I. Introduction: A Reform and Its Shadow
When the GST Council convened for its 56th meeting on 3 September 2025, it delivered what has justly been described as the most far reaching recalibration of the goods and services tax since its introduction in July 2017.1 The familiar four tier tariff was collapsed into a lean two rate structure, a merit rate of five per cent and a standard rate of eighteen per cent, with a solitary demerit rate of forty per cent reserved for sin and luxury goods; the reform took effect from 22 September 2025 through a suite of rate notifications.2 The stated object was noble and, on its own terms, largely achieved: fewer slabs, fewer classification disputes, and a lighter burden upon the common consumer.
Yet it is a settled truth of fiscal design that no rate is an island. Every output rate is tethered to a chain of input rates that precede it, and when the former is cut while the latter is left standing, the tax paid on inputs ceases to find full absorption against the tax due on outputs. The credit does not vanish; it accumulates, unutilised and inert, upon the books of the assessee. This is the inverted duty structure, and it is the shadow that GST 2.0 has cast upon several of the very sectors it sought to relieve.
The paradox deserves to be stated plainly. A reform conceived to ease the taxpayer has, in places, tightened the knot of stranded credit, because while the finished product was moved to five per cent, the services and capital goods that feed its manufacture remain obstinately at eighteen per cent. The relief promised to the consumer has thus become, for the manufacturer, a fresh source of working capital stress.
II. The Anatomy of an Inversion
An inverted duty structure arises whenever the rate of tax on inputs exceeds the rate of tax on the output supply. In such a case the output liability is simply too small to consume the credit generated by the inputs, and the surplus lies dormant. The credit is neither notional nor tainted; it is a genuine entitlement earned upon tax actually paid. Its vice lies only in its immobility, for credit that cannot be utilised is, to the man of business, indistinguishable from capital locked in a vault to which he holds no key.
The sectors afflicted are neither few nor obscure. Textiles have long laboured under inversion, and continue to do so where finished goods bear five per cent while yarn, fibre, and above all the services woven into production bear eighteen. Food processing tells the same tale: the packaged article is taxed at five per cent, yet the aluminium foil that wraps it is taxed at eighteen. Vaccines present a like difficulty, the finished dose attracting a modest rate while specialised chemicals and packaging attract a higher one. Electric vehicles, fertilisers, stationery, and renewable energy equipment complete a long and growing roll. In each the arithmetic is identical and the consequence uniform: an ever swelling pool of credit that the output tax can never drain.
III. The Statutory Architecture of Refund
The legislature was not blind to this mischief. Section 54(3) of the CGST Act confers upon the registered person a right to claim refund of any unutilised input tax credit.3 The right, however, is hedged. The first proviso permits refund in only two situations: first, zero rated supplies made without payment of tax; and second, where credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies, that is to say, the inverted duty structure. Even the second gateway is qualified, for it excludes nil rated and fully exempt supplies, and further excludes such goods or services as the Government may notify. Certain goods stand so notified and are denied inversion refund altogether.4
Were the matter to rest there, the relief would be generous. It does not rest there. Rule 89(5) of the CGST Rules prescribes the formula by which the refund is quantified, and the Explanation to that rule defines Net ITC as the input tax credit availed on inputs alone.5 The consequence is momentous and easily overlooked: the refund reaches the tax paid on input goods, but it does not reach the tax paid on input services, nor upon capital goods. Expressio unius est exclusio alterius; by naming inputs, the rule silently banishes the rest. The relief, in short, is partial even where it is available, and it is at its weakest precisely where modern industry is most exposed, namely in the mounting share of cost that services now represent.
IV. The Jurisprudential Settlement
The exclusion did not go unchallenged. In VKC Footsteps India Pvt Ltd the Gujarat High Court held the Explanation to Rule 89(5) ultra vires section 54(3), reasoning that input tax credit as defined embraces the tax on both goods and services, and that a subordinate formula could not curtail what the parent statute had granted. The Madras High Court, in Transtonnelstroy Afcons, took the opposite view, holding the restriction to be a legitimate exercise of delegated power. The conflict travelled to the Supreme Court, which, by its judgment of 13 October 2021, affirmed Madras and disapproved Gujarat.6,7
The Court's reasoning repays attention, for it is the fulcrum upon which the entire controversy still turns. A refund, their Lordships held, is neither a constitutional guarantee nor an inherent entitlement; it is a creature of statute, and the legislature may confer it in such measure and upon such terms as it thinks fit. Since Parliament had consciously confined inversion refund to input goods, the Court would not, under the guise of interpretation, rewrite the formula and step into the shoes of the legislature. The plea under Article 14, that manufacturers and service suppliers were treated unequally, was repelled on the footing that the two stood upon a different statutory basis. Dura lex sed lex; the law was upheld though its harshness was not denied.
And it was not denied. In a passage that has since acquired a life of its own, the Court candidly acknowledged the anomalies thrown up by the formula and strongly urged the GST Council to reconsider it. That invitation was, in part, accepted. By Notification No. 14/2022 Central Tax the formula in Rule 89(5) was amended to temper its second limb, so that the tax payable on the inverted supply would be reduced with reference to the proportion that input services bore to the whole.8 The amendment did not, it must be stressed, restore input services to the definition of Net ITC; the substantive exclusion pronounced in VKC Footsteps endures to this day. What the amendment corrected was a distortion within the arithmetic, not the exclusion itself.
