GST · 26 June 2026
What Is an Inverted Tax Structure and Who Can Claim a Refund?
An inverted tax structure is where the GST rate on your inputs is higher than the GST rate on what you sell, so input tax credit piles up faster than you can use it. Section 54(3) of the CGST Act lets a business claim a refund of that unutilised credit, with the amount capped by the Rule 89(5) formula. The refund covers credit on input goods, not input services, and certain notified supplies are barred from it altogether.
By Mrs. Swapna Patel
Last reviewed
26 June 2026
In this section
Answers
- What Is an Inverted Tax Structure and Who Can Claim a Refund?
- What Is GSTR-1, the GST Return of Outward Supplies?
- What Is GSTR-3B, the Monthly GST Summary Return?
- What Is the Time of Supply Under GST, and When Does Tax Become Due?
- Advance Receipt Under GST: When Do You Issue a Receipt Voucher?
- Credit Note vs Debit Note Under GST: When Do You Issue Each?
- What Is GSTR-2B, and Why Does It Now Decide Your Input Tax Credit?
- What Is the Value of Supply Under Section 15 of the CGST Act?
- What Are the GST Rate Slabs in India After the GST 2.0 Reform?
- Exempt vs Nil-Rated vs Zero-Rated Supply: What Is the Difference?
If GST on your raw materials is higher than the GST you charge, the extra credit is simply lost.
Under Section 54(3) of the CGST Act, an inverted tax structure lets you claim a refund of the unutilised input tax credit, worked out by the Rule 89(5) formula and subject to a list of excluded supplies.
What is an inverted tax structure?
Short answer
It is where the GST rate on your inputs is higher than the rate on your output, so under Section 54(3) input tax credit accumulates faster than it can be set off.
Take a maker whose raw materials are taxed at 18 percent but whose finished product is taxed at 5 percent. On every sale, the credit earned on inputs is larger than the tax collected on the sale, so a balance of unused credit builds up month after month. That stranded credit is the problem an inverted-duty refund exists to release.
Who can claim the inverted-duty refund?
Short answer
A registered business carrying unutilised credit due to the rate gap can claim under Section 54(3), unless its supply is on the barred list in Notification 5/2017 – Central Tax (Rate).
- The credit must have accumulated specifically because input tax rate is higher than output tax rate, not for any other reason.
- Certain notified supplies are excluded from the refund even when the rate is inverted, so check the barred list first.
- Where output is nil-rated or fully exempt rather than lower-rated, different rules apply, so the inverted-duty route may not fit.
How is the refund amount worked out?
Short answer
By the formula in Rule 89(5), which ties the refund to the share of turnover from inverted-rated supplies and limits it to credit on input goods.
- The formula scales the accumulated credit by the proportion of turnover that comes from the inverted-rated supply.
- It refunds credit on input goods. Credit on input services is generally outside the inverted-duty refund.
- The exact formula has been amended before, so apply the version in force for the refund period you are claiming.
Why does an inverted structure matter to cash flow?
Short answer
Because unclaimed credit is cash locked in the GST ledger, and the Section 54(3) refund is how a business gets that working capital back.
- Without the refund, the credit balance grows each period and ties up money the business could otherwise use.
- Filing the refund converts a paper credit into cash in the bank account.
- Clean tax invoices for your purchases are what make the input credit claimable in the first place.
References & related
Primary sources
- Section 54(3), Central Goods and Services Tax Act 2017 — CBICRefund of unutilised input tax credit where credit accumulates because input tax rate exceeds output tax rate.
- Rule 89(5), Central Goods and Services Tax Rules 2017 — CBICFormula for the maximum refund of input tax credit in an inverted duty structure.
- Notification No. 5/2017 – Central Tax (Rate) — CBICRate notification listing the supplies on which the inverted-duty refund of accumulated credit is not allowed.
Last reviewed: 26 June 2026