GST Refunds: Legislative Intent vs Administrative Reality

Nine years into GST, the refund mechanism under Section 54 of the CGST Act remains the single biggest determinant of working capital health for exporters and inverted-duty-structure manufacturers. This article traces the statutory architecture of refunds, the 2025 extension of 90% provisional sanctions to inverted duty claims, and the parallel tightening brought by the GSTR-2B hard block and Invoice Management System. It then reviews the judicial correctives from Jian International on deficiency memos to the Supreme Court’s 2026 ruling in BLA Infrastructure on pre-deposit refunds, that continue to align field practice with statutory intent.

Introduction: The Refund Valve in a Destination-Based Tax

GST was introduced to eliminate the burden of multiple indirect taxes and ensure that tax is ultimately borne only by the final consumer in India. To achieve this objective, taxes paid on exports and input tax credit accumulated due to a higher tax rate on inputs than on outputs should be refunded to taxpayers. Section 54 of the CGST Act, 2017, along with Rules 89 to 97A of the CGST Rules, provides the legal framework for claiming these refunds, helping businesses maintain healthy cash flow and working capital. However, in practice, obtaining refunds has often been more challenging than the law intended. Even after nine years of GST, taxpayers and professionals continue to face issues arising from the GST portal, procedural requirements, and varying approaches adopted by tax authorities. This article examines the current state of the GST refund mechanism as of mid-2026 and highlights how the judiciary has played an important role in ensuring that the law is implemented fairly and in line with its original intent.

The Statutory Map of Refund Categories

Section 54 does not create a single, uniform refund right; it recognises at least nine distinct fact situations, each with its own qualifying condition. Exports of goods with tax payment are refunded through the automated ICEGATE-Shipping Bill route. Exports of services, and exports under a Letter of Undertaking without tax payment, route through Form GST RFD-01. Supplies to SEZ units, deemed exports, excess balance in the cash ledger, tax paid under the wrong head, refunds consequent to appellate orders, and the most litigated of all accumulated credit under an inverted duty structure, each carry their own documentation and verification requirements. A general two-year limitation runs from the “relevant date” for the transaction, and the Finance Act, 2023 layered an absolute three-year outer cap on top of it, effective from October 2023, so that no application can revive a stale claim however the relevant date is computed. Underlying all of this is the doctrine of unjust enrichment codified in Section 54(8): a refund is credited to the Consumer Welfare Fund rather than the applicant unless the taxpayer can show that the incidence of tax was never passed on. The statute carves out exports and ITC refunds from this test, presuming in those cases that the burden was absorbed by the claimant.

Choosing Between the IGST and LUT Export Routes

Exporters continue to face a genuine commercial choice between two zero-rating mechanisms. Under the IGST payment route, tax is paid at the time of export and refunded once the shipping bill and GSTR-3B are validated; for goods, this is largely automated through ICEGATE and the Public Financial Management System, making it the faster option for physical exports. Under the Letter of Undertaking route, no IGST is paid upfront, but ITC accumulates on procurements and must be claimed back through Form GST RFD-01. Most cash-strapped exporters prefer the LUT route precisely because it avoids the need to fund the initial tax outflow, even though the refund itself then depends on a manual application rather than an automated portal handshake.

The Inverted Duty Structure: Where Rate Anomalies Trap Capital

An inverted duty structure arises whenever the GST rate on inputs exceeds the rate on the finished output, forcing a manufacturer to pay more tax on procurement than it can ever collect on sales. Electric vehicles, textiles, edible oils, fertilisers and corrugated packaging are recurring examples — an EV attracting 5% GST while its battery and electronic components are taxed at 18% is a familiar illustration for practitioners advising the auto-components sector. Rule 89(5) prescribes the formula for computing the maximum refundable amount, and its definition of “Net ITC” was the subject of prolonged litigation before the Supreme Court settled the question in Union of India v. VKC Footsteps India Pvt. Ltd. The Court held that a refund of accumulated credit is a statutory concession, not a fundamental right, and that Parliament was entitled to restrict Net ITC to credit on input goods alone. Credit on input services — rent, professional fees, software licences and on capital goods remains outside the formula altogether, a distinction that continues to generate deficiency memos whenever taxpayers inadvertently include such credit in their working.

