Inverted Duty Refund Rejected 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.
Inverted duty refunds are rejected more often than most other refund types, because the claim depends on a formula, a definition of "inputs" and a list of circulars that have been partly struck down. Most rejections fall into a small set of grounds. Some are sound and should be corrected in a fresh claim. Others rest on positions the courts have already rejected and can be contested.
The usual grounds are: input services or capital goods in Net ITC (a sound objection after VKC Footsteps); same input and output goods (CBIC's Circular 135/05/2020 position, which several High Courts have rejected); goods on the restricted list in Notification 5/2017-CT(R); nil-rated or exempt output; credit not in GSTR-2B; and time bar. Two grounds based on Circular 181/13/2022 are now weak: that the substituted Rule 89(5) formula applies only to applications from 05.07.2022 (quashed in Ascent Meditech, Gujarat HC, 17.10.2024), and that restrictions from 18.07.2022 apply to all later applications regardless of period (struck down in Patanjali Foods, Gujarat HC, and Gemini Edibles, AP HC, SLP dismissed 09.05.2025). Before rejecting, the officer must issue RFD-08; you reply in RFD-09.
The rejection grounds at a glance
| Ground | Legal basis the officer cites | How strong is it? | What to do |
|---|---|---|---|
| Input services or capital goods included in Net ITC | Section 2(59), Rule 89(5), VKC Footsteps (SC, 13.09.2021) | Strong | Recompute Net ITC with input goods only |
| Input and output are the same goods | Circular 135/05/2020, para 3.2 (as substituted by Circular 173/05/2022) | Contestable | Show other inputs taxed higher, or a concessional rate; cite High Court rulings |
| Goods on the restricted list | Notification 5/2017-CT(R), as amended | Strong if the goods and period are covered | Check the HSN and the period the credit relates to |
| Restriction applied by filing date, not accumulation period | Circular 181/13/2022, para 2.2 | Weak | Cite Patanjali Foods and Gemini Edibles |
| Old formula applied to pre-05.07.2022 applications | Circular 181/13/2022 | Weak | Cite Ascent Meditech |
| Output nil-rated or fully exempt | Section 54(3)(ii) | Strong | Remove exempt turnover; reverse credit for exempt supplies |
| Credit not reflected in GSTR-2B | Rule 89(2) and CBIC instructions | Usually strong | Reconcile; exclude unmatched invoices |
| Claim filed after two years | Section 54(1), Explanation 2 | Strong, subject to COVID exclusion | Check the relevant date and the exclusion period |
| Drawback of central tax availed | Proviso to section 54(3) | Strong where applicable | Check what drawback was taken |
If you have an RFD-08 in hand or an RFD-06 rejecting your claim, our GST refund rejection service can assess which of these grounds actually applies and prepare the reply or appeal.
1. Input services and capital goods in Net ITC
Section 2(59) defines "inputs" as goods other than capital goods. Rule 89(5) defines Net ITC as ITC availed on inputs. The ICAI Handbook notes CBIC's clarification that both the law and the rules prevent refund of tax paid on input services and capital goods under this route. The Supreme Court in VKC Footsteps India Pvt Ltd (13.09.2021) upheld this, holding that reading input services into "inputs" would be a judicial re-writing of the provision.
This is the most common reason for partial rejection, and there is little room to argue it. Freight, job work, rent, professional fees, testing and machinery credit must come out of Net ITC. Input service credit appears only in the denominator of the second part of the formula. See Net ITC meaning in the refund formula.
2. Same input and output goods
Circular 135/05/2020 says refund under section 54(3)(ii) does not apply where the input and output supplies are the same, as where a trader's goods move from 18% to 12% after purchase. Circular 173/05/2022 allows refund where the same goods carry a lower rate at the same time under a concessional notification.
The Handbook reports rulings that go further in the taxpayer's favour: Shivaco Associates (Calcutta HC), Baker Hughes (Rajasthan HC), Nahar Industrial Enterprises (Rajasthan HC) and Indian Oil Corporation (Delhi HC). Indian Oil held that a claim cannot be denied because the principal input and output carry the same rate where other inputs are taxed higher. If your rejection rests on this ground, it is worth contesting. See inverted duty refund for traders vs manufacturers.
