Published 14 October 2026
A business whose credit ledger keeps growing faces a hard rule. Credit that cannot be used is not, in general, refundable. An exporter that pays no tax on its sales, or a manufacturer whose inputs are taxed at 18 per cent and whose product is taxed at 5 per cent, will accumulate credit month after month. The law allows a refund in those two cases only, and only through a single form that is filed period by period. Every claim is checked against a formula, the credit ledger and GSTR-2B. Most refunds that fail do so on procedure: a missed time limit, a statement that does not match GSTR-1, or a return not filed.
This guide covers what is common to both cases: who may claim, the time limit, FORM GST RFD-01 and its statements, how the claim is processed, and what happens to the debited credit if the claim fails. The formulas are in Refund of Credit on Exports and SEZ Supplies under LUT and Refund on an Inverted Duty Structure.
The two cases in section 54(3)
Section 54(3) allows a registered person to “claim refund of any unutilised input tax credit at the end of any tax period”, subject to sub-section (10). The first proviso then limits it: “no refund of unutilised input tax credit shall be allowed in cases other than”:
- (i) “zero rated supplies made without payment of tax”. These are exports and supplies to SEZ units or developers for authorised operations, made under a bond or letter of undertaking (section 16 of the IGST Act).
- (ii) credit accumulated “on account of rate of tax on inputs being higher than the rate of tax on output supplies (other than nil rated or fully exempt supplies)”, except for supplies notified by the Government. This is the inverted duty structure.
Credit that builds up for any other reason stays in the ledger. Examples are a fall in sales, stock-building, or capital expenditure.
Who cannot claim
| Bar | Source |
|---|---|
| A supplier who claims drawback of central tax, or refund of IGST paid, on the same supplies | Section 54(3), last proviso |
| Zero-rated supply of goods subject to export duty, from 1 November 2024 | Section 54(15) |
| Inverted duty, where the output is nil-rated or fully exempt | Section 54(3)(ii) |
| Inverted duty, for goods notified under Notification No. 5/2017-Central Tax (Rate), as amended. These include railway locomotives and parts (chapter 86), edible oils (chapter 15) and coal (chapter 27) from 18 July 2022, and imitation zari (polyester film) from 20 October 2023. For woven and knitted fabrics the bar now affects only credit on supplies received before 1 August 2018, which lapsed | Notifications 5/2017, 20/2018, 9/2022 and 20/2023-Central Tax (Rate) |
| Inverted duty, for construction of a complex or building intended for sale, where consideration is received before completion | Notification No. 15/2017-Central Tax (Rate), as amended by 15/2023 |
| Inverted duty, where input and output are the same goods and the difference arises only from a change in rate over time | Circular No. 135/05/2020-GST para 3.2, as substituted by Circular No. 173/05/2022-GST. Credit is refundable where the lower output rate arises from a concessional notification at the same time |
| A person who has not undergone Aadhaar authentication | Rule 10B, read with rule 89(1) |
| A composition taxpayer | Not entitled to credit at all (section 10(4)) |
| A claim below one thousand rupees | Section 54(14). Circular No. 125/44/2019-GST para 60 applies the limit to each tax head separately |
The time limit
Section 54(1) requires the application “before the expiry of two years from the relevant date”. The relevant date depends on the case (Explanation 2 to section 54):
| Claim | Relevant date |
|---|---|
| Export of goods | The date the ship or aircraft leaves India, the goods pass the land frontier, or the post office despatches them |
| Export of services | The date of receipt of payment in convertible foreign exchange (or rupees where RBI permits), or the invoice date where payment came in advance |
| Supply to an SEZ unit or developer | The due date of the return under section 39 for the period of the supply |
| Inverted duty | The due date of the return under section 39 for the period in which the claim arises |
Three adjustments apply:
- Notification No. 13/2022-Central Tax excludes 1 March 2020 to 28 February 2022 from the two years.
- An application rejected by a deficiency memo is replaced by a fresh one, which must itself be within the limit (Circular No. 125/44/2019-GST para 12). Since 18 May 2021, the proviso to rule 90(3) excludes the time from the first filing to the deficiency memo.
- A claim for a period cannot be filed until all GSTR-1 and GSTR-3B returns due by the date of filing have been filed (Circular No. 125/44/2019-GST para 6). The portal enforces this.
Is the two years absolute? The courts are divided.
In M/s Sethi Sons (India) v Assistant Commissioner (Delhi High Court, Division Bench, W.P.© 4179/2022, 22 December 2023), an exporter had tried twice in 2018 to file monthly refund claims for credit on exports under LUT, and failed because of portal errors. It filed a consolidated claim in February 2020, which was rejected as late for exports made from September 2017. The Court allowed the claim. It held that “if the taxpayer has made a bona fide attempt to make an application but was prevented to do so on account of technical glitches or for any reason attributable to GST authorities, its claim for refund cannot be denied on account of delay”. It expressly recorded its “reservation” about the Madras High Court’s view in Lenovo (2023) that the period is directory.