The 2025 Shift: Provisional Refunds Reach Inverted Duty Claims

For years, the 90% provisional refund facility under Section 54(6) and Rule 91 was available only to zero-rated exporters, leaving inverted-duty manufacturers to wait out the full sixty-day cycle and often longer, before seeing any money. That asymmetry was addressed following the 56th GST Council meeting in September 2025. With effect from October 1, 2025, an amendment to Rule 91(2) and CBIC Instruction No. 6/2025 extended the 90% provisional sanction to inverted duty structure applications as well. The mechanism now runs through a system-driven risk assessment on the GSTN portal: an applicant classified as low-risk is entitled to a provisional sanction in Form GST RFD-04 within seven days of acknowledgment, with the balance ten percent settled after full scrutiny within the overall sixty-day window. Officers retain discretion to withhold a provisional sanction, but the Instruction requires that any departure from a system-generated low-risk score be justified with specific written reasons rather than routine suspicion, and certain categories flagged under a companion notification remain excluded from the facility altogether including cases with a pending appellate dispute or an unresolved show-cause notice. For pharmaceutical, textile, chemical and fertiliser manufacturers, this is a meaningful improvement in the speed at which refund capital returns to the business.

The Other Side of the Ledger: GSTR-2B and the ITC Hard Block

Even as provisional refunds became faster, the rules governing what counts as eligible credit tightened considerably. Since January 2026, the portal has enforced a hard block on GSTR-3B filing wherever claimed ITC exceeds the auto-populated GSTR-2B figures beyond a permitted variance, with no scope for manual override. The Invoice Management System, now fully operational with its “ejected Records” feature rolled out in February 2026, has effectively retired any residual reliance on the older, dynamic GSTR-2A statement. Because GSTR-2B is a static snapshot generated on the 14th of each month, a supplier who files its outward return even a day late — on the 15th, say — pushes the recipient’s credit into the following month’s statement, misaligning input credit with the export shipment it relates to. Four broad mismatch patterns recur in practice: complete non-filing by a supplier, which can cause the credit and the associated refund to lapse permanently if unresolved by the annual return deadline; timing gaps that merely defer the credit; value understatement, which caps the recipient’s claim at the reported figure; and misdirected invoices reaching the wrong GSTIN. Layered on top of these is Rule 37’s 180-day payment rule, under which unpaid invoices trigger a mandatory reversal with 24% interest — a reversal that, if it relates to credit already refunded, can expose the taxpayer to recovery proceedings under Sections 73 or 74. For a manufacturer computing a Rule 89(5) refund, the practical consequence is that the numerator of the formula is now hostage to a vendor’s compliance discipline in a way it was not under the earlier GSTR-2A regime.

Deficiency Memos and the "Complete Code" Principle

Rule 90 gives a proper officer fifteen days either to acknowledge a refund application as complete in Form GST RFD-02 or to flag defects through a deficiency memo in Form GST RFD-03. For several years, officers routinely missed this window and issued memos far later, forcing taxpayers to refile — and, in the process, resetting the sixty-day interest clock in the department’s favour. The Delhi High Court closed this loophole in Jian International v. Commissioner of DGST, holding that Rules 90 and 91 form a complete procedural code that the department cannot bypass; a memo issued beyond fifteen days is simply too late, and the original application must be treated as complete with interest running accordingly. When compliance with that ruling itself faltered, the same court entertained contempt proceedings in 2026 to enforce it. The principle was refined further in M/s G.S. Industries v. Commissioner of Central Tax and GST, where the Court held that while the period a taxpayer takes to respond to even a belated memo can fairly be excluded from the interest calculation, the department’s own delay in issuing that memo beyond fifteen days cannot be visited upon the taxpayer.

