Next-Gen GST: Export Refunds at the Crossroads

By B. Venkateswaran, IRS (Retd.), Assistant Commissioner Central GST

The Government of India, through Notification No. 9/2025-Central Tax (Rate) and Notification No. 10/2025-Central Tax (Rate), both dated 17th September 2025 and effective from 22nd September 2025, has introduced a comprehensive restructuring of the GST rate framework.

Based on the GST Council’s recommendations, these reforms aim to rationalize GST rates, reduce the tax burden on consumers, and provide targeted relief to essential sectors. The streamlined rate structure includes a simplified two-slab system primarily featuring 5% and 18% GST rates, alongside higher rates for luxury and sin goods, intending to bring greater clarity and ease of compliance.

While this policy promises significant benefits such as lower consumer prices and increased ease for businesses, the implications for exporters and zero-rated supplies are nuanced and complex. Exporters, in particular, face challenges in managing accumulated Input Tax Credit (ITC), navigating refund eligibility criteria, and ensuring compliance with procedural mandates under Rule 96 and Rule 89 of the CGST Rules.

This article provides an in-depth examination of the legal foundations, procedural requirements, and practical implications of these recent GST reforms. It serves as a detailed guide for taxpayers preparing for the transition to this next-generation GST framework, helping them to optimize compliance and cash flow management amid these significant changes.

Overview of GST Rate Rationalization

A. Downward Revision of GST Rates

The GST Council has undertaken a rationalization of GST rates, reducing rates on many goods from previously higher slabs of 28% and 12% downward to 18% and 5%, respectively. The reforms aim to alleviate cost pressures on manufacturers and consumers by simplifying tax structures and making essential and everyday goods more affordable. The key categories of goods impacted include:

– Consumer durables and electronics:

• Appliances such as air conditioners, televisions (screen sizes above 32 inches), dishwashers, and monitors have moved from 28% to 18%.

– Automobiles:

• Small petrol vehicles (<1200 cc), diesel vehicles (<1500 cc), motorcycles (<350 cc), and three-wheelers have also shifted to the 18% rate.

– Processed food and FMCG:

• Goods such as chocolates, biscuits, hair oils, shampoos, soaps, and oral care products moved from 12% to 5%, easing costs on widely consumed items.

– Textile and apparel:

• Articles of apparel and clothing accessories priced under Rs. 2500 remain at 5%. Footwear priced above Rs. 2500 per pair has been set at 18%.

– Agricultural inputs:

• Certain agriculture-related goods and equipment, like tyres and diesel engines, are now taxed at 5%, supporting the farming community.

B. Exemption of Specific Goods and Services:

Under Notification No. 10/2025-Central Tax (Rate), there is a broader exemption coverage aiming to reduce tax burdens on essential commodities and social sectors. Typical items moved to the exempt category include:

• Basic food items:
  • Fresh vegetables, fruits, unprocessed cereals, and other staple foods are exempted to support low-income households.
• Healthcare products:
  • 33 lifesaving drugs and medical supplies, certain health insurance products, and medical instruments have been exempted, expanding healthcare affordability.
• Educational materials:
  • Books, reading materials, and some education-related services now attract nil GST to promote knowledge accessibility.
• Agriculture and allied activities:
  • Unprocessed agricultural products and farming services have been brought under exemption or reduced rates to support rural economies.

Rate of GST on capital goods post rate change:

Most capital goods falling under GST Chapters 84 (machinery and mechanical appliances), 85 (electrical machinery and equipment), and 90 (optical, photographic, cinematographic, measuring, checking, precision apparatus) are generally taxed at 18% under the current GST rate structure, including after the September 2025 rationalization.

These chapters largely comprise machinery, equipment, and instruments used as capital goods in various industries, and the GST Council has aligned many such items under the standard 18% tax slab to maintain consistency and simplify compliance. There may be some exceptions or specific items within these chapters with different rates or exemptions, but broadly the 18% slab applies to capital goods in these categories

Zero Rated supply Refunds Legal Provisions under GST

Section 16(3), IGST Act, 2017

This section provides a registered person making zero-rated supplies with two options to claim refund:

• (a) Export goods or services under bond or Letter of Undertaking (LUT) without payment of IGST, then claim refund of unutilized Input Tax Credit (ITC)
• (b) Export goods or services on payment of IGST, then claim refund of the IGST actually paid.

