Finance Bill 2026 Changes: Inverted Duty Provisional Refunds u/s 54(6) CGST Act

The Finance Bill, 2026 proposes an important amendment to the Central Goods and Services Tax Act, 2017. The change expands the scope of provisional refunds under Section 54(6) to include refunds arising from inverted duty structure.

This proposal addresses a long-standing concern of taxpayers whose input tax credit remains blocked due to rate mismatches. If implemented effectively, it could significantly improve liquidity for such businesses.

Existing Position Under Section 54(6)

Under the current provisions of the CGST Act:

• Provisional refunds of up to 90 percent are allowed only for zero rated supplies of goods or services.
• The refund is released before complete verification, subject to prescribed conditions.
• Final settlement follows after scrutiny of documents.

Refunds of unutilised input tax credit caused by an inverted duty structure were outside the scope of provisional refunds, even though they were otherwise eligible for refund under Section 54(3).

What the Finance Bill 2026 Proposes

The proposed amendment expands Section 54(6) by explicitly covering “refunds of unutilised input tax credit allowed under clause (ii) of the first proviso to Section 54(3)“.

This refers to ITC accumulated due to an inverted duty structure, where the tax rate on inputs exceeds the rate on outward supplies.

With this change, provisional refunds will apply to both zero rated supplies and inverted duty structure refunds.

Provisional Refund Amount and Process

The amendment does not modify the refund mechanism itself.

• Provisional refund available: 90 percent of the total refund claimed
• Balance 10 percent: Paid after final verification
• Refund remains subject to prescribed conditions, safeguards, and limitations

The consistency in procedure ensures minimal disruption while expanding eligibility.

Effective Date

• The amendment will take effect from a date to be notified by the Government.
• Until such notification is issued, inverted duty structure refunds cannot be claimed provisionally under the amended provision.

Taxpayers should monitor official notifications closely.

Implementation Context

In practice, even where provisional refunds were clearly permitted for zero rated supplies, actual grant at the field level has often been delayed or bypassed in favour of full scrutiny. This weakened the intended benefit of Section 54(6).

To address this issue, the Government has recently issued departmental instructions to operationalise provisional refunds more actively, including for inverted duty structure refunds with effect from October 2025. The proposed amendment strengthens the statutory support for these instructions.

Why This Amendment Matters

For businesses affected by inverted duty structure, the amendment offers:

• Faster access to a significant portion of accumulated ITC
• Improved working capital management
• Reduced cash flow stress during refund processing
• Greater certainty and parity with export related refund mechanisms

It reflects a policy shift towards treating domestic manufacturing refunds with the same urgency as export refunds.

Action Points for Taxpayers

To effectively use this amendment, businesses should:

• Track the notification bringing the amendment into force
• Identify refund claims eligible under inverted duty structure
• Ensure accurate reconciliation of ITC and outward tax liability
• Maintain robust documentation to support refund applications
• Clearly invoke Section 54(6) once provisional refund becomes applicable

Preparation will be key to avoiding delays or disputes.

Key Limitations and Practical Concerns

Despite its positive intent, the proposed amendment has a few structural weaknesses. It becomes effective only upon notification, which delays certainty for taxpayers. The continued use of the word “may” keeps provisional refunds discretionary, allowing inconsistent field‑level application to persist. There is also no prescribed timeline for granting provisional refunds, reducing its value as a liquidity relief measure. Past experience shows that expanding the law alone does not ensure timely refunds unless supported by strict administrative discipline. As a result, while the amendment strengthens the legal basis for provisional refunds in inverted duty structure cases, its impact will ultimately depend on consistent and proactive implementation rather than legislative wording alone.

Conclusion

The proposed amendment to Section 54(6) under the Finance Bill, 2026 is a focused and practical reform. By extending provisional refunds to inverted duty structure cases, it tackles a persistent liquidity issue under GST.

However, the real benefit will depend on consistent implementation by tax authorities. If applied in the manner intended, this change can materially improve the refund experience and ease of doing business for a wide range of taxpayers.