90% Provisional Refunds for Inverted Duty – Risk-Based Automation

If you’ve been stuck in the never-ending wait for GST refunds under the inverted duty structure, there’s finally some good news. The 56th GST Council Meeting (3rd September 2025, New Delhi) has approved a new system: 90% provisional refunds for inverted duty cases, granted automatically through a risk-based mechanism.

This change is a lifeline for manufacturers in sectors like textiles, footwear, fertilisers, and fabric-intensive industries, where input tax rates are higher than output tax rates, leaving businesses with huge Input Tax Credit (ITC) accumulation.

The Council’s move mirrors the earlier risk-based refund system for zero-rated exports, and if implemented well, it could resolve one of the biggest cash-flow pain points under GST.

The Problem – Why Inverted Duty Refunds Matter

An inverted duty structure arises when:

• Input GST rate > Output GST rate.
• Example: A textile unit buys fabric at 12% GST but sells finished garments at 5% GST.

The result? Unutilised ITC accumulation in electronic credit ledgers. While refunds are legally available under Section 54(3) of the CGST Act, the ground reality has been frustrating:

• Refund applications stuck in manual verification.
• Repeated notices for mismatches in GSTR-2A/2B vs GSTR-3B.
• Delays stretching from weeks to months.
• Working capital blockages hurting MSMEs.

What’s New – The Council’s Decision

The Council has directed CBIC to:

• Administratively roll out a revised system for 90% provisional refunds in inverted duty cases.
• Use system analytics and risk evaluation to decide eligibility.
• Replicate the risk-based framework already used for zero-rated refunds (like exporters under LUT).

This means if your profile and filings are clean, 90% of the refund will be credited upfront, with only 10% held back for detailed verification.

What It Means for Businesses

1. Faster Cash-Flow Relief
   • Immediate release of 90% refunds reduces strain on MSMEs and manufacturers.
2. Reduced Human Interface
   • Automation cuts discretionary delays and unnecessary queries.
3. Compliance Is King
   • Only taxpayers with clean compliance profiles (accurate returns, reconciliations, no flagged risks) will benefit.
4. Risk-Scoring Matters
   • Expect CBIC to evaluate based on return consistency, vendor compliance, e-invoicing adoption, and history of mismatches.

How to Prepare – Compliance Action Plan

To actually see refunds flow smoothly, businesses must prepare their house in order.

Step 1: Strengthen Invoice-Level Accuracy

• Match GSTR-2B with GSTR-3B every month.
• Fix mismatches before filing refund claims.

Step 2: Maintain Return Hygiene

• File GSTR-1 and GSTR-3B on time.
• Avoid nil-filing errors or late submissions.

Step 3: E-Way Bill & E-Invoicing Compliance

• Ensure all outward supplies are e-invoiced where applicable.
• Align e-way bills with invoices to avoid red flags.

Step 4: Build a Refund SOP

• Prepare reconciliations: Input vs Output, ITC accumulation charts.
• Document rationale notes explaining inverted duty structure.
• Keep supplier compliance certificates ready.

Step 5: Leverage Export Data Trails

• For exporters, maintain LUT/BRC evidence to demonstrate low-risk credibility.

Real-Life Example

• Textile Manufacturer: Buys yarn at 12% GST worth ₹1 crore. Finished garments sold at 5% GST worth ₹90 lakh.
  • Input GST paid = ₹12 lakh.
  • Output GST collected = ₹4.5 lakh.
  • Refund claim = ₹7.5 lakh.

Under the new system:

• ₹6.75 lakh (90%) credited upfront.
• ₹75,000 (10%) verified later.
• Net result: Faster liquidity and reduced bank borrowing needs.

Legal Basis

• Section 54(3), CGST Act, 2017 – allows refund of unutilised ITC in inverted duty cases.
• Rule 89, CGST Rules, 2017 – prescribes refund application procedures.
• Circular No. 125/44/2019-GST – earlier guidelines for refund claims.
• New CBIC Circular (Expected Sept 2025) – will formalise 90% provisional refund system for inverted duty cases.

FAQs

Q1: Does this apply to all industries?
Yes, any sector facing inverted duty accumulation can claim, unless excluded by notifications (e.g., certain petroleum or specific goods).

Q2: Will refunds be automatic?
They will be system-driven but risk-based. Clean compliance → faster refunds.

Q3: What about the remaining 10%?
It will be verified through scrutiny and credited later once checks are complete.

Q4: Can past refund applications benefit?
No, the system applies prospectively. Old claims will still follow the manual process.

Compliance Checklist for Claiming Refunds

✅ Monthly reconciliation of 2A/2B vs 3B.
✅ Track ITC ineligible items under Section 17(5).
✅ Keep export/BRC/LUT records ready (for exporters).
✅ Update ERP with risk-free vendor mapping.
✅ Train staff to prepare refund documentation sets.

The GST Council’s move to allow 90% provisional refunds for inverted duty cases is a game-changer for Indian industry. It addresses a long-standing demand for faster liquidity, reduces manual bottlenecks, and rewards compliant taxpayers.

For businesses, the message is crystal clear: compliance is the new currency. Those maintaining clean records, timely returns, and accurate reconciliations will see the fastest refunds.

Review your compliance profile today. Build a refund SOP, strengthen vendor compliance, and get ready for the system-driven rollout from September 2025.

With automation stepping in, refund pain could soon be a thing of the past—at least for those who play by the rules.