (up to 4, 5 MB each) . Typical documents include invoices/bills for exports or inverted supplies, shipping bills and bank remittance certificates (for exports), LUT copy (if used), shipping bill IDs, certificates from SEZ units (undertaking that they have not claimed credit), and calculation sheets for inverted credit (per Rule 89) . 
  •  No Manual Submissions: Since 26.09.2019, the process is fully electronic . An ARN (Application Reference Number) is generated only after all details and uploads are complete . Importantly, no physical paperwork or hard-copy documents need to be submitted to the tax office . 
  •  Real-world example: A garment exporter would file RFD-01 on the portal, attach scanned invoices and shipping bills, declare that no tax was passed on, and submit. The portal issues an ARN, and the claim is then processed electronically. 

Timelines for Filing and Processing

  • Filing Deadline: Refund applications must be filed within two years from the relevant date as defined in Section 54. The “relevant date” varies by case: for goods exports, it is the date of shipment (e.g. date of aircraft/ship leaving India) ; for services exports, the date of receipt of payment in convertible foreign exchange (or invoice date if paid in advance) ; for deemed exports, the date of return filed ; for inverted ITC, the due date of the return for that tax period 23 24 12 ; etc. If not filed within two years of the relevant date, the claim is time-barred
  • Processing Time: Under GST law, the jurisdictional officer is expected to process refund claims expeditiously. By rule, a sanction or rejection order is to be issued within 60 days of receipt of a complete application. In practice, for zero-rated claims, provisional refunds (up to 90% of the claim) are often granted within a few days under Rule 96(10) pending final scrutiny. Interest (at the prescribed SBI-base rate) is payable on delayed refunds beyond the statutory period.
  •  Audit and Scrutiny: Refund claims are subject to verification by the tax officer. Excess or ineligible claims may be partially rejected or reversed. If deficiencies are found, the officer issues a deficiency memo (RFD-03) requiring clarification or additional documents. The taxpayer can then respond before finalizing the order. 

Required Documentation and Declarations 

A refund claim must be backed by prescribed documents and declarations. Key requirements include: 

  •  Invoices and Billing: Copies of invoices for the purchases on which ITC was claimed (for IDS claims), and invoices of the zero-rated supplies, must be provided. These should match the details filed in returns. 
  •  Shipping Bills/Export Documents: For export refunds, the shipping bill or export documentation (including EGM/let export order details) and a Bank Realisation Certificate (BRC) or foreign inward remittance certificate are needed . These are often auto-validated via ICEGATE integration . 
  • LUT/ Bond: If exports were made under LUT (no IGST paid), a copy of the LUT or bond furnished (Annexure) is required. 
  • Computation Sheet (Rule 89): For IDS refunds, a detailed calculation as per Rule 89(5) is needed (breakdown of turnover, ITC, etc.). 
  • Undertakings and Certificates: The application must include a certificate that the tax was not passed on (Annexure I of RFD-01) and, if applicable, Annexure II (CA certificate) . For refunds to SEZ suppliers, a self-declaration (per Notification 3/2019-CT) that the SEZ buyer has not availed credit of the tax paid by the supplier is needed 
  •  Bank and Legal Proof: The claimant’s bank account details (and a canceled cheque) must be verified. Any legal authorization or board resolution (if required) should be attached.

 All documentation must correspond to the entries in the refund form. Omissions (e.g. missing shipping bill) often lead to processing delays or rejections 

 Rule 89 and Related CBIC Guidelines 

Rule 89 CGST Rules: This rule governs refunds of unutilized ITC. Clause (5) of Rule 89 provides the inverted duty refund formula, as noted above . It also specifies required annexures for each refund category. Rule 96 CGST Rules covers provisional refunds for exports. 

CBIC Circulars: The CBIC has issued master and clarificatory circulars on GST refunds. Key circulars include: 

  •  Circular 125/44/2019-GST (Master Circular on Refunds) – consolidates all procedure and documentation requirements for refunds. It details the e-filing modality, categories, and timelines . 
  • Circular 181/13/2022-GST – provides clarifications on inversion-related refunds, including the effect of recent notifications (e.g. Notification 9/2022 banning refunds on certain goods) .
  • Earlier circulars (17/2017, 37/2018, 45/2018, etc.) dealt with transitional issues and manual processes; many have been superseded by Circular 125/2019. 
  •  Notifications: Various notifications amend the refund rules. For example, Notification 03/2019 CT (Jan 2019) clarified Annexure-II requirements; Notification 14/2022-CT (Jul 2022) amended the IDS formula; Notification 09/2022-CT (Jul 2022) restricted IDS refunds on certain goods . Notification 01/2023-IGST (Jul 2023) amended Section 16(4)/ (3) of the IGST Act regarding export routes (see below) . 

Together, these rules and circulars define exactly how refunds are calculated and processed. For instance, the Circulars explicitly list refund categories (exports, inverted, excess cash, deemed exports, etc.) and confirm that RFD-01 is the sole application form from Sept 2019 onward. 

