Inverted Duty Refund explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Electric vehicle makers are among the most common inverted duty claimants. The finished vehicle usually sits in a concessional GST slab, while key inputs such as cells, battery packs, electronics and many parts are taxed higher. The gap shows up as credit that never gets used. Section 54(3)(ii) lets you take that credit back in cash, within limits.
An EV manufacturer whose input goods carry a higher GST rate than the vehicle it sells can claim a refund of the accumulated credit in RFD-01 under section 54(3)(ii), using the Rule 89(5) formula. Credit on capital goods (assembly lines, test rigs) and input services (R&D contracts, logistics, royalties) is excluded. Only invoices reflected in GSTR-2B count. Vehicles and parts rates have moved over the years and were touched by GST 2.0 on 22.09.2025, so confirm the current rate for each HSN before you model the claim.
Why EV makers end up with an inverted structure
We are not quoting specific rates here, because they vary by vehicle type, battery chemistry and HSN, and several were revised on 22.09.2025. The pattern, though, is well established:
| Side | What it usually includes | Rate position (illustrative) |
|---|---|---|
| Output | Electric two-wheelers, three-wheelers, cars, buses | Concessional slab (say 5%) |
| Inputs | Cells, battery packs, BMS, motors, controllers, harnesses, plastics, tyres | Many at the standard slab (say 18%) |
| Excluded from Net ITC | Capital goods, R&D and design services, freight, rent, marketing | Refund not available on these |
If your inputs are at, say, 18% and the vehicle at 5%, every sale leaves credit behind. At scale this ties up working capital, which is the reason the inverted duty route exists.
Worked example: an electric two-wheeler maker
Illustration (one quarter, round figures, rates illustrative):
| Item | Amount (₹) |
|---|---|
| Turnover of vehicles (inverted rated supply) | 5,00,00,000 |
| Adjusted Total Turnover | 5,00,00,000 |
| Tax payable on vehicles | 25,00,000 |
| Net ITC on inputs (cells, motors, parts) | 60,00,000 |
| ITC on input services | 5,00,000 |
| ITC on inputs + input services | 65,00,000 |
| ITC on capital goods (new line) | 10,00,000 |
Rule 89(5): (5,00,00,000 × 60,00,000 ÷ 5,00,00,000) − (25,00,000 × 60,00,000 ÷ 65,00,000) = 60,00,000 − 23,07,692 = ₹36,92,308
Ledger at quarter end: 65,00,000 + 10,00,000 − 25,00,000 = ₹50,00,000. The refund is the lower figure, ₹36,92,308. The capital goods credit stays in the ledger for future use. You can check your own figures on the GST refund calculator.
For a detailed review of your Net ITC and ledger position, see our inverted duty refund service.
Issues specific to EV claims
1. Spare parts and batteries sold separately. Sales of replacement batteries, chargers or spares may be at a different rate from the vehicle. Only turnover where the output rate is lower than the input rate is "inverted rated supply". Turnover at a higher rate goes into Adjusted Total Turnover and reduces the refund proportionately.
2. Imported cells. ITC on IGST paid at import is verified against the Bill of Entry, not GSTR-2B. That is one of the exceptions in Circular 197/09/2023-GST. Keep the Bill of Entry data clean, because mismatches on the ICEGATE side cause deficiency memos.
3. R&D and homologation costs. Testing, certification and design fees are input services. They are excluded from Net ITC after VKC Footsteps. Many EV start-ups over-claim here.
4. Subsidy-linked pricing. If the price is reduced by a subsidy or discount structure, make sure the taxable value in GSTR-1 matches the turnover used in the formula. Differences invite questions.
5. Exports. Vehicles exported under LUT are zero-rated and claimed under Rule 89(4), in a separate category. See GST refund for exporters.
6. Rate changes on 22.09.2025. If parts or vehicles changed rate, stock bought before and sold after the change may raise a "same goods" question. CBIC's view is that a rate change on the same goods is not an inverted duty case. For a vehicle maker whose inputs and outputs are different goods, this issue rarely arises. It matters for EV dealers and parts traders. See inverted duty refund for traders vs manufacturers.
Provisional refund is coming, but not yet
The Finance Act 2026 extends 90% provisional refund under section 54(6) to inverted duty claims. It has been enacted but is not yet in force, because it awaits notification. For now, EV makers wait for full scrutiny. That usually means acknowledgement within 15 days and sanction within 60 days of a complete application. Interest at 6% applies if sanction is late.
Need help with an EV refund?
EV claims are large, and they draw scrutiny on import credit, R&D services and spare-part turnover. We can build a defensible Rule 89(5) working, reconcile imports and GSTR-2B, and track the claim to disbursement. See inverted duty structure refund support or the wider GST refund services.
Key takeaways
- EV makers whose input goods are taxed higher than the vehicle can claim under section 54(3)(ii) and Rule 89(5).
- Capital goods and input services, including R&D and testing, are excluded from Net ITC.
- Import credit is verified against Bills of Entry. Domestic credit must appear in GSTR-2B.
- Spares or batteries sold at a higher rate lower the refund through Adjusted Total Turnover.
- Provisional refund for inverted duty claims has been enacted but is not yet in force.
Read next
- How to file inverted duty refund on the GST portal
- Provisional refund for inverted duty structure under section 54(6)
- ITC accumulation after GST 2.0 rate cuts
- Inverted duty refund rejected: common grounds
Disclaimer: Positions stated as on 30 September 2026, based on the CGST Act and Rules as amended, the Finance Act 2026, and the ICAI Handbook on Refunds under GST (January 2026). Verify current notifications before filing.