“8 Years of Waiting Over: Inverted Duty Structure (IDS) Finally Gets 90% Provisional Refunds!

Introduction: A Long-Awaited Reform

After eight years of GST implementation, the government has finally addressed one of the most persistent pain points for businesses – the refund processing mechanism. Through Notification No. 14/2025-Central Tax and Instruction No. 06/2025-GST, effective from October 1, 2025, the CBIC has introduced revolutionary changes:

• a shift from manual to system-driven refund processing, and
• the extension of provisional refund benefits to Inverted Duty Structure (IDS)

This reform, based on the 56th GST Council meeting held on September 3, 2025, aims to automate refund processing through system-based risk assessment while ensuring revenue security.

The New Framework: How It Works

1. System-Driven Approach

The new mechanism replaces officer-dependent scrutiny with automated risk assessment:

The Process:

1. Taxpayer files refund application
2. System generates acknowledgement (Form RFD-02) or deficiency memo (RFD-03)
3. System automatically assigns risk score
4. Low-Risk Applications: 90% refund released immediately without scrutiny
5. High-Risk Applications: Detailed verification before final refund

This ensures uniform treatment across India and eliminates human bias.

2. The 90% Provisional Refund

Zero-Rated Supplies (continues with improved processing):

• Export of goods or services
• Supplies to SEZ units/developers

Inverted Duty Structure (NEW - the real breakthrough):

• Applicable when input GST rate > output GST rate
• Creates accumulated ITC that cannot be fully utilized
• Common in textiles, footwear, leather, pharmaceuticals

3. Who Cannot Access Provisional Refunds?

Notification No. 14/2025-CT identifies two excluded categories:

1. Non-Aadhaar Authenticated Taxpayers

Any person who hasnt undergone Aadhaar authentication under Rule 10B is barred from provisional refunds.

2. Suppliers of Specified Goods

4. Provisional Refund Based on Administrative Instruction pending Amendment in Finance Act

Currently, provisional refund in case of IDS will be allowed based on administrative instruction (pending Finance Act amendment). While legally vulnerable, its based on GST Council recommendation and likely to be upheld.

Key Issues and Challenges

1. Opacity of Risk Parameters

Government hasnt disclosed how risk scores are calculated. Thus, taxpayers cannot predict categorization or improve their scores.
Suggestion: Publish broad risk parameters (filing consistency, GSTR-1 vs 3B matching, past track record etc).

2. Aadhaar Authentication Barriers

Corporate entities, foreign nationals face practical difficulties in aadhaar authentication. Thus, legitimate businesses denied benefits.
Suggestion: Allow alternatives like passport authentication, transition periods.

3. Sector-Specific Discrimination

The blanket exclusion for provisional refund penalizes compliant businesses in specified sectors.
Thus, compliant essential oil exporters treated same as non-compliant ones.
Suggestion: Individual risk assessment to be done instead of sectoral bans.

4. Officer Discretion Misuse Potential

The officers can deny provisional refunds citing routine grounds like 'pending scrutiny.' Thus, reform could be undermined.
Suggestion: Robust monitoring, monthly reports on denials, departmental reviews.

5. Final Verification Delays

The balance 10% still requires verification which may take months. Thus, resulting in continued working capital blockage of 10%.
Suggestion: Mandate 60-day timeline for final verification with auto-release.

7. Interim Legal Status of IDS Refunds

Currently only administrative instruction has been issued for provisional refund in case of IDS, not statutory. There is potential for legal challenges.
Suggestion: Fast-track Finance Act amendment.

Conclusion

This reform is about trust – in technology, in taxpayers, and in progressive governance. The next 6-12 months are crucial. If implemented thoughtfully, this could transform GST from a compliance burden to a business facilitator. 

The blueprint is ready; execution will determine success.