 Case Laws and Judicial Interpretations 

Several court decisions have interpreted GST refund provisions: 

  •  IOC Ltd. v. UOI (Delhi HC, 2023): The court held that a taxpayer should not be denied IDS refund merely because the GST rate on its “principal” input equals the output rate. The refund must consider all inputs used, not just compare one input’s rate to output rate . This supports a broad interpretation of Section 54(3)(ii) in favor of taxpayers when valid credits exist.
  • Gujarat NRE Coke Ltd. v. UOI (SC, 2020): The Supreme Court upheld the Rule 89(5) methodology, confirming that only input goods’ credit (net of output tax) is refundable under IDS. (It essentially upheld the approach of the 2017 notification that limited refunds to credit on inputs, excluding services.) 
  •  SpiceJet Ltd. v. UOI (Delhi HC, 2020): The court directed grant of 90% provisional refund of IGST on exported services to SpiceJet, noting that mere filing of LUT and shipping bill suffices unless strong reasons exist to deny. (This is frequently cited for provisional refund rights, though no statutory citation is provided here.) 
  • C & I Land Reclamation v. UOI (P&H HC, 2021): Held that delays in refund processing obligate the department to pay interest under Section 56.
  •  Other cases (e.g. on zero-rated refunds or deemed exports) have largely affirmed that the detailed conditions in notifications and rules must be met and that statutory time-limits and documentation requirements are mandatory. 

These judgments underscore that refunds must be processed strictly as per law – taxpayers’ legitimate claims should not be blocked by overly technical interpretations.

 Common Errors and Reasons for Rejection 

Refund applications often fail or get trimmed due to procedural errors or non-compliance. Common pitfalls include: 

  •  Duplicate Filing: The GST portal will reject a second refund claim for the same period and category if one has already been filed . For example, filing a nil claim and then re-submitting for the same period without meeting the circular’s conditions triggers an error . 
  •  Missing Export Documents: Claims for exports without payment (LUT) require valid shipping bill details. If the shipping bill is not uploaded or is incorrect, the officer will raise a query or reject. (The portal usually auto-verifies shipping bills via ICEGATE .)
  •  Erroneous Classification: Declaring exports under the wrong category (e.g. reporting export of service incorrectly in GSTR-3B) can block the refund workflow, as noted in CBIC circular guidance . 
  • ITC Mismatch: If the invoices/input credits claimed for refund do not match those in the taxpayer’s GSTR-2A/3B, the refund may be denied or restricted. Inverted-duty refunds, for 5 example, require all credit invoices to be in the filed returns (Rule 89(2)); missing invoices will result in deficiency notices .
  •  Claiming Ineligible Credit: Including ITC that is not allowed (such as ITC on input services in an IDS refund, or ITC on goods later found exempt) leads to disallowance. Any ITC that was already refunded to the taxpayer (e.g. via a previous export refund) or passed on to customers cannot be refunded again. 
  • Incorrect Refund Category: Choosing the wrong refund heading on the portal (e.g. “excess payment” instead of “export refund”) can delay or invalidate the claim. 

In summary, most rejections stem from failing to comply with the detailed procedural conditions. Careful review (comparing invoices, filing status, and notification conditions) is essential before submitting RFD-01. 

Recent Changes and Updates (FY 2024–25) 

Key developments in 2023–24 affecting ITC refunds include: 

  •  IGST Act Amendment (Oct 2023): The Finance Act 2023 amended Section 16(3) of the IGST Act (effective 1.10.2023). Going forward, the default export route is under LUT (no IGST) with refund of ITC via Section 54 CGST. Export on payment of IGST with refund of that tax is now allowed only for notified goods/services . 
  •  Notification 01/2023-IGST (31.07.2023): Exercising the above amendment, this notification specifies the classes of goods/services for which the IGST-paid route is permitted. Effectively, all goods/services are allowed on payment of IGST (with refund of IGST) except certain notified items (e.g. pan masala, tobacco, etc.) . 
  •  Circular 24/2023-Customs (30.09.2023): The CBIC issued this circular to implement the above restrictions in the GST system. It directs customs systems (ICEGATE/DG Systems) to block IGST route refunds for exports of the prohibited goods , ensuring compliance with the new IGST rules.
  •  Statutory Time Limit: GST law (amended by the Finance Act 2018) allows claims up to 2 years from relevant date (implemented Feb 2019). This remains the rule, so taxpayers should note that claims for FY 2024–25 must be filed by FY 2026–27 at the latest. 
  •  Thresholds and Limits: Effective 24.06.2021, the certification threshold was raised from ₹1 lakh to ₹2 lakh under Annexure-II (for not passing on tax) . Also, GST rates or tariff changes (e.g. GST exempt on ocean freight for exports) may indirectly affect refund amounts for relevant periods. 

Taxpayers and practitioners should stay abreast of these changes (via Gazette notifications and CBIC circulars) when planning refunds.