Summary

Vide Notification No. 03/2026–Central Tax dated 26 October 2026 (S.O. 5791(E)), issued in exercise of the powers under clause (b) of sub-section (2) of section 1 of the Finance Act, 2026 (4 of 2026), the Central Government has appointed 1 November 2026 as the date on which sections 153, 154 and 155 of the Finance Act, 2026 come into force. These sections amend sections 15, 34 and 54 of the Central Goods and Services Tax Act, 2017 ("CGST Act").

Section 155 amends section 54(6) and section 54(14) of the CGST Act. The first extends the provisional refund mechanism to refunds of unutilised input tax credit ("ITC") arising from an inverted duty structure. The second carves out an exception to the minimum refund threshold of ₹1,000 in respect of goods exported out of India with payment of tax.

The statutory amendments operate together with the CGST (Amendment) Rules, 2026, notified vide Notification No. 05/2026–Central Tax of the same date under section 164 of the CGST Act, which substantially rework Rules 89 to 92 to give effect to the recommendations of the 57th GST Council meeting held on 8 October 2026. Certain limbs of the rules apply from 1 December 2026 and 1 April 2027.

This article examines the amended provisions, their practical interpretation and the compliance steps that registered persons, and the professionals advising them, should now consider.

1. Background: Why the Refund Mechanism Was Reformed

Under the erstwhile framework, a provisional refund of up to 90% of the claim was available under section 54(6) only in respect of zero-rated supplies, that is, exports of goods or services and supplies to Special Economic Zones. Refunds of accumulated ITC on account of an inverted duty structure under section 54(3) were processed only after complete scrutiny, and acknowledgement or deficiency memos were frequently issued beyond the time that was considered ordinary. The consequence was prolonged blockage of working capital, particularly for manufacturers and MSMEs.

The 57th GST Council recommended system-based processing and sanction of refunds relating to excess balance in the electronic cash ledger, zero-rated supplies and inverted duty structure, to be implemented in two phases. The present amendments give statutory and procedural effect to the first phase and to certain measures that were recommended alongside it.

2. Provisions at a Glance

3. Section 54(6): Provisional Refund for Inverted Duty Structure

3.1 Legal position

Section 155 of the Finance Act, 2026 amends section 54(6) of the CGST Act so that the provisional refund framework applies to eligible unutilised ITC refund claims arising from an inverted duty structure, as contemplated in clause (ii) of the first proviso to section 54(3). An inverted duty structure arises where the rate of tax on inputs exceeds the rate of tax on output supplies, for example, inputs taxed at 18% and the final product taxed at 5%, resulting in accumulation of unutilised credit in the electronic credit ledger.

3.2 Procedure under the amended Rules

Under the amended Rule 91, once the application is acknowledged, the common portal generates the provisional refund order in FORM GST RFD-04 within 3 working days, on the basis of the system's identification and evaluation of risk. The proper officer is not required to revalidate such order, and the payment order in FORM GST RFD-05 may be issued through the portal.

3.3 Practical interpretation

The expression "may" in section 54(6) merits attention. The provision does not confer an indefeasible right to a provisional refund, and the system's risk parameters will determine whether a claim is processed on this track or is referred for detailed officer scrutiny. The balance amount is released upon final sanction.

Illustration: A manufacturer files an inverted duty refund claim of ₹20 lakh. If the claim is processed on the provisional track, up to ₹18 lakh (90%) may be sanctioned provisionally, and the remaining ₹2 lakh is dealt with at the stage of final sanction.

4. Section 54(14): Minimum Refund Threshold

4.1 Legal position

Section 54(14) of the CGST Act provides that no refund shall be granted under section 54(5) or section 54(6) where the amount is less than ₹1,000. By virtue of the amendment, this restriction does not apply where the refund is of tax paid on goods exported out of India with payment of tax.

4.2 Scope and limits of the relaxation

The exception is confined to exports of goods with payment of tax. It is not a general removal of the threshold. For other categories of refund, including unutilised ITC on account of inverted duty structure and on zero-rated supplies without payment of tax, the ₹1,000 limit continues to apply. Accordingly, a claim of ₹750 in respect of IGST paid on goods exported may now be validly filed and sanctioned, whereas a claim of the same amount under another head remains barred.

5. Revised Timelines and System-Generated Orders

The CGST (Amendment) Rules, 2026 introduce the following procedural changes:

• Rule 90: The proper officer is required to issue the acknowledgement in FORM GST RFD-02 or the deficiency memo in FORM GST RFD-03 within 10 days, in place of 15 days. Where neither is done, the application is deemed to be acknowledged and the period under section 54(7) is computed from the date of filing.

• Rule 91: Provisional refund order in RFD-04 to be generated by the common portal within 3 working days of acknowledgement.

• Rule 92: Insertion of sub-rule (1B) enabling the common portal to generate the final sanction order in FORM GST RFD-06, reflecting any amount adjusted against outstanding demand.

• Rule 89(3): The amount of refund is to be debited first from the IGST credit and thereafter equally from the CGST and SGST/UTGST credit, with any shortfall in one being met from the other.

