DMRN & Associates, Chartered Accountants | 19 October 2026
Refunds Widen, Eligibility Does Not
Input services and capital goods join the GST refund computation: what the 57th Council has recommended, what it leaves untouched, and how businesses should prepare
SYNOPSIS
The 57th GST Council has recommended that accumulated input tax credit on input services and capital goods be brought into the refund computation under the inverted duty structure, and that capital goods credit also be admitted for zero-rated supplies made without payment of tax. The pool of refundable credit grows; the test for when an inverted duty structure exists does not change. The relief is staggered, with 1 November 2026 and 1 April 2027 as the relevant dates, and the recommendations await notification. The interval is best used to prepare records and procurement plans.
A Long-Standing Blockage, Partly Cleared
Consider a manufacturer that pays 18% GST on its logistics, warehousing, maintenance and professional fees, and sells its finished product at 5%. The credit on those services reaches the electronic credit ledger every month, and every month it stays there, because the refund framework has had no place for it. For the better part of a decade, that has been the quiet arithmetic of working capital for a very large number of Indian businesses.
The 57th meeting of the GST Council, held in New Delhi on 8 October 2026, has recommended amendments to Section 54(3) of the CGST Act and to the CGST Rules that begin to loosen this position. The refund proposals sit within a wider package covering registration, returns, adjudication and enforcement, and they are the part of it that speaks most directly to liquidity. In essence, the Council has recommended that credit on input services be admitted to the refund computation under the inverted duty structure (“IDS”), and that credit on capital goods be admitted both under the IDS and for zero-rated supplies made without payment of tax.
THE RECOMMENDATIONS AT A GLANCE
Input Services: The 57th GST Council has recommended that input services be included in the definition of “Net ITC” for the purpose of computing refunds under the Inverted Duty Structure (IDS) in Rule 89(5) of the CGST Rules. This recommendation is proposed to apply to ITC availed on or after 1 November 2026.
Capital Goods: The GST Council has recommended that ITC on capital goods, to the extent attributable to the relevant period, be included in “Net ITC” for computing refunds on zero-rated supplies made without payment of tax under Rule 89(4), as well as refunds under the Inverted Duty Structure in Rule 89(5). The refund attributable to capital goods is proposed to be spread over a period of 60 months. This recommendation is proposed to apply to ITC availed on or after 1 April 2027.
Source: Recommendations of the 57th GST Council Meeting (press release dated 8 October 2026). These recommendations have not yet been notified.
Two features of the design deserve early attention. The relief follows the date on which credit is availed, so balances already sitting in the ledger from earlier periods fall outside its reach. And for capital goods the Council has chosen attribution over time rather than refund up front: each month of the 60-month period carries one-sixtieth of the eligible credit into the refund computation, starting with the month of availment. It is a way of measuring how much credit can support a claim in a given period, and not a release of the full credit in the month the asset is purchased.
Why the Credit Accumulates
Section 54(3) of the CGST Act permits refund of unutilised ITC in two principal situations: where supplies are zero-rated and made without payment of tax under a bond or Letter of Undertaking, and where credit has built up because the rate of tax on inputs is higher than the rate on outward supplies. GST law, however, treats inputs (goods other than capital goods), input services and capital goods as distinct categories, and the refund formulae have not treated them alike. Refund under the IDS has been confined to inputs. Refund for zero-rated supplies without payment of tax has covered inputs and input services, but not capital goods.
The omission of input services from the IDS refund was contested almost from the outset. The question reached the Supreme Court in Union of India v. VKC Footsteps India Pvt. Ltd. (Civil Appeal No. 4810 of 2021, decided on 13 September 2021), where the Court upheld Rule 89(5) and accepted the distinction the statute draws between goods and services for this purpose. It treated refund as a matter of statutory prescription and declined to widen the entitlement by interpretation. At the same time, it urged the GST Council to revisit the formula as a matter of policy. The recommendations of the 57th meeting can fairly be read as the Council’s response to that invitation, arriving five years later.
The commercial consequence was straightforward. Businesses could take credit on logistics, warehousing, security, engineering services, professional consultancy and IT support, and on laptops, equipment and plant and machinery, yet could not convert the accumulated balance into cash. Industry representations earlier this year added a further point: that the rate reductions under GST 2.0 had deepened inversion on the services side, which gave the issue fresh urgency.
Input Services: What Changes and What Does Not
Under the recommendation, credit on input services will form part of “Net ITC” in the Rule 89(5) formula, for credit availed on or after 1 November 2026. What the recommendation does not do is change how an inverted duty structure is identified. As the FAQs issued after the meeting clarify, the test continues to compare the rate of tax on inputs, meaning goods, with the rate of tax on output supplies. A higher rate on input services, taken by itself, does not create an inversion.
