The refund the Supreme Court told the Council to fix

A client in an inverted duty structure has been paying for the same thing twice for eight years: once in the tax on services they buy, and again in the working capital that tax ties up because it can never be refunded.

On 8 October the Council recommended ending that. Not immediately, and not for credit already sitting in the ledger — for credit availed on or after 1 November 2026.

Which makes the next three weeks a planning exercise rather than a filing one.

What the formula does today

Refund in an inverted duty structure is not computed on the accumulated credit. It is computed by a formula in rule 89(5):

Maximum refund = (turnover of inverted rated supply × Net ITC ÷ adjusted total turnover) − tax payable on that inverted rated supply

Everything turns on Net ITC, and the rule defines it narrowly: credit availed on inputs. Goods. Capital goods are excluded and input services are excluded.

That exclusion was not in the original rule. It arrived by amendment in April 2018, and it has cost inverted-structure manufacturers ever since — because for most of them the services are not incidental. Job work, freight, warehousing, professional fees, plant maintenance: on many cost sheets that is a quarter of the input tax and none of it has been refundable.

The Supreme Court said the formula was flawed, and upheld it anyway

This was litigated to the end. In Union of India v. VKC Footsteps India (P) Ltd, decided in September 2021, the Supreme Court upheld the validity of rule 89(5) and the exclusion of input services.

The reasoning is worth knowing, because it explains why nothing moved for five years. The Court held that goods and services are constitutionally distinct, that Parliament may legislate differently for them, and — the part that decided it — that a refund is a statutory benefit, not a right. If the statute grants it narrowly, a narrow grant is what you get.

But the Court did not pretend the result was coherent. Having noted the anomalies the assessees had demonstrated, it urged the GST Council to reconsider the formula and take a policy decision on it.

The Council has now done the thing the Court asked for. It took five years, and it arrives as a recommendation that still has to become a rule.

What changes, and the date that governs it

Input services count towards Net ITC — for credit availed on or after 1 November 2026.

Read that date carefully, because it attaches to the wrong end of the transaction from a planning point of view. It is not the date of the refund claim. It is the date the credit was availed. Credit availed on 31 October is outside it for ever; credit availed on 1 November carries the right.

Capital goods are on a different footing again. The Council recommended including them too, but spread over 60 months, and for credit availed on or after 1 April 2027. Two different heads, two different dates, two different mechanics — and a client who hears "refunds are being opened up" will merge all three unless you separate them.

What it is worth

The formula is proportional, which is the part people get wrong when estimating this in their head. Adding input services to Net ITC does not add the services tax to the refund. It adds the services tax multiplied by the ratio of inverted turnover to adjusted total turnover, and then the tax payable is still deducted.

So two clients with identical services costs can see very different gains. One selling almost entirely into the inverted structure gets nearly the whole of it. One with a mixed book, where inverted supplies are a third of turnover, gets about a third.

Run it for each client rather than assuming. The ratio is the variable, and it is already in their returns.

What to do before 1 November

• Identify which clients are actually in an inverted structure. Not who thinks they are — who has output rates below input rates on real supplies this year.
• For those, quantify the services component of input tax. It is the number that decides whether anything below matters.
• Look at what is being invoiced in late October. Where a service invoice can properly fall in November rather than October — a genuine question of when the supply is made and the invoice raised, not a backdating exercise — the credit availed on it carries a refund right that the October one does not.
• Do not touch capital goods on this basis. Different date, different mechanism, and April 2027 is far enough away that anything done now is premature.
• Tell the client the rule is unamended. The right exists in a recommendation. If it changes in drafting, you want to have said so first.

The honest summary

This is the largest single number in the 57th Council package for a manufacturing client, and it is the one most likely to be claimed on the wrong credits because the governing date sits at the moment of availment rather than the moment of claim.

Eight years of accumulated services credit does not become refundable on 1 November. Only what is availed from that day does. The work this month is making sure your clients know the difference, and that the invoices arriving in three weeks' time are recognised for what they now are.