Even that limited correction was administratively hedged. Circular No. 181/13/2022 sought to confine the benefit of the amended formula to refund applications filed on or after 18 July 2022, thereby creating a classification founded upon nothing more than the date of filing.9 The courts were unpersuaded. The Gujarat High Court in Ascent Meditech held the amendment to be curative and hence retrospective, a view from which the Supreme Court declined to interfere.10 The same conclusion was reached in Filatex India,11 and the Bombay High Court in CHEC-TPL Line 4 Joint Venture allowed refund claims relating to periods anterior to 5 July 2022, holding that an anomaly once corrected must be treated as never having been intended.12
V. The Same Product Bar and Its Unravelling
A second and more insidious restriction merits separate notice, for it bears directly upon the fallout of a rate rationalisation. By paragraph 3.2 of Circular No. 135/05/2020 the Board took the view that no inversion refund would lie where the accumulation arose merely because the rate on a product had been reduced over time, the input and the output being one and the same commodity.13 The logic, such as it was, sought to distinguish a true inversion from a temporal one.
The High Courts would have none of it. The Gauhati High Court in BMG Informatics held the paragraph unsustainable and liable to be ignored, observing that the statute drew no such distinction and that the executive could not import one.14 The Calcutta High Court in Shivaco Associates, dealing with liquefied petroleum gas taxed at eighteen per cent as input and five per cent as output, struck the same note, holding that a circular issued under section 168(1) cannot supplant or implant a provision absent from the Act.15,17 The Rajasthan High Court in Baker Hughes concurred.16 The principle that emerges is orthodox and salutary: ubi lex non distinguit, nec nos distinguere debemus, where the law does not distinguish, neither ought the administrator.
This body of authority assumes fresh importance under GST 2.0, for much of the inversion now complained of has arisen precisely from the reduction of rates upon finished goods. Were the discredited reasoning of Circular 135 to be revived in departmental practice, and there is a lamentable tendency for buried restrictions to resurface, the taxpayer would be driven once more to the writ court to vindicate a right that the statute plainly confers.
VI. The Fallout in the Field
The practical incidence of the reform may be simply stated. In textiles the finished garment sits at five per cent while inputs and services persist at eighteen, and the inversion, far from healed, has in several segments widened. In food processing the packaged product bears five per cent while its very packaging bears eighteen. In electric vehicles, and in sectors heavily dependent upon services or capital goods, the mismatch is sharpest, for it is exactly the services and the capital goods that the refund does not reach. The correction in man made fibre and yarn, both moved to five per cent, shows that inversion is best cured by aligning input and output rates rather than by cutting the output rate alone; but that lesson has been applied unevenly, and where it has not, the credit simply piles higher.
It is instructive that the concern was voiced at the highest levels of the administration itself. In the inter ministerial deliberations that preceded the rollout, proposals were canvassed to permit stranded credit to be applied against State tax, to be set off against customs duty, or to be converted into tradable scrips. That such remedies were even contemplated is an admission, tacit but telling, that the ordinary refund route was known to be inadequate to the scale of the accumulation the reform would produce.
VII. The Government's Palliative
To its credit, the Government did not sit idle. By Notification No. 13/2025 Central Tax the second sub rule of Rule 91 was amended to provide for the sanction, on a provisional basis and upon a system driven evaluation of risk, of ninety per cent of the refund claimed, with effect from 1 October 2025.18 By Instruction No. 06/2025 the Board extended this facility, as an interim measure, to refunds arising from the inverted duty structure, pending the statutory amendment of section 54(6) that is to be carried through the Finance Act and ratified by the States.19,20
The relief is real and its liquidity value is not to be disparaged. A manufacturer who once waited months for his money may now recover the greater part of it within days of acknowledgement. Yet one must not mistake acceleration for enlargement. The provisional refund hastens the payment of that which was always refundable; it does not bring within the fold a single rupee of the credit that Rule 89(5) has placed beyond reach. The tax borne on input services and on capital goods remains stranded, whether it be released quickly or slowly. The palliative eases the symptom; it does not touch the disease.
VIII. The Unfinished Business
Three fault lines therefore remain open, and honesty compels their acknowledgement.
First, the substantive exclusion of input services and capital goods from inversion refund, sanctioned in VKC Footsteps, survives untouched. As services swell as a proportion of industrial cost, an outcome that GST 2.0 has if anything accelerated, the exclusion bites harder with each passing quarter. What was a tolerable rough edge in 2017 is fast becoming a structural leak.
Second, the provisional refund, welcome though it is, is a measure of cash flow and not of restitution. It addresses when the taxpayer is paid, not how much.
