GST Refunds under Inverted Duty Structure (IDS): MOOWR–DTA Focus, Process, Formula & Case Law

1) Executive Overview

Under India’s GST, an Inverted Duty Structure (IDS) exists when GST on inputs exceeds GST on outputs, causing ITC accumulation and liquidity pressure. Refunds of unutilised ITC are permitted by Section 54(3)(ii) of the CGST Act, computed via Rule 89(5) of the CGST Rules. Administrative guidance (e.g., CBIC circulars) and recent GST Council decisions have refined the process, including 90% provisional refunds to ease cash flows in IDS cases.

2) The MOOWR–DTA Scenario

2.1 Why MOOWR Units Face IDS on DTA Sales

• Imported spares/components used in overhaul typically attract 18% (or higher) GST, whereas DTA sale of refurbished / As such / Manufactured / assemblies may be taxed at 5%/12%, creating inversion and ITC pile-up.

2.2 How You Claim the Refund

1. Eligibility: Where GST on input goods > GST on DTA output, claim refund under Section 54(3)(ii)read with Rule 89(5) (IDS). Only input goods ITC is refundable; input services and capital goods are excluded.
2. Computation: Apply Rule 89(5)formula (see §3). Maintain strict segregation between goods, services, and capital goods in your ERP and ledgers.
3. Filing: Submit RFD-01/RFD-01A on the GST portal, with reconciliations (GSTR-2B vs GSTR-3B), purchase register, ITC ledger, declarations, and CA/CMA certificate where required. The portal enforces latest return filing before refund creation.
4. Provisional Relief: Seek the 90% provisional refund introduced post the 56th GST Council meeting; balance 10% follows post-verification.

Practical impact for MOOWR: Because refunds exclude services and capital goods, MOOWR operations (which are service-heavy and equipment-intensive) often retain stranded credits even after claiming IDS refunds. Optimise procurement toward eligible input goods where feasible.

3) Refund Formula & Terms (Rule 89(5))

Maximum Refund =

Turnover of inverted-rated supplies × Net ITC Adjusted Total Turnover - Tax payable on such inverted-rated supplies Net ITCITC availed on inputs & input services

Net ITC = ITC on input goods only (services and capital goods excluded).

• Adjusted Total Turnover = As per Rule 89 definitions; excludes exempt turnover and turnover already considered in other refunds.

4) Procedure & Timelines

4.1 Filing Steps (Portal)

• Path: Services - Refunds - Application for Refund - “Refund on account of ITC accumulated due to Inverted Tax Structure.”
• Pre-conditions: System requires GSTR-1/3B for the relevant period and blocks filing when returns are pending.
• Attachments: Statement 1A, Rule 89(5) workings, declarations, and CA/CMA certificate (refund > Rs.2 lakh).

4.2 Limitation Period

• Two years from the end of the relevant period (tax period), with responsibility on the taxpayer to ensure timely filing.

5) Case Law & Judicial Position — Key Judgements

A. Supreme Court (Binding Precedent)

1. Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court
   • Holding: Validity of Rule 89(5)upheld; refund of input services is not available under IDS; refunds limited to input goods. Court urged GST Council to review formula anomalies but did not expand statutory scope.
2. Union Of India & Ors. Versus M/s. Tirth Agro Technology Pvt. Ltd. & Ors. - 2025 (7) TMI 1824 - SC Order
   • Context: After Notification 14/2022 (05-07-2022) amended Rule 89(5) formula, taxpayers sought additional/differential refunds via rectification for prior periods.
   • Outcome:SLP dismissed; Gujarat HC’s view (relying on Ascent Meditech) that the amended formula could be applied to pending/related claims was not interfered with by SC—strengthening assessees’ ability to seek appropriate recalculations where legally tenable within limitation. (Note: Positions differ across commentaries on retroactivity vs prospective application; rely on the specific order applicable to your facts and jurisdiction.)

B. High Courts

1. Tvl. Transtonnelstroy Afcons Joint venture, Tvl. Essa Garments Private Limited, India Dyeing Mills (P) Limited, M/s. Veekesy Footcare (India) Pvt. Ltd., Kaleesuwari Refinery Pvt Ltd., Victur Dyeings Versus Union of India, The Goods and Services Tax Council, Assistant Commissioner ST And Others - 2020 (9) TMI 931 - MADRAS HIGH COURT 
   • Holding: Denied IDS refund of input services; approach later affirmed by SC in VKC Footsteps.
2. VKC Footsteps India Pvt. Ltd. Versus Union of India & 2 Other (s) - 2020 (7) TMI 726 - GUJARAT HIGH COURT
   • Holding: Initially allowed inclusion of input services in Net ITC for IDS refunds; overruled by SC in Sep 2021.
3. M/s. Malabar Fuel Corporation, Versus The Assistant Commissioner Central Tax And Central Excise, Kannur, The Joint Commissioner (Appeals) Kochi, Union Of India, State Of Kerala, Central Board Of Indirect Taxes & Customs - 2024 (1) TMI 1203 - KERALA HIGH COURT
   • Holding: Refund under IDS allowed even where inward and outward supplies are the same, if inversion exists; Circular 135/05/2020 cannot override the statute. Useful to counter denial where department cites “same goods” argument.
4. Ascent Meditech Ltd Versus Union of India & Ors. - 2024 (12) TMI 511 - GUJARAT HIGH COURT
   • Holding: Treated the amended Rule 89(5) formula and Circular 181/13/2022 as clarificatory/curative, enabling recalculation for certain pending claims; later not interfered with by SC, influencing Tirth Agro outcome. (Apply cautiously, considering your period and jurisdiction.)
5. Baker Hughes Asia Pacific Ltd. v. Union of India (Rajasthan/Gujarat HC references; departmental SLP outcomes noted in practitioner summaries)
   • Theme: Treatment of amended formula and rights to rectification for differential refunds under IDS. (Use with care; verify the exact HC and SLP references in your jurisdiction.)