Manual Filing Where the Portal Cannot Cope

CBIC’s 2019 circular mandating fully electronic refund processing has occasionally collided with situations the portal genuinely cannot handle — business reorganisations, new GSTINs without historical data, or transitional filing errors. The Bombay High Court in Laxmi Organic Industries Ltd. v. Union of India held that Rule 97A expressly permits manual filing and that a procedural circular cannot override a substantive rule. The Himachal Pradesh High Court applied the same reasoning in AMN Life Pvt Ltd v. Union of India, invoking the settled principle that the law does not compel a party to do what is genuinely impossible, and directing that a refund cannot be refused merely because it was filed on paper rather than online.

Interest as an Automatic, Not Discretionary, Right

Section 56 converts delay into a statutory cost: interest at 6% per annum accrues automatically from the sixty-first day after a valid application, rising to 9% where the refund flows from an appellate or judicial order that has attained finality. Departments have periodically tried to reset this clock to the date of a fresh application filed after a remand or a cured deficiency memo. The Punjab and Haryana High Court rejected exactly this argument in SBI Cards & Payment Services Limited v. Union of India, holding that the sixty-day period runs from the original application regardless of intervening rejections or remands, because the taxpayer’s capital had been unavailable throughout. The Delhi High Court in Raghav Ventures went further, confirming that Section 56 interest is payable automatically once the threshold is breached, without any separate claim or reminder from the taxpayer.

Striking Down the Export Valuation Cap

An amendment to Rule 89(4)(C) in March 2020 had capped the export turnover used for LUT-route refund computation at the lower of the actual export value or 1.5 times the domestic value of comparable goods, a formula that made little sense for bespoke, high-value exports with no domestic equivalent. In Tonbo Imaging India Pvt Ltd v. Union of India, the Karnataka High Court struck the provision down as ultra vires, finding that it contradicted the statutory guarantee of zero-rating, discriminated without any rational basis between IGST-route and LUT-route exporters, and rested on undefined terms such as “like goods” that made compliance impossible for specialised manufacturers.

Pre-Deposits: A Right Outside Section 54's Limitation Clock

A separate but equally practical dispute concerned refunds of the mandatory pre-deposit made under Section 107(6) to file a first appeal. Because appeals routinely run for years, tying that refund to Section 54’s two-year clock effectively forfeited the deposit regardless of outcome. The Supreme Court resolved this in January 2026 in State of Jharkhand & Ors. v. M/s. BLA Infrastructure Private Limited, holding that a pre-deposit refund is governed exclusively by Section 107(6) read with Section 115, not by Section 54, and that once an appeal succeeds, the right to that refund vests immediately and cannot be denied on limitation grounds.

Unjust Enrichment and Cross-Border Services

Where an Indian company pays IGST on services rendered to a foreign client, revenue authorities have sometimes argued that the tax was passed on to that client and must therefore be treated as unjustly retained. In Jar Productions Private Limited v. Union of India, the Bombay High Court held that Section 54(8)’s unjust enrichment bar applies only where the incidence of tax is passed on to a person within India; because the recipient of an exported service is outside Indian territory, the doctrine has no application, and the refund could not be withheld on that ground.

When the Machinery Overreaches Itself

Several 2023-2026 rulings illustrate administrative practices that courts have found difficult to accept. In M/s Samyak Metals Pvt. Ltd. v. Union of India, the Punjab and Haryana High Court ordered the return of amounts coercively collected through Form GST DRC-03 during search proceedings, without a formal show-cause notice or assessment. In a 2026 ruling concerning Abbott Healthcare Pvt. Ltd., the same court quashed a show-cause notice that merely repeated statutory language without any computation or factual basis, holding that such notices leave a taxpayer unable to mount a defence. In the SPL Motors Pvt. Ltd. matter, the Court clarified that Rule 86A’s power to block a credit ledger is a preventive safeguard, not a licence to force the ledger into an artificial negative balance in place of formal adjudication. Perhaps most striking is M/s Proxima Steel Forge Pvt. Ltd. v. Union of India, where a proper officer rejected a refund a second time on the same limitation ground that an appellate authority had already overruled — a plain act of insubordination that led the Punjab and Haryana High Court to direct disciplinary proceedings against the officer concerned, in addition to setting aside the order.

