The recent amendments brought in through GST 2.0 reforms (56th Council Meeting held in Sep-2025) have resulted in situations wherein the rates of taxes on various products (outputs) had been reduced without a corresponding decrease in the rate of tax on inputs — giving rise to new categories of taxpayers impacted by the inverted duty structure.
What is Inverted Duty Structure?
Inverted duty structure arises in cases where the rate of tax on inputs is higher than the rate of tax on output. For example, inputs attracting 18% GST while the finished output attracts only 5% GST. This mismatch results in accumulated Input Tax Credit (ITC) that cannot be utilized against output tax liability, leading to significant working capital blockage.
The GST 2.0 reforms — specifically the rate rationalization decisions of the 56th GST Council Meeting — have reduced output tax rates on certain products without a commensurate reduction in input tax rates. This has inadvertently expanded the universe of taxpayers facing inverted duty challenges.
Key Insight: When input GST rates (e.g., 18%) exceed output GST rates (e.g., 5%), businesses accumulate ITC they cannot offset — creating a cash flow crisis that the provisional refund mechanism is designed to address.
What is a Provisional Refund?
One of the most crucial pain points for certain businesses under the GST regime has been delays in refund processing, leading to substantial working capital blockage. To address this issue, the concept of provisional refund was introduced under the CGST Act, 2017.
As per the existing provisions of GST law, in respect of refund claims on account of zero-rated supplies of goods or services or both (under LUT), the proper officer can sanction a provisional refund of up to 90% of the total amount claimed — subject to prescribed conditions, limitations and safeguards — before the final settlement of the refund claim after due verification of documents.
Purpose
Provides immediate liquidity to businesses while the detailed verification of documents and final settlement of refund claims is in progress.
Safeguards
The balance 10% is withheld and released only after due verification, ensuring government revenue interests are adequately protected.
Extension of Benefit of Provisional Refund
The benefit of grant of provisional refund has now been extended to include refunds arising out of inverted duty structure. This is a significant expansion of the earlier benefit which was limited only to zero-rated supply refund cases.
The proper officer can sanction a provisional refund of up to 90% of the total amount claimed within 7 days of filing the refund application. The provisional refund is not automatic or final — the balance 10% will be granted after due verification, safeguarding revenue interests. For verification and grant of final refund, the officer has a timeline of 60 days from the date of filing of the refund application.
Important Note: The provisional refund mechanism reflects a taxpayer-centric approach. The proposed extension of this benefit to inverted duty structure cases is a welcome move that addresses long-standing liquidity concerns of businesses across multiple sectors.
Impact & Business Implications
The amendment will lead to improved cash flow for businesses stuck with accumulated ITC due to inverted duty structure. This reduces working capital blockage, which is a major concern in inverted duty cases.
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01 Improved Cash FlowBusinesses that have been accumulating ITC without being able to utilize it against output tax will now receive 90% of their refund claims within 7 days of application, substantially improving working capital position.
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02 Reduced Financial BurdenThe extended provisional refund mechanism reduces the financial strain on businesses operating in sectors newly impacted by inverted duty as a result of GST 2.0 rate rationalization.
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03 Revenue ProtectionThe 10% retention mechanism ensures that the government's revenue interests are adequately protected during the pendency of full verification, maintaining a balance between taxpayer convenience and fiscal prudence.
The extension of provisional refund benefit to inverted duty structure cases under GST 2.0 is a taxpayer-centric reform that directly addresses the acute liquidity crisis faced by businesses affected by the recent rate rationalization. The 90% upfront release within 7 days, combined with the 60-day final settlement timeline, strikes an effective balance between business relief and regulatory safeguards.
— APMH Consulting | GST Advisory Practice | www.apmhconsulting.com