Library / Goods and Services Tax: The Professional's Master Guide

26. Refunds (Sections 54 to 58)

Refund returns tax or credit that the Government should not keep. Most claims come from exporters and businesses with an inverted duty structure. The law is in sections 54 to 58 of the CGST Act and rules 89 to 97A.

Situation	What is refunded
Export of goods or services, or supply to SEZ, under LUT	Unutilised ITC (rule 89(4))
Export of goods with payment of IGST	IGST paid (rule 96, through customs)
Export of services or supply to SEZ with IGST	IGST paid (RFD-01)
Inverted duty structure	Unutilised ITC on inputs (rule 89(5))
Deemed exports	Tax paid, claimed by supplier or recipient
Excess balance in cash ledger	Cash balance (section 49(6))
Tax paid on a supply not made, wrong head of tax, or following an appellate order	Tax paid

26.1 Time limit and relevant date

A refund application must be filed within two years from the relevant date (section 54(1)). Refund of cash ledger balance can be claimed at any time. The relevant date is defined in Explanation 2 to section 54.

Case	Relevant date
Export of goods by sea or air	Date the ship or aircraft leaves India
Export of goods by land / by post	Date goods pass the frontier / date of dispatch by the Post Office
Deemed exports	Date of filing the return relating to the deemed export
Export of services	Date of receipt of payment in foreign exchange (or invoice date if payment was received in advance)
Unutilised ITC (zero-rated or inverted)	Due date for the return under section 39 for the period of the claim
Supplies to SEZ with refund of tax or ITC	Due date for the return for the period of supply
Tax refunded following an order or judgment	Date of communication of the order
Any other case	Date of payment of tax

Illustration 143: Two-year limit

Joshi Exports exported goods with payment of IGST; the vessel left Mundra on 14 October 2024. It also wants an inverted duty refund for its domestic unit for October 2024.

Step 1: For the IGST refund, the relevant date is 14 October 2024. Excluding that day (section 9 of the General Clauses Act, 1897), two years end on 14 October 2026.

Step 2: For the inverted duty refund for October 2024, the relevant date is the GSTR-3B due date, 20 November 2024. The claim must be filed by 20 November 2026.

26.2 Process: RFD-01 to RFD-06

The claim is filed online in RFD-01 with the prescribed statements and documents. Within 15 days the officer either acknowledges it in RFD-02 or issues a deficiency memo in RFD-03. After a memo, a fresh application is filed, and the time taken by the first one is excluded from the two years. The officer passes the final order in RFD-06 within 60 days of receipt of a complete application (section 54(7)), and payment is made through RFD-05. Rejection needs a prior notice in RFD-08.

Provisional refund. For zero-rated supplies, 90% of the claim is paid provisionally in RFD-04 within 7 days of acknowledgement (section 54(6), rule 91). The Finance Act, 2026 amended section 54 to extend the 90% provisional refund to inverted duty claims and to remove the Rs. 1,000 minimum for export refunds with payment of tax, but these amendments had not been notified as on 28 September 2026. Meanwhile, from October 2025, CBIC grants 90% provisional refunds on system-based risk evaluation for zero-rated and inverted duty claims, except high-risk applicants.

Withholding. The Commissioner may withhold refund where the taxpayer has not filed returns or paid tax, interest or penalty that is not stayed (section 54(10)), or where an order granting refund is under appeal and he believes release would harm revenue (section 54(11)).

26.3 Interest on delayed refund (section 56)

If refund is not paid within 60 days from receipt of the application, interest at 6% is payable from the day after the 60 days end to the date of refund. Where refund arises from an order of an adjudicating authority, appellate authority, tribunal or court that has attained finality, and is not paid within 60 days of the application filed after that order, the rate is 9%.