Conclusion: Automation and Adjudication Must Move Together

The refund landscape in 2026 is defined by two parallel movements pulling in different directions. On one side, CBIC’s extension of risk-based provisional sanctions to inverted duty claims, and the automated ICEGATE-linked processing for goods exports, show a genuine intent to speed up the return of working capital. On the other, the GSTR-2B hard block and the Invoice Management System have made a taxpayer’s own refund entitlement dependent on a vendor’s compliance discipline to a degree the earlier GSTR-2A regime never demanded. Sitting between these two forces, the judiciary has consistently held the line for taxpayers — treating Rules 90 and 91 as a complete code in Jian International, refusing to let a circular override a substantive rule in Laxmi Organic, separating pre-deposit refunds from Section 54’s limitation in BLA Infrastructure, and disciplining outright insubordination in Proxima Steel Forge. For practitioners advising exporters and inverted-duty manufacturers, the practical lesson is unchanged even as the rules evolve: reconcile GSTR-2B meticulously before filing, track the fifteen-day and sixty-day clocks as closely as the department does, and be prepared to rely on this now well-settled body of case law wherever field practice departs from it.

References

1. Section 54, CGST Act, 2017, read with Rules 89-97A, CGST Rules, 2017.
2. Union of India v. VKC Footsteps India Pvt. Ltd. (2021), Supreme Court of India.
3. CGST Instruction No. 6/2025-GST dated October 3, 2025; Notification 13/2025-Central Tax; Notification 14/2025-Central Tax.
4. Jian International v. Commissioner of Delhi Goods and Services Tax (2020), Delhi High Court.
5. M/s G.S. Industries v. Commissioner of Central Tax and GST (2025), Delhi High Court.
6. Laxmi Organic Industries Ltd. v. Union of India (2021), Bombay High Court.
7. AMN Life Pvt Ltd v. Union of India (2024), Himachal Pradesh High Court.
8. SBI Cards & Payment Services Limited v. Union of India (2023), Punjab and Haryana High Court.
9. Raghav Ventures v. Union of India (2024), Delhi High Court.
10. Tonbo Imaging India Pvt Ltd v. Union of India (2023), Karnataka High Court.
11. State of Jharkhand & Ors. v. M/s. BLA Infrastructure Private Limited (2026), Supreme Court of India.
12. Jar Productions Private Limited v. Union of India (2022), Bombay High Court.
13. M/s Samyak Metals Pvt. Ltd. v. Union of India (2023), Punjab and Haryana High Court.
14. In re Abbott Healthcare Pvt. Ltd. (2026), Punjab and Haryana High Court.
15. In re SPL Motors Pvt. Ltd. (2026), Punjab and Haryana High Court.
16. M/s Proxima Steel Forge Pvt. Ltd. v. Union of India (2024), Punjab and Haryana High Court.

The author is an Assistant General Manager (AGM) in the Corporate Audit Department at Venus Remedies Limited, a leading pharmaceutical company. He is a qualified Chartered Accountant with vast experience in the fields of Internal Audit, Financial Reporting, GST, Direct Taxation, Corporate Compliance, Risk Management, and ERP-based business process controls.

During his professional career, he has been actively involved in conducting risk-based internal audits, strengthening internal control systems, implementing process improvements, and ensuring compliance with statutory and regulatory requirements. His experience encompasses GST compliance and litigation, Ind AS reporting, financial statement analysis, inventory and operational audits, EXIM compliance, and audit analytics.

He has played a significant role in audit automation initiatives, ERP validation projects, and the development of management reporting frameworks aimed at enhancing governance and operational efficiency. His professional interests include taxation, auditing standards, corporate governance, technology-driven assurance services, data analytics, and emerging regulatory developments impacting businesses.

Sunil regularly contributes to professional discussions and knowledge-sharing initiatives on taxation, audit practices, and corporate compliance. He is committed to promoting excellence in the accounting profession through continuous learning, practical insights, and the dissemination of knowledge on contemporary issues relevant to Chartered Accountants and finance professionals. He can also be reached at casunilsharma.in@gmail.com