TWO ILLUSTRATIONS
Scenario A – Inverted Duty Structure with Higher Tax Rates on Goods Inputs
In this scenario, the GST rate on input goods is 18%, while the rate on outward supply is 5%. Input services also attract GST at 18%. Since the tax rate on input goods is higher than the rate on outward supply, an Inverted Duty Structure (IDS) exists. Accordingly, ITC on input services availed on or after 1 November 2026 is proposed to be included in “Net ITC” for the purpose of computing refunds under Rule 89(5) of the CGST Rules.
Scenario B – Higher Tax Rate on Input Services Without Inversion of Goods Inputs
In this scenario, both input goods and outward supplies attract GST at 5%, whereas input services are taxed at 18%. Since there is no difference between the tax rates on input goods and outward supplies, an Inverted Duty Structure does not arise merely because input services attract a higher GST rate. Consequently, no IDS refund becomes available solely on account of the higher tax rate applicable to input services.
Note: The above illustrations are based on the position clarified in the post-meeting FAQs and explain the proposed treatment of input services for refund computation under the Inverted Duty Structure.
The distinction matters most for service-intensive businesses, whose accumulation is driven by the rate on services and not by inversion on goods. For them the recommendation does not open a new refund route, and they should not plan on the assumption that it will. For manufacturers already within the IDS, the effect is material: credit on services that has so far been a sunk cost will begin to count towards refund.
Capital Goods: Refund by Attribution
The inclusion of capital goods credit is the more consequential change for capital-intensive sectors, where large asset purchases have produced credit balances that stayed unrecovered even though the underlying supplies were zero-rated without payment of tax or were subject to inversion. The recommendation brings that credit into “Net ITC” under Rule 89(4) and Rule 89(5), but only to the extent attributable to the relevant period, and only for credit availed on or after 1 April 2027.
By way of illustration only, if a business availed credit of ₹1.20 crore on plant and machinery in a month after the effective date, one-sixtieth, or ₹2 lakh, would be attributable to each month of the 60-month period, beginning with the month of availment. Whether that attributed amount produces a refund in a given month would still depend on the other conditions of the refund formula.
The 60-month period appears to be aligned with the five-year useful life that Rule 43 of the CGST Rules already assumes for capital goods. In practice, it points towards asset-level tracking: the date and amount of credit availed, the portion eligible, any reversals under Rule 43, and the amount attributable to each period will all need to be traceable for each asset. One position remains as it was. The recommendation does not alter the existing mechanism for zero-rated supplies made with payment of integrated tax, where credit on capital goods is not restricted.
Open Points Awaiting Notification
The recommendations are yet to be notified, and the benefit can be realised only once the amendments take effect. Several practical questions remain open, particularly for the transition.
The first is how opening balances, and credit availed around the cut-off dates, will be identified. Closely linked is the trigger itself. Eligibility could turn on the date of the invoice, the receipt of supply, the availment of credit, the capitalisation of the asset, or the refund period, and each choice produces a different result for credit that straddles 1 November 2026 or 1 April 2027.
The second concerns documentation. It is not yet clear whether an IDS claim will require invoice-level or document-level tagging of each input service. For capital goods, the mechanics of the 60-month attribution need to be settled for cases where the asset is sold, transferred or written off, or where credit is reversed under Rule 43.
The third is whether the revised forms and system validations will permit correction of bona fide classification or attribution errors, instead of converting them into grounds for rejection. Refund claims have a history of running into technical deficiencies, and this point may prove as important as the formula itself.
DMRN Perspective
The Council’s step addresses a grievance that has run since the early days of GST, and for credit-heavy businesses it is a genuine development. Its real effect, however, will be decided by the drafting of the amended provisions, the refund formula and the portal build, and it is important that these do not introduce fresh disputes of their own.
Until notification, refund claims should continue to be filed on the current methodology. There is nonetheless useful work to be done now. Businesses should ensure that input service credit availed from 1 November 2026 can be identified separately from earlier credit, and should begin building asset-wise records for capital goods to be capitalised from 1 April 2027, covering availment, eligible credit, Rule 43 reversals and the monthly attributable portion. Where commercially sensible, the timing of large capital purchases and major service contracts can be planned with the effective dates in view. Finally, businesses should test whether they fall within the IDS at all, by comparing the rate on goods inputs with the rate on outward supplies, since that determines whether the wider credit pool will be of use to them.
Read together with the other recommendations of the 57th meeting, the direction is plain: credit that flows more smoothly, greater reliance on the filings the taxpayer has already made, and more standardised processes supported by technology.
This publication is intended for general information. It reflects the recommendations of the GST Council as publicly reported on 19 October 2026, which take effect only on notification or amendment of the law, and it does not constitute professional advice. Readers should seek advice specific to their circumstances before acting.
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