Rule 96, CGST Rules, 2017

• The shipping bill filed by the exporter is deemed to be an application for refund of the integrated tax (IGST) paid on exports, provided the exporter has furnished a valid and compliant GSTR-3B return, and the export manifest (Export General Manifest- EGM) has been filed.
• Refunds under this route is processed automatically by the Customs department, usually linked directly to the shipping bill, facilitating a fast-track refund of tax paid.

Rule 89, CGST Rules, 2017

• This rule applies when the exporter opts for zero-rated supplies without payment of IGST under bond or LUT and claims refund of unutilized ITC instead of IGST refund.
• Exporters must file Form RFD-01 to claim the refund of accumulated ITC.
• The refund amount is calculated as:

Refund= Turnover of zero-rated supplies× Net ITC / Adjusted Total Turnover where Net ITC excludes capital goods ITC (which is not refundable under this formula).

Process Flow for Rule 96 IGST Route

• Exporter files shipping bill.
• GSTR-3B for the relevant tax period is filed timely.
• Export manifest (EGM) is filed.
• Shipping bill acts as automatic refund application, linked to IGST paid invoices.
• Customs department processes refund, generates scroll, and credits exporter’s bank account usually within 7–15 days.

Process Flow for Rule 89 LUT Route (ITC Refund)

• Exporter furnishes bond or LUT for zero-rated export without paying IGST on exports.
• Files Form RFD-01 online, providing invoice-wise and ITC details.
• The refund amount is computed based on the formula linked to turnover and eligible ITC.
• GST officer scrutinizes the application, may raise queries or ask for additional documents.
• After verification and resolution of queries, refund is sanctioned, and funds credited through Public Financial Management System (PFMS).
• The refund process is manual and can be time-consuming, often taking several weeks.
• Refund claims must be filed within two years from the relevant date of export as per Section 54 of the CGST Act.
• Exporters should ensure accurate filing of GSTR-1 and GSTR-3B returns to prevent delays.
• Verification often involves scrutiny of shipping bills, bank realization certificates (BRCs), and export documentation.

Comparative Table: Rule 96 vs Rule 89 Export Refunds

Aspect	Rule 96 (IGST Route)	Rule 89 (LUT Route)
Statutory Basis	Section 16(3)(b) IGST Act + Rule 96 CGST Rules	Section 16(3)(a) IGST Act + Rule 89 CGST Rules
Method	Pay IGST on exports using ITC; refund processed via Customs	Export without IGST payment under LUT/bond; refund on unutilized ITC
Eligible Refund	IGST actually paid on exports	ITC on inputs & input services (capital goods ITC excluded)
Capital Goods ITC	Indirectly utilized if used to pay IGST	Not refundable under LUT route
Process	Automatic, faster	Time-consuming, manual application filing with documents
Application	Through shipping bill, auto generation of refund scroll linked to shipment	Online application (Form RFD-01), verification, possible queries, sanction
Refund Timeline	Typically processed within 7–15 days	May take several weeks; subject to verification and clarification

This overview underscores the legal framework, procedural distinctions, and practical challenges associated with the two primary mechanisms for securing export refunds under GST — Rule 96 (IGST paid route) and Rule 89 (LUT route for ITC refund).

Rule 96 offers relative speed and simplicity, with refunds processed in an automated manner, directly linked to shipping bills and Customs clearance. For most exporters, this route minimizes compliance hurdles and ensures quicker liquidity.

By contrast, refunds under Rule 89 — where exports are made without payment of IGST under a bond or Letter of Undertaking (LUT) — remain far more cumbersome. Exporters must file refund applications in Form RFD-01, upload supporting documents, and undergo detailed scrutiny by tax officers. This manual, verification-heavy process often leads to delays, extended timelines, and additional compliance costs. The consequence is a heavier working capital burden, particularly for smaller exporters with limited financial flexibility.