3. Restricted goods and Circular 181, para 2.2
Notification 5/2017-CT(R) bars inverted duty refund for notified goods. Notification 9/2022-CT(R) added restrictions from 18.07.2022. Para 2.2 of Circular 181/13/2022 then extended them to every application filed after that date, even for older credit.
- Patanjali Foods Ltd. (Gujarat HC): Notification 9/2022 is prospective; para 2.2 of Circular 181 struck down as arbitrary, ultra vires section 54 and violative of Article 14. The Handbook adds that the court said a refund once granted cannot be recovered by a fresh show cause notice unless an appeal or review has been started.
- Gemini Edibles and Fats India Ltd. (AP HC): credit accumulated before 18.07.2022 remains refundable, whenever the claim is filed. The Supreme Court dismissed the Revenue's SLP on 09.05.2025.
The test is when the credit accumulated. Details are in goods where inverted duty refund is not allowed and Circular 181 cannot override section 54(3).
4. The formula in Circular 181
Notification 14/2022-CT (05.07.2022) substituted the Rule 89(5) formula. The new formula reduces the tax-payable deduction by the ratio of Net ITC to total ITC on inputs and input services, which usually gives a higher refund. Circular 181/13/2022 said the change was prospective, applying only to applications filed on or after 05.07.2022.
In Ascent Meditech Ltd. (Gujarat HC, 17.10.2024), the court quashed that part of the circular. It held the amendment curative and clarificatory, so it applies retrospectively to refund or rectification applications filed within the two-year period under section 54(1).
Illustration (round figures): inverted turnover and ATT ₹1,00,00,000; tax payable ₹5,00,000; Net ITC ₹9,00,000; total ITC on inputs and input services ₹10,00,000.
- Old formula: 9,00,000 − 5,00,000 = ₹4,00,000
- Substituted formula: 9,00,000 − (5,00,000 × 9 ÷ 10) = ₹4,50,000
If an officer applied the old formula to your claim, the ₹50,000 difference is worth pursuing. Try both on the GST refund calculator.
5. Exempt output, GSTR-2B and time bar
- Exempt output. Section 54(3)(ii) excludes nil-rated and fully exempt supplies. See inverted duty refund where output is exempt or nil.
- GSTR-2B. Invoices that did not appear in GSTR-2B are routinely excluded. See refund rejected: ITC not in GSTR-2B.
- Time bar. Two years from the GSTR-3B due date for the period. The period 01.03.2020 to 28.02.2022 is excluded under Notification 13/2022-CT. See GST refund rejected as time-barred.
How to respond
- RFD-08 first. The officer cannot reject without a show cause notice in RFD-08. Reply in RFD-09 within the time given, on each ground separately, and ask for a personal hearing. See RFD-08 reply format.
- After RFD-06. Where the amount debited is rejected, it is re-credited to the ledger through PMT-03 once the appeal period is over or the order is accepted. See re-credit of rejected refund.
- Appeal. You can appeal under section 107 with the pre-deposit, and further to GSTAT. See appealing a refund rejection order.
- Fresh claim. Where the rejection was right (for example, input services in Net ITC), correct the working and file afresh if still within the two-year limit.
Need help with a rejected inverted duty claim?
A rejection order often mixes one sound objection with two weak ones. We can separate them, reply to the RFD-08 on the contestable grounds, correct what needs correcting and take the matter to appeal where needed. See GST refund rejection support. If you want the next claim prepared properly from the start, see inverted duty refund filing.
Key takeaways
- Input services and capital goods in Net ITC is a sound ground after VKC Footsteps. Correct and refile.
- "Same goods" rejections under Circular 135 are contestable in the light of several High Court rulings.
- Circular 181's formula position was quashed in Ascent Meditech; its para 2.2 was struck down in Patanjali Foods and Gemini Edibles.
- Restricted-goods and exempt-output rejections are sound if the goods and period are actually covered.
- The officer must issue RFD-08 before rejecting. Reply ground by ground in RFD-09.
Read next
- Common reasons for GST refund rejection and remedies
- Goods where inverted duty refund is not allowed
- How to file inverted duty refund on the GST portal
- Appealing a refund rejection order
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.