C. Circulars & Administrative Clarifications (often litigated)

• Circular 135/05/2020 (Mar 31, 2020) — attempted to deny IDS refunds where input and output are the same goods due to rate change over time; faced pushback from multiple HCs.
• Circular 173/05/2022 (Jul 6, 2022) — clarified that IDS refunds are available where output is at a concessional rate vis-à-vis higher-rated inputs at the same time (i.e., “same goods” at different rates due to notification), correcting the over-broad reading of Circular 135.
• Circular 181/13/2022 (Nov 10, 2022) — guidance on the application timing of the amended formula under Rule 89(5); many HCs treated parts of this circular as prospective or contrary to law when denying legitimate recalculations. (Check current status in your jurisdiction.)

6) Compliance Checklist (MOOWR + DTA IDS Refunds)

1. Eligibility test: Confirm inversion exists: input goods taxed higher than output DTA supplies (not nil/exempt or notified-restricted).
2. ITC hygiene: Reconcile GSTR-2B, GSTR-3B monthly; remove blocked credits (Section 17(5)); segregate goods/services/capital at PO level.
3. Computation: Apply Rule 89(5) accurately; map Adjusted Total Turnover and inverted supply turnover; retain working papers.
4. Documentation: Purchase register, ITC ledger, Statement 1A, declarations, CA/CMA certificate (>Rs.2 lakh).
5. Filing cadence:RFD-01/RFD-01A periodically; diarise the 2-year limit; track ARN; respond promptly to queries.
6. Provisional refund: Request 90% upfront (where eligible); prepare for post-sanction audit with robust trail.
7. ERP configuration: Tag every inward line item and work-order to MOOWR and DTA outputs to automate Rule 89(5) workings and avoid leakage.

7) Illustrative MOOWR Example

• Inputs (goods): Imported spares @ 18% GST worth Rs.1,00,00,000 Rs. ITC Rs.18,00,000
• Output (DTA): Refurbished assemblies @ 5% GST; monthly turnover Rs.1,00,00,000 - Output tax Rs.5,00,000
• Accumulation: Potential refundable (subject to Rule 89(5) apportionment across total turnover) ˜ Rs.13,00,000
• Non-refundable: ITC on diagnostic/testing services (18%) and capital equipmentexcluded per Rule 89(5) and VKC Footsteps.

8) Strategic Recommendations

• Maximise “goods” share in procurement where commercially feasible to increase refundable ITC; negotiate supply bundles favouring eligible goods.
• Rolling claims: File IDS claims monthly/quarterly to compress ledger build-up and utilise 90% provisional refunds to stabilise liquidity.
• Internal utilisation: Where viable, pair low-rate DTA lines with higher-rate outputs or inter-unit charges to naturally absorb ITC, reducing dependence on refunds.
• Policy engagement: Through industry bodies, press for legislative changes to extend IDS refunds to input services & capital goods, echoing SC’s observation that such corrections lie in the Council/Parliament’s domain.

9) Quick Reference — Sources & Judgements

• Statute & Rules:Section 54(3)(ii) & Rule 89(5)(formula and terms).
• Portal Procedure:RFD-01/RFD-01A user guide & return prerequisites.
• Supreme Court:
  • Union of India & Ors. Versus VKC Footsteps India Pvt Ltd. - 2021 (9) TMI 626 - Supreme Court  - services excluded; formula upheld.
  • Union Of India & Ors. Versus M/s. Tirth Agro Technology Pvt. Ltd. & Ors. - 2025 (7) TMI 1824 - SC Order — SLP dismissed; HC stance on amended formula not interfered with.
• High Courts:
  • Tvl. Transtonnelstroy Afcons Joint venture, Tvl. Essa Garments Private Limited, India Dyeing Mills (P) Limited, M/s. Veekesy Footcare (India) Pvt. Ltd., Kaleesuwari Refinery Pvt Ltd., Victur Dyeings Versus Union of India, The Goods and Services Tax Council, Assistant Commissioner ST And Others - 2020 (9) TMI 931 - MADRAS HIGH COURT  — services not refundable; later affirmed.
  • M/s. Malabar Fuel Corporation, Versus The Assistant Commissioner Central Tax And Central Excise, Kannur, The Joint Commissioner (Appeals) Kochi, Union Of India, State Of Kerala, Central Board Of Indirect Taxes & Customs - 2024 (1) TMI 1203 - KERALA HIGH COURT — refund allowed even for same goods where inversion exists; circular cannot override statute.
• Circulars:
  • 135/05/2020 — restrictive stance on “same goods”; widely litigated.
  • 173/05/2022 — clarifies entitlement in concessional-rate scenarios.
  • 181/13/2022 — application timing of amended formula; judicial pushback on over-prospective reading.
• Policy/Process Updates:90% provisional refunds in IDS post 56th GST Council meeting.