The Jharkhand High Court followed Lenovo in BLA Infrastructure Pvt Ltd v State of Jharkhand (Division Bench, W.P.(T) No. 6527 of 2024, 30 January 2025), holding that the word “may” in section 54(1) makes the limit “directory in nature and it is not mandatory”. That case concerned a refund of pre-deposit after a successful appeal, not credit. On the State’s appeal, the Supreme Court on 9 January 2026 upheld the refund but set aside that reading of section 54: a refund of pre-deposit rests on section 107(6) read with section 115, so the time limit in section 54(1) did not arise. The High Court’s view that the limit is directory therefore no longer stands. Getting the Pre-Deposit Back sets out the procedure.
Sethi Sons, the decision on a refund of credit, does not treat the limit as directory. It excuses delay caused by the portal or the department.
What to have ready
| Item | Where it comes from |
|---|---|
| GSTR-1, GSTR-3B (and GSTR-1A where filed) for every period up to the date of filing | Returns |
| Turnover for the period: zero-rated, inverted rated, exempt, and the State turnover | Books, reconciled with GSTR-1 |
| Net credit for the period, split into inputs, input services and capital goods | Books and table 4 of GSTR-3B |
| Inward invoices, with HSN or SAC, showing which appear in GSTR-2B | Purchase register and GSTR-2B |
| Credit ledger balance at the end of the period and on the date of filing | Portal |
| Shipping bills and EGM details; BRC or FIRC for services; SEZ endorsements | ICEGATE, bank, SEZ officer |
| LUT acknowledgement for the year, for zero-rated claims | Portal |
| Bank account validated in the registration | Registration (REG-14 for changes) |
FORM GST RFD-01 and its statements
The application is FORM GST RFD-01 under rule 89(1). Its ground is chosen from a list. Unutilised credit falls under “Exports of goods/services – without payment of tax (accumulated ITC)”, “ITC accumulated due to inverted tax structure”, or “supplies made to SEZ unit/SEZ developer (without payment of tax)”. Annexure 1 carries the statements:
- Statements 1 and 1A (inverted duty): the rule 89(5) calculation, and the invoices for inward and outward supplies under rule 89(2)(h)
- Statements 3 and 3A (exports): the export invoices, shipping bills and EGM, or BRC or FIRC, under rule 89(2)(b) and ©, and the rule 89(4) calculation
- Statements 5 and 5A (SEZ): the invoices with the SEZ officer’s endorsement under rule 89(2)(d) and (e), and the rule 89(4) calculation
The form also carries declarations under section 54(3), including that no drawback has been claimed and, for inverted duty, that the claim excludes credit used for nil-rated or exempt supplies. There is a declaration under rule 89(2)(f) for SEZ supplies. There is also an undertaking to repay with interest if the conditions of section 16(2)© are later found not met. Circular No. 197/09/2023-GST removed the old reference to section 42 from that undertaking.
A declaration or chartered accountant’s certificate that tax has not been passed on is not needed. Rule 89(2)(l) and (m) exempt refunds under clause (b) of section 54(8), which covers unutilised credit.
Circular No. 125/44/2019-GST, Annexure-B (as modified by Circular No. 135/05/2020-GST), adds a statement of inward invoices with HSN or SAC. Since the period of January 2022, Circular No. 197/09/2023-GST restricts a refund of credit to invoices “reflected in FORM GSTR-2B of the applicant for the said tax period or for any of the previous tax periods”. Credit on imports, ISD invoices and reverse charge is not affected by this restriction (Circular No. 139/09/2020-GST).
Filing and the debit to the ledger
Under rule 89(3), “the electronic credit ledger shall be debited by the applicant by an amount equal to the refund so claimed”. Circular No. 125/44/2019-GST para 37 states how the portal caps the claim, at the lowest of:
- the formula amount
- the credit ledger balance at the end of the period, after its GSTR-3B is filed
- the balance on the day of filing
The portal’s FAQs add that each tax head is limited to its own balance.
Paragraph 8 of the same circular requires claims of the same category to be filed chronologically. Circular No. 135/05/2020-GST para 2 removed its bar on clubbing periods across financial years. The portal’s manual says that where there is nothing to claim for an earlier period, a nil application is filed for it.
The portal’s FAQs describe the steps. Under Services > Refunds > Application for Refund, the applicant chooses the ground and the period. The statement of documents is uploaded through the offline utility and validated against GSTR-1. The applicant then enters the turnover figures, reviews the formula and the amount to be claimed, and selects the bank account. The application can be saved as a draft for up to fifteen days. Once filed, the portal generates an ARN, emails it, and debits the credit ledger. No changes are possible after filing.
Who signs. The authorised signatory files with DSC or EVC.