Third, the constitutional question that the Supreme Court expressly left ajar, the asserted inequality between the supplier of goods and the supplier of services under Articles 14 and 19(1)(g), has never been fully argued and remains, upon the Court's own invitation, open to reconsideration.21
The path forward is not obscure. The most principled course would be a legislative amendment restoring input services, and in due course capital goods, to the definition of Net ITC, thereby giving effect to the very reconsideration the Supreme Court solicited. Failing that, the alternative utilisations under study, whether set off against State tax or customs duty, or conversion into tradable instruments, would at least confer upon stranded credit a mobility it presently lacks. What cannot be defended is inertia, for a credit that is genuine yet perpetually frozen is a tax upon capital in all but name, and it sits uneasily with the promise that the goods and services tax would be a seamless levy free of cascading.
IX. Conclusion
GST 2.0 has simplified the tariff, and for that it deserves the acclaim it has received. But simplification of the rate card is not the same as resolution of the inversion, and in several sectors the reform has deepened the very anomaly it was meant to dissolve. The refund architecture, as settled by VKC Footsteps and refined by the amendment of 2022, offers only a partial answer; the provisional refund instruction of October 2025 offers only a faster partial answer. Until the statute itself is enlarged to reach input services and capital goods, or an alternative destiny is legislated for stranded credit, the blocked refund fallout will endure as the reform's conspicuous unfinished business. Ubi jus ibi remedium: where there is a right there is a remedy, and the right to relief from frozen credit still awaits a remedy equal to its measure.
References
References follow the AMA style.
1. GST Council. Recommendations of the 56th Meeting of the GST Council. New Delhi: Press Information Bureau, Government of India; September 3, 2025.
2. Government of India, Ministry of Finance. Notifications Nos. 09/2025 to 17/2025 Central Tax (Rate), dated September 17, 2025 (effective September 22, 2025).
3. Central Goods and Services Tax Act, 2017, s 54(3) and the first proviso thereto (India).
4. Government of India, Ministry of Finance. Notification No. 5/2017 Central Tax (Rate), dated June 28, 2017 (India).
5. Central Goods and Services Tax Rules, 2017, r 89(5) and Explanation (a) thereto (India).
6. Union of India v VKC Footsteps India Pvt Ltd, [2021] 130 taxmann.com 193 (SC); Civil Appeal No 4810 of 2021, decided October 13, 2021.
7. Tvl Transtonnelstroy Afcons Joint Venture v Union of India, WP No 8596 of 2019 (Madras High Court), affirmed in reference 6.
8. Government of India, Ministry of Finance. Notification No. 14/2022 Central Tax, dated July 5, 2022 (amending r 89(5), CGST Rules, 2017) (India).
9. Central Board of Indirect Taxes and Customs. Circular No. 181/13/2022 GST, dated November 10, 2022 (India).
10. Union of India v Ascent Meditech Ltd, [2025] 173 taxmann.com 154 (SC).
11. Filatex India Ltd v Union of India, [2025] 174 taxmann.com 79 (Gujarat High Court).
12. CHEC-TPL Line 4 Joint Venture v Union of India, Writ Petition No 2583 of 2025 (Bombay High Court).
13. Central Board of Indirect Taxes and Customs. Circular No. 135/05/2020 GST, dated March 31, 2020, para 3.2 (India).
14. BMG Informatics Pvt Ltd v Union of India, 2021 SCC OnLine Gau 2570; WP(C) No 3878 of 2021, decided September 2, 2021 (Gauhati High Court).
15. Shivaco Associates v Joint Commissioner of State Tax, 2022 SCC OnLine Cal 459 (Calcutta High Court).
16. Baker Hughes Asia Pacific Ltd v Union of India, 2022 SCC OnLine Raj 1061 (Rajasthan High Court).
17. Central Goods and Services Tax Act, 2017, s 168(1) (India).
18. Government of India, Ministry of Finance. Notification No. 13/2025 Central Tax, dated September 17, 2025 (amending r 91(2), CGST Rules, 2017; effective October 1, 2025) (India).
19. Central Board of Indirect Taxes and Customs. Instruction No. 06/2025 GST, dated October 3, 2025 (India).
20. Central Goods and Services Tax Act, 2017, s 54(6) (India).
21. Constitution of India, arts 14 and 19(1)(g).
Confidence Assessment
High confidence: the two rate architecture of GST 2.0 and its effective date; the statutory refund framework under section 54(3) and Rule 89(5); the exclusion of input services and capital goods from Net ITC; the ratio and disposition in VKC Footsteps; the same product line of authority (BMG Informatics, Shivaco Associates, Baker Hughes); and the provisional refund measures (Notification No. 13/2025 Central Tax read with Instruction No. 06/2025 GST).
Moderate confidence, to be verified against the bound reports before publication: the parallel neutral and SCC citations for VKC Footsteps; the reported citations [2025] 173 and 174 taxmann.com for Ascent Meditech and Filatex; and the exact cause numbers for Transtonnelstroy Afcons and CHEC-TPL Line 4 Joint Venture.
Flag: the extension of provisional refund to inverted duty structure claims presently rests upon an administrative Instruction as an interim measure; the substantive amendment to section 54(6) is to be carried by the Finance Act and requires ratification by the States. The reader should confirm whether that amendment has since been enacted and whether any fresh circular or notification has intervened after the date of writing.