Judicial view: Interest runs from the statutory date

Ranbaxy Laboratories Ltd. v. Union of India (Supreme Court, 2011): Under section 11BB of the Central Excise Act, interest on delayed refund runs from the expiry of three months from the date of the application, not from the date of the order allowing refund. The principle carries over to section 56: interest runs from the end of 60 days from receipt of the application.

Illustration 144: Interest on delayed refund

A refund application of Pillai Spices for Rs. 5,00,000 is received on 1 March 2026. The refund is paid on 29 July 2026.

Step 1: 60 days from 1 March 2026 end on 30 April 2026.

Step 2: Interest period = 1 May to 29 July 2026 = 90 days.

Step 3: Interest = Rs. 5,00,000 x 6% x 90 / 365 = Rs. 7,397.

26.4 Unjust enrichment

Under section 54(8), refund is paid to the applicant only if the incidence of tax has not been passed on to another person, or in specified cases such as exports, inverted duty, supplies to SEZ, and tax paid on a supply not made. In other cases the amount goes to the Consumer Welfare Fund. A claim above Rs. 2 lakh must be supported by a chartered accountant's or cost accountant's certificate that the incidence has not been passed on.

Judicial view: The doctrine of unjust enrichment

Mafatlal Industries Ltd. v. Union of India (Supreme Court, 1997, nine-judge bench): A claim for refund of duty, whether under the statute or by suit or writ, succeeds only if the claimant has not passed on the burden to others. Section 54(8) of the CGST Act carries this principle into GST.

Illustration 145: Excess tax charged to customers

Singh Motors charged 28% instead of 18% on spare parts of Rs. 5,00,000 sold to retail customers, collecting Rs. 50,000 extra tax.

Result: The incidence was passed on, so any refund goes to the Consumer Welfare Fund. Credit notes to customers within time would have allowed Singh Motors to adjust the tax.

26.5 Refund of ITC on exports under LUT (rule 89(4))

Refund = (Turnover of zero-rated supply x Net ITC) / Adjusted total turnover. For goods, the turnover of zero-rated supply is the export value or 150% of the value of like goods supplied domestically by the same or a similarly placed supplier, whichever is less. CBIC clarified in 2021 that the capped value is also used in adjusted total turnover. The cap stops over-invoicing of exports.

Illustration 146: Export refund with the 150% cap

Kiran Leather Exports makes zero-rated exports under LUT of Rs. 60,00,000 and domestic taxable sales of Rs. 40,00,000 in a quarter. The domestic value of like goods is Rs. 35,00,000. Net ITC on inputs and input services is Rs. 12,00,000.

Step 1: 150% of Rs. 35,00,000 = Rs. 52,50,000, which is less than Rs. 60,00,000. Turnover of zero-rated supply = Rs. 52,50,000.

Step 2: Adjusted total turnover = Rs. 52,50,000 + Rs. 40,00,000 = Rs. 92,50,000.

Step 3: Refund = Rs. 52,50,000 x Rs. 12,00,000 / Rs. 92,50,000 = Rs. 6,81,081.

Result: Without the cap the refund would be Rs. 60,00,000 x Rs. 12,00,000 / Rs. 1,00,00,000 = Rs. 7,20,000. The cap reduces it by Rs. 38,919.

26.6 Inverted duty refund (rule 89(5))

Section 54(3)(ii) allows refund where the rate on inputs is higher than the rate on output supplies, except for supplies that are nil-rated or fully exempt and goods notified as ineligible. Only ITC on inputs is refunded; credit on input services and capital goods is not. The formula, amended with effect from 5 July 2022, is: Maximum refund = (Turnover of inverted rated supply x Net ITC / Adjusted total turnover) minus (Tax payable on inverted rated supply x Net ITC / ITC availed on inputs and input services). Net ITC means ITC on inputs.

Illustration 147: Inverted duty refund

Rathore Fabrics makes only fabric taxable at 5%, turnover Rs. 1,00,00,000, tax payable Rs. 5,00,000. ITC on dyes and chemicals (inputs at 18%) is Rs. 12,00,000; ITC on input services is Rs. 1,00,000.

