According to a senior government official, the Central Government is actively considering allowing refunds of unutilised ITC on capital goods under the inverted duty structure (IDS).
The proposal, if implemented, would mark a crucial step towards rationalising credit flow and reducing working capital blockages in sectors affected by inverted duty rates - where the tax rate on inputs is higher than that on finished goods, leading to accumulation of unutilised ITC.
"The government has the appetite and is examining how a refund of unutilised ITC on capital goods can be enabled under IDS," the official said, adding that a similar mechanism for input services may take longer.
Currently, under the GST framework, refunds of unutilised ITC are permitted only for inputs (raw materials) under IDS, while those accumulated on capital goods and input services remain blocked. This has long been a concern for industries such as manufacturing and export-oriented sectors that face liquidity constraints due to stranded credits.
A second official noted that ITC reform is emerging as "the next big agenda before the government," acknowledging that the absence of refunds for services and capital goods creates structural distortions in the GST regime.
"The fact that refunds of ITC on services and capital goods are not permitted under IDS is a structural imbalance. This needs to be addressed," the official added.
Implementation May Take Time
Officials clarified, however, that the change may not be immediate. The Centre's focus is currently on stabilising the GST 2.0 framework, which was recently launched to simplify compliance and strengthen data integration before introducing new policy amendments.
Under existing provisions, while refunds are allowed on unutilised ITC from inputs, businesses availing high-value services or capital goods often face blocked credits that erode liquidity and increase compliance costs.
At present, certain state schemes reimburse assessees based on net cash GST paid - that is, the amount paid through the electronic cash ledger after utilising available credit which further limits liquidity benefits for companies operating under the inverted structure.
The Road Ahead
While the proposal is still under discussion, experts believe that enabling ITC refunds on capital goods could be a pivotal reform for India's manufacturing ecosystem. It would align with the government's broader "Make in India" and ease of doing business objectives by addressing one of the key inefficiencies in the GST credit mechanism.
If the Centre moves ahead with this reform, it could pave the way for a more balanced and transparent GST regime, benefiting both domestic manufacturers and exporters in the long term.
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