Rule 89(4): The Refund Formula and the 1.5 Times Value Cap

Rule 89 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.

The refund formula looks mechanical until you reach the definition of "Turnover of zero-rated supply of goods", which since July 2022 has carried a cap that one High Court has struck down as arbitrary and another has held to be a valid procedural change. Both judgments stand, and neither has been displaced.

Rule 89(4) computes the maximum refund of unutilised ITC on zero-rated supplies as (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover. Notification No. 14/2022-Central Tax dated 05.07.2022 amended rule 89(4)(c) so that turnover of zero-rated goods is "the value… or the value which is 1.5 times the value of like goods domestically supplied by the same or similarly placed supplier, as declared by the supplier, whichever is less." In Tonbo Imaging India Pvt Ltd v. Union of India the Karnataka High Court declared the amendment "arbitrary and unreasonable"; in Indian Herbal Stores (P) Ltd the Delhi High Court held it "procedural in nature and hence prospective".

The three definitions inside the formula

"Net ITC" — "input tax credit availed on inputs and input services during the relevant period." Capital goods are outside it.

"Turnover of zero-rated supply of goods" — "the value of zero-rated supply of goods made during the relevant period without payment of tax under bond or letter of undertaking or the value which is 1.5 times the value of like goods domestically supplied by the same or, similarly placed, supplier, as declared by the supplier, whichever is less."

"Turnover of zero-rated supply of services" — "the aggregate of the payments received during the relevant period for zero-rated supply of services and zero-rated supply of services where supply has been completed for which payment had been received in advance in any period prior to the relevant period reduced by advances received for zero-rated supply of services for which the supply has not been completed during the relevant period."

"Adjusted Total Turnover" — total turnover of goods and services "excluding the value of exempt supplies other than zero-rated supplies."

That last exclusion matters enormously in agriculture. Exempt domestic sales are stripped out of the denominator, which raises the refund fraction for an exporter who also sells exempt produce at home.

And the export value itself "shall be taken as – (i) the Free on Board (FOB) value declared in the Shipping Bill or Bill of Export… or (ii) the value declared in tax invoice or bill of supply, Whichever is less."

Why the cap was introduced, and what it does

The cap addresses over-invoicing of exports: an exporter who declares an inflated export value inflates the numerator of the formula and extracts a larger refund than his actual input tax burden warrants.

The mechanism is a comparison to the domestic market. If the same or a similarly placed supplier sells like goods domestically at ₹100, the export turnover for refund purposes cannot exceed ₹150 however high the declared export value.

Three practical difficulties follow.

"Like goods domestically supplied" may not exist. An exporter of a grade or variety produced only for export has no domestic comparable.

"Similarly placed supplier" is undefined, and requires the exporter to know a competitor's domestic pricing.

"As declared by the supplier" puts the burden of establishing the comparable on the claimant.

The Karnataka decision

Tonbo Imaging India Pvt Ltd v. Union of India, W.P.C. No. 13185 of 2020, decided 16 February 2023. The Handbook records the reasoning:

"Availability of rotation of funds is essential for business to thrive — Entire concept of refund of unutilized input tax credit relating to zero-rated supply would be obliterated in case department was permitted to put any limitation and condition that would take away petitioner's right to claim refund of all taxes paid on domestic purchases used for purpose of zero-rated supplies — Amendment of rule 89(4C) is arbitrary and unreasonable inasmuch as possibility of taking undue benefit by inflating value of zero-rated supply of goods could not be a ground to amend rule — Said rule deserves to be declared invalid."

The core of it is the last clause. The Court accepted that over-invoicing is a real risk, but held that the risk of abuse cannot justify a rule that defeats a legitimate claimant's substantive right — the answer to inflated valuations being assessment and enquiry, not a formula ceiling.

The Delhi decision

Indian Herbal Stores (P) Ltd, Writ Petition Nos. 9908 and 9912 of 2021. The Handbook records: "it was upheld the amendment is procedural in nature and hence this amendment is prospective in nature. Further, the right for refund of the accumulated ITC stands crystalised on the date when the subject goods are exported."

Two holdings, and they are separable.

On character: the amendment is procedural, and therefore prospective — it cannot be applied to exports made before 05.07.2022.

On crystallisation: the right to refund arises at the date of export. So the law as it stood on that date governs, and a later amendment cannot reach back.

The two courts are not squarely in conflict. Karnataka went to validity; Delhi went to temporal reach. An exporter outside Karnataka is on the Delhi footing — the cap applies, but only to exports on or after 05.07.2022.

The inverted duty formula, and its narrower "Net ITC"

Rule 89(5) is a different computation:

Maximum Refund Amount = {(Turnover of inverted rated supply of goods and services) × Net ITC ÷ Adjusted Total Turnover} − tax payable on such inverted rated supply of goods and services × (Net ITC ÷ ITC availed on Inputs & Input services)

Here "Net ITC" means ITC availed on inputs during the relevant period — inputs only, not input services.

The Handbook explains the policy: "Section 2(59) defines inputs as any goods other than capital goods… Thus, inputs do not include services or capital goods. Therefore, the intent of the law is not to allow refund of tax paid on input services or capital goods as part of refund of unutilized ITC when the refund application is under 'inverted rate duty structure'."

And one important exclusion. Circular No. 135/05/2020-GST dated 31.03.2020 clarifies "that refund of accumulated ITC under Section 54(3)(ii)… would not be applicable in cases where the input and the output supplies are the same." A trader buying and selling the identical commodity at different rates — because of packaging or branding — cannot claim inverted duty refund.

This bites in agriculture. A person buying unbranded exempt rice and selling it pre-packaged at 5% has the same input and output supply, and is outside section 54(3)(ii). Rates and the pre-packaged switch →

Key takeaways

• Rule 89(4): refund = (zero-rated goods turnover + zero-rated services turnover) × Net ITC ÷ Adjusted Total Turnover.
• "Net ITC" for rule 89(4) covers inputs and input services; for rule 89(5) it covers inputs only.
• Adjusted Total Turnover excludes exempt supplies other than zero-rated ones — favourable to agricultural exporters with exempt domestic sales.
• Export value is the lower of the FOB value in the shipping bill and the tax invoice value.
• Notification No. 14/2022-CT capped zero-rated goods turnover at 1.5 times the domestic value of like goods, from 05.07.2022.
• Tonbo Imaging (Karnataka HC) held the amendment arbitrary and unreasonable and liable to be declared invalid.
• Indian Herbal Stores (Delhi HC) held it procedural and prospective, the refund right crystallising on the date of export.
• Circular No. 135/05/2020-GST bars inverted duty refund where the input and output supplies are the same.

Read next

• Refunds for Exporters of Agricultural Produce, and the LUT
• ITC Reversal in a Rice Mill: Rule 42, Worked Through
• GST Rates on Agricultural Goods After Notification No. 9/2025

Disclaimer: Positions stated as on 5 September 2026, based on section 54(3) of the CGST Act, 2017, rules 89(4) and 89(5) of the CGST Rules, 2017, Notification No. 14/2022-Central Tax dated 5 July 2022, Circulars No. 135/05/2020-GST and 125/44/2019-GST, and the decisions in Tonbo Imaging India Pvt Ltd v. Union of India (Karnataka High Court) and Indian Herbal Stores (P) Ltd (Delhi High Court), as reproduced in the ICAI Handbook on Applicability of GST on Agricultural Sector (January 2026, law updated to 31 December 2025).