Step 1: First part = Rs. 1,00,00,000 x Rs. 12,00,000 / Rs. 1,00,00,000 = Rs. 12,00,000.

Step 2: Second part = Rs. 5,00,000 x Rs. 12,00,000 / Rs. 13,00,000 = Rs. 4,61,538.

Step 3: Maximum refund = Rs. 12,00,000 minus Rs. 4,61,538 = Rs. 7,38,462.

Result: The pre-July 2022 formula gave Rs. 12,00,000 minus Rs. 5,00,000 = Rs. 7,00,000. The amended formula spreads the output tax between inputs and input services and gives Rs. 38,462 more.

Judicial view: Input services excluded from inverted duty refund

Union of India v. VKC Footsteps India (P) Ltd. (Supreme Court, 2021): Section 54(3)(ii) and Explanation (a) to rule 89(5), which confine refund to unutilised credit on inputs and exclude input services, are valid. Refund is a matter of statutory policy, and the legislature may choose which credit to refund. The Court left the formula's anomalies to the GST Council, which led to the 2022 amendment.

Same rate inputs and outputs. Credit may accumulate even where inputs and outputs carry the same rate, because of falling prices or stock build-up. No refund is available: a CBIC circular of March 2020 clarified that section 54(3)(ii) covers only a difference in rates.

After GST 2.0. The rate cuts of 22 September 2025 moved many outputs from 12% to 5% while inputs such as chemicals and packing stayed at 18%, creating inverted structures in packaged foods, tractors and farm machinery, and some textile goods. Refund under rule 89(5) is available subject to the notified ineligible goods. Credit accumulated before the rate change is not lapsed and need not be reversed merely because the rate fell; it is reversed only where the output becomes exempt (section 17(2) or 18(4)).

26.7 IGST refund on exports and SEZ supplies

For export of goods with payment of IGST, the shipping bill itself is the refund application (rule 96). It is treated as filed once the export general manifest (EGM) is filed and GSTR-3B is filed for the period. Table 6A of GSTR-1 is matched with the shipping bill on ICEGATE and the refund goes to the bank account registered with customs. Common errors: invoice number or date in GSTR-1 differing from the shipping bill, GSTIN mismatch, EGM missing or wrong, IGST in GSTR-1 lower than in the shipping bill, and an unvalidated bank account. Reconcile shipping bills with GSTR-1 monthly. Rule 96(10), which barred IGST-paid exports by exporters using certain import duty benefits, was omitted from October 2024 prospectively; claims for earlier periods remain subject to litigation.

SEZ suppliers. A supplier to an SEZ unit or developer for authorised operations can supply under LUT and claim refund of ITC, or pay IGST and claim refund of the tax. The supplier claims, with the SEZ officer's endorsement that goods were admitted in full or evidence that services were received.

Chapter summary

• Refund is claimed within two years from the relevant date; for ITC refunds, the return due date for the period.

• RFD-06 within 60 days of a complete RFD-01; interest at 6% (9% for appellate orders) thereafter.

• 90% provisional refund for zero-rated supplies; the Finance Act, 2026 extension to inverted duty is not yet notified.

• Unjust enrichment bars refund where tax was passed on (Mafatlal), except for exports, inverted duty and similar cases.

• Rule 89(4) caps export turnover of goods at 150% of domestic value; rule 89(5) refunds only input credit (VKC Footsteps) under the 2022 formula.

• IGST export refunds depend on matching GSTR-1 Table 6A with the shipping bill and EGM.

PART G: SECTOR AND SPECIAL TOPICS

How GST applies to particular industries, groups and business events

The general rules of supply, value and credit apply to every business, but each sector has its own notifications, exemptions and practices. This Part takes the sectors a practitioner meets most often, then deals with employees and group companies, small businesses and startups, and restructuring and insolvency.