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.
Footwear is where the modern law on inverted duty refunds was settled. The Supreme Court's VKC Footsteps judgment came from a footwear maker, and the rate split in this industry still makes credit pile up for many manufacturers. This guide explains who qualifies, how the rate bands affect the maths, and where claims usually go wrong.
Footwear under Chapter 64 is taxed at 18%. The exception is footwear with a retail sale price not exceeding ₹2,500 per pair, marked or embossed on the footwear, which is taxed at 5%. When soles, uppers, adhesives, components and packing cost you more in GST than you charge on 5% footwear, the extra credit is refundable under section 54(3)(ii) using Rule 89(5). Only credit on input goods counts. VKC Footsteps (SC, 13.09.2021) confirmed that input services are excluded. If you also sell 18% footwear, only the 5% turnover is "inverted rated supply", and the refund is capped by your credit-ledger balance.
Why footwear makers accumulate credit
The rate on footwear depends on price. The ICAI's June 2026 handbook on finalisation of accounts gives the current split: Chapter 64 goods are at 18%, except footwear with a retail sale price not exceeding ₹2,500 per pair, which is at 5% provided the price is marked or embossed on the footwear itself.
A manufacturer of mass-market footwear therefore sells mostly at 5%. Many of its inputs are taxed higher. Typical examples are synthetic materials, PU and rubber compounds, adhesives, eyelets and trims, and cartons. Each month the input credit exceeds the output tax and the credit ledger grows. Check the current rate for each of your input HSNs. This guide keeps the input rate illustrative.
What VKC Footsteps decided
The footwear industry argued that credit on input services (job work, freight, rent, advertising) should also be refundable. The Supreme Court disagreed. It held that section 54(3)(ii) speaks of "inputs", meaning goods, and that reading input services into it would rewrite the statute. Rule 89(5), which limits Net ITC to inputs, was upheld.
The practical effect is that a footwear unit that outsources stitching or pays large freight bills will keep some credit in its ledger that it cannot get back through this route. It can only use it against future output tax.
Mixed price bands: a worked example
Most brands sell in both bands. The formula treats only the 5% turnover as inverted rated supply, while Adjusted Total Turnover includes everything.
Illustration (one month, round figures):
| Item | Amount (₹) |
|---|---|
| Footwear ≤ ₹2,500 a pair (5%) | 60,00,000 |
| Footwear above ₹2,500 a pair (18%) | 40,00,000 |
| Adjusted Total Turnover | 1,00,00,000 |
| Tax payable on the 5% turnover | 3,00,000 |
| Tax payable on the 18% turnover | 7,20,000 |
| Net ITC (inputs only) | 11,00,000 |
| ITC on input services | 1,00,000 |
| ITC on inputs + input services | 12,00,000 |
Formula refund = (60,00,000 × 11,00,000 ÷ 1,00,00,000) − (3,00,000 × 11,00,000 ÷ 12,00,000) = 6,60,000 − 2,75,000 = ₹3,85,000
Now the ledger check. Total credit ₹12,00,000 less total output tax ₹10,20,000 leaves ₹1,80,000 in the credit ledger. The portal pays the least of the formula figure and the ledger balances, so the refund is ₹1,80,000.
The lesson: the 18% range absorbs credit before the refund is worked out. A brand with a large premium range may see a big formula number but a small cheque. Try your own mix on the GST refund calculator, or ask our inverted duty refund team to model it across months.
Price-band classification is where audits start
Because the rate turns on the retail sale price per pair, the refund officer and later auditors will look at:
- whether the price was marked or embossed on the footwear itself, which the concessional rate requires;
- whether invoices split pairs correctly when a pack or combo is sold;
- whether the output tax you paid matches the band.
If some pairs should have been at 18%, the "inverted rated supply" figure shrinks. You may also face a demand for short payment. Get the classification right before you claim.
Other conditions footwear makers miss
- GSTR-2B match. For periods from 01.01.2022, only credit reflected in GSTR-2B is refundable (Circular 197/09/2023-GST). Small component suppliers are the usual gap.
- Capital goods. Credit on moulds, machines and dies does not enter Net ITC.
- Statement 1A. Every inward and outward invoice for the period goes into the Rule 89(2)(h) statement. See our Statement 1A guide.
- Time limit. Two years from the due date of GSTR-3B for the claim period.
- Stock carried across 22.09.2025. If you bought finished footwear before the GST 2.0 changes and sold it afterwards at a lower rate, CBIC treats same-goods rate changes as outside the inverted duty route. High Courts have taken a different view in some cases. Take advice before you claim on that basis.
Need help with a footwear refund?
Footwear claims turn on three things: the price-band split, keeping input services out of Net ITC, and the ledger cap. We can build month-wise Rule 89(5) workings, reconcile to GSTR-2B and take the claim through to RFD-06. See GST refund for inverted duty structure.
Key takeaways
- Footwear with a retail sale price up to ₹2,500 a pair (marked on the footwear) is at 5%. Other Chapter 64 footwear is at 18%.
- Credit on input goods above the 5% output tax is refundable under section 54(3)(ii) and Rule 89(5).
- VKC Footsteps confirmed that input services are excluded from inverted duty refunds.
- With mixed bands, the 18% output tax uses up credit, and the ledger balance often caps the refund.
- Price-band classification and GSTR-2B matching are the main audit points.
Read next
- Inverted duty refund for traders vs manufacturers
- Net ITC meaning in the GST refund formula
- Inverted duty refund rejected: common grounds
- Inverted duty refund formula with examples
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.