Processing: the forms that follow
| Stage | Form | Time limit and provision |
|---|---|---|
| Acknowledgement of a complete application | RFD-02 | Within fifteen days of filing (rule 90(2)) |
| Deficiency memo | RFD-03 | Within the same fifteen days. A fresh application is required (rule 90(3)) |
| Provisional refund of 90 per cent | RFD-04 | Within seven days of acknowledgement (rule 91(2)) |
| Payment order | RFD-05 | With RFD-04 or RFD-06 |
| Final order | RFD-06 | Within sixty days of a complete application (section 54(7)) |
| Withholding | RFD-07 | Under section 54(10) or (11) |
| Notice proposing rejection, and reply | RFD-08 and RFD-09 | Reply within fifteen days; no rejection without a hearing (rule 92(3)) |
Once RFD-02 issues, no deficiency memo can follow (Circular No. 125/44/2019-GST para 9).
Provisional refund, and its extension. Section 54(6) allows 90 per cent of a zero-rated claim to be refunded provisionally, before verification. Rule 91(2), substituted from 1 October 2025 by Notification No. 13/2025-Central Tax, makes the order “on the basis of identification and evaluation of risk by the system”. The officer may, for recorded reasons, go straight to a final order. Instruction No. 06/2025-GST of 3 October 2025 directs that claims the system rates “low-risk” receive 90 per cent provisionally without further scrutiny, and others do not.
Excluded from provisional refund are:
- persons prosecuted for evasion above Rs 250 lakh in the preceding five years (rule 91(1))
- from 1 October 2025, persons who have not undergone Aadhaar authentication, and suppliers of areca nuts, pan masala, tobacco and essential oils (Notification No. 14/2025-Central Tax)
Section 54(6) does not yet cover inverted duty. Section 155 of the Finance Act, 2026 inserts the words that extend it, but CBIC’s text records that amendment as not yet in force. Pending that, Instruction No. 06/2025-GST para 5.1 directs that inverted duty claims filed on or after 1 October 2025 may be sanctioned 90 per cent provisionally “in similar manner”. The detail is in Refund on an Inverted Duty Structure.
Interest on delay. Under section 56, a refund not paid within sixty days of the application carries interest at 6 per cent (Notification No. 13/2017-Central Tax). Rule 94(2) excludes the time the applicant takes beyond fifteen days to reply to an RFD-08, and time spent correcting bank details.
When a claim fails: getting the credit back
The debited credit returns to the ledger in four situations.
- Deficiency memo. The amount debited “shall be re-credited” (rule 93(1)). Circular No. 125/44/2019-GST para 10 states that this happens automatically, without a PMT-03.
- Withdrawal. An application can be withdrawn in RFD-01W at any time before RFD-04, RFD-05, RFD-06, RFD-07 or RFD-08 issues. The debit is then credited back (rule 90(5) and (6)).
- Rejection, in whole or part. The rejected amount is re-credited “by an order made in FORM GST PMT-03” (rule 93(2)). A refund is “deemed to be rejected” only “if the appeal is finally rejected or if the claimant gives an undertaking in writing to the proper officer that he shall not file an appeal”. The portal provides an “Undertaking for PMT-03 for inadmissible amount” on the refund case’s ORDERS tab.
- Rejection for ineligible credit. Here the RFD-08 also proposes recovery of the credit under section 73 or 74 (or 74A), and the RFD-06 serves as the order under both (Circular No. 125/44/2019-GST paras 20 to 23). The ineligible credit, with interest and any penalty, goes to the liability register through DRC-07. The rest of the rejected amount is re-credited only after the undertaking.
A provisional refund later found excessive is recovered the same way, through an RFD-08 under section 54 read with section 73, 74 or 74A (Instruction No. 06/2025-GST para 3.4). A refund on exports of goods must be repaid with interest if the sale proceeds are not realised within the FEMA period (rule 96B).
What can still be put right
- A deficiency memo is answered by a fresh RFD-01 with the deficiencies cured. The time from the first filing to the memo is excluded from the two years.
- An application filed with a wrong figure can be withdrawn in RFD-01W before it reaches the orders listed above, and refiled.
- An RFD-08 is answered in RFD-09 within fifteen days. A rejection order is appealable under section 107 (Appeals and Pre-Deposit). If the appeal succeeds, the refund is claimed by a fresh RFD-01 under the ground “on account of order” (Circular No. 125/44/2019-GST para 24).
- Returns that block the application must be filed first (Late Returns). Errors in GSTR-1 that cause a statement to fail validation are corrected as described in Correcting Mistakes in Returns.
The procedure in order
- Confirm the claim falls within section 54(3)(i) or (ii) and is not barred.
- Fix the relevant date for each period and check the two years, net of any excluded period.
- File every GSTR-1 and GSTR-3B due, and complete Aadhaar authentication.
- Reconcile turnover, net credit and GSTR-2B for the period, and compute the formula amount.
- File RFD-01 with the right statements, declarations and undertaking, with DSC or EVC. The ledger is debited.
- Track RFD-02 or RFD-03, then RFD-04 and RFD-06. Answer any RFD-08 in RFD-09 within fifteen days.
- On rejection, decide whether to appeal. Without an appeal, file the undertaking so that PMT-03 re-credits the ledger.
The next guide applies this to exports and SEZ supplies under a letter of undertaking: the LUT itself, the rule 89(4) formula and its cap, and the export documents.