• Rule 89: The facility to file the refund application through a Facilitation Centre is removed.

6. Refund of Excess Balance in the Electronic Cash Ledger

In terms of the 57th Council recommendation, the full refund claim in respect of excess balance in the electronic cash ledger under section 49(6) is to be sanctioned by the system without officer intervention, after adjustment of pending dues, if any. The newly inserted Rule 92(1B) provides the procedural basis for the generation of the order in RFD-06 by the common portal.

It is to be noted that this forms part of Phase 1 of the reform. Phase 2, comprising system-generated acknowledgement and automated sanction of the entire claim for zero-rated supplies, has been recommended for a later stage and is not operative from 1 November 2026. As the functionalities are being enabled on the common portal in a phased manner, registered persons should track the advisories issued by GSTN.

7. Expanded Computation of Refundable ITC

The amended formula in Rule 89(5) for refund on account of inverted duty structure is:

Maximum refund = (Turnover of inverted rated supply × Net ITC ÷ Adjusted total turnover) − Tax payable on such inverted rated supply

The definition of Net ITC is widened as follows:

• Input services: ITC on eligible input services availed on or after 1 November 2026 is included. Earlier, only inputs in the nature of goods were considered.

• Capital goods: With effect from 1 April 2027, ITC on capital goods attributable to the relevant period is included, spread at one-sixtieth per month over 60 months, only in respect of capital goods credit availed on or after that date and net of reversals. The same treatment is extended to the formula in Rule 89(4) for zero-rated supplies made under Letter of Undertaking.

• Export turnover cap: The limit of 1.5 times the value of like goods domestically supplied under clause (C) of Rule 89(4) is omitted with effect from 1 November 2026.

8. Changes in Application Forms and Declarations

A revised FORM GST RFD-01 applies from 1 December 2026. The Rules prescribe the following additional requirements:

• A statement of invoices and ITC for claims of unutilised ITC.

• A declaration that the applicant has not been prosecuted for tax evasion exceeding ₹250 lakh in the preceding five years.

• From 1 April 2027, a declaration that the capital goods forming part of the claim continue to be in use.

• Invoice-wise details along with the shipping bills of the recipient exporter in cases of merchant exports under Notification No. 40/2017–Central Tax (Rate), at the concessional rate of 0.1%.

9. Related Amendment: Post-Supply Discounts (Sections 153 and 154)

The same notification brings into force the amendments to section 15(3)(b) and section 34(1). A discount given after the supply may now be excluded from the value of supply where the supplier issues a credit note and the recipient reverses the corresponding ITC, without the earlier requirements that the discount be agreed upon before or at the time of supply and be linked to specific invoices. The earlier test continues to apply to supplies made and credit notes issued before 1 November 2026. Businesses allowing year-end or volume-based incentives should review their credit note and ITC reversal confirmation processes accordingly.

10. Compliance Considerations

Since the first level of scrutiny is shifting from the proper officer to the system, accuracy of underlying data becomes the principal determinant of timely refund. The following steps are recommended:

1. Reconciliation of returns: Ensure consistency between GSTR-1, GSTR-2B and GSTR-3B so as to avoid ITC mismatches that may trigger risk flags.

2. Export documentation: Align invoice particulars, shipping bills and the data reflected on the common portal.

3. Outstanding demands: Since refund orders reflect adjustments against pending demands, review liabilities before filing the application.

4. Bank account details: Verify that the bank account registered on the portal is valid and operative.

5. Transition planning: Update internal checklists for the revised RFD-01 from 1 December 2026, the input service credit cut-off of 1 November 2026 and the capital goods provisions from 1 April 2027.

11. Frequently Raised Queries

Q1. From which date are the amendments to section 54 effective? Section 155 of the Finance Act, 2026 is effective from 1 November 2026 under Notification No. 03/2026–Central Tax. Certain rule amendments apply from 1 December 2026 and 1 April 2027.

Q2. Does a provisional refund of 90% amount to final sanction? No. It is an interim release based on system risk evaluation. The balance is sanctioned at the stage of final order, and claims identified as high risk may be subjected to officer scrutiny.

Q3. Is the ₹1,000 threshold withdrawn for all refunds? No. The exception applies only to refund of tax paid on goods exported out of India with payment of tax.

Q4. Is input service ITC availed before 1 November 2026 included in the inverted duty refund formula? No. Only ITC on input services availed on or after that date is included.

Q5. Can the refund be adjusted against outstanding demand? Yes. The order generated under Rule 92 reflects any amount adjusted against pending demand.

Conclusion

The amendments mark a clear shift in the architecture of GST refunds from officer-dependent verification to risk-based, system-driven processing. Extension of the provisional refund to inverted duty claims, the carve-out from the minimum threshold for tax-paid exports, the reduced acknowledgement period and the widening of Net ITC collectively improve liquidity for the affected taxpayers. At the same time, the reliance on automated validation places a greater premium on reconciled returns, accurate export documentation and timely compliance with the revised forms. Practitioners should advise clients to align internal processes with the phased implementation timeline.