Rule 96 and Its Application

Rule 96 of the CGST Rules deals specifically with the refund of IGST paid on export of goods or services. Where exporters pay IGST on exports and claim its refund, the refund will be restricted to the IGST component paid on the export turnover—there’s no mechanism under Rule 96 to refund surplus ITC due to higher input taxes except to the extent IGST is paid on exports.

If an exporter procures goods/services at a higher rate (say, 18%) but exports are taxed at a concessional rate (5%), only the actual 5% IGST paid on the export can be claimed as refund under Rule 96. Any additional ITC accumulated due to the difference (i.e., the remaining 13%) remains unutilised.

Practical Illustration

Suppose an exporter purchases inputs worth ₹10,00,000 at 18% GST (i.e., ITC of ₹1,80,000) and exports finished goods valued at ₹10,00,000 with output GST at 5% (i.e., IGST on export ₹50,000):

• IGST paid and refunded: ₹50,000 (refunded as per Rule 96)
• ITC remaining (stuck): ₹1,80,000 (ITC on inputs) minus ₹50,000 (utilized against export IGST) = ₹1,30,000 (remains in credit ledger, not refundable under Rule 96)
• The exporter may seek refund of this blocked credit under “inverted duty structure” provisions, but there are restrictions (ITC on input services/capital goods is generally not allowed for refund).

Scenario	Input GST Rate	Output/Export GST Rate	IGST Refundable	Accumulated ITC
Rates Equal (e.g., 18%)	18%	18%	All utilized	NIL
Input Rate > Output Rate	18%	5%	Only 5% paid	Balance 13% “stuck”
Input Rate > Output Rate	18%	Exempted	Not possible under Rule 96

This highlights that when GST input exceeds the output/export rate, Rule 96 restricts refund to only the IGST paid on exports, with surplus ITC remaining unutilized. Thus, post rate change Rule 96 creates “Dead Working Capital”.

Exporter of goods now exempted please note that wef 22/09/2025 you can not export goods on payment of IGST.

Is Rule 89 a viable mechanism to mitigate the creation of dead working capital?

Rule 89 of the CGST Rules, 2017 governs the refund of unutilized input tax credit (ITC) on account of exports made without payment of tax under bond or Letter of Undertaking (LUT). Its main aim is to ensure exports remain zero-rated by refunding accumulated ITC. However, Rule 89 also comes with a range of practical challenges—commonly referred to as “fit falls”—that exporters must address.

1. The rule does not permit refund of Capital goods on which ITC is availed.
2. Though the rules speak about unutilised ITC, as per the formula the ITC availed based on relevant period is allowed.

The relevant formula for refund calculation under Rule 89(4) is:

Refund Amount=Turnover of zero-rated supplies x Net ITC / Adjusted Total Turnover,

where:

• Net ITC includes ITC on inputs and input services only (not capital goods).
• Turnover of zero-rated supplies is the value of zero-rate supply during the relevant period.
• Adjusted Total Turnover excludes exempt supplies other than zero-rated supplies and turnover on which refund has been claimed under sub-rules (4A) or (4B).

Thus, Net ITC is the pool of input tax credit available on inputs and input services during the period for which an exporter can claim a refund under Rule 89, while capital goods ITC is excluded for refund purposes under this rule. Under Rule 89, the relevant period is the specific tax period(s) for which accumulated ITC on zero-rated supplies is claimed as refund through Form RFD-01. In effect the refund is based on ITC claimed during the relevant period which are auto populated in GSTR-2B and accepted by the Taxpayer. Thus, refunds are restricted to input goods and services leave significant blocks of credit tied up in capital goods, perpetuating the “dead working capital” problem.

Unless legislative or policy corrections broaden the scope, Rule 89 will continue to function as a partial palliative rather than a complete cure.

Can exporters of goods claim refund Rule 89(4) and Rule 89(5) to mitigate the accumulation of ITC?

In the case of exporters of goods, the law provides two distinct avenues for claiming refund of unutilised input tax credit:

1. Rule 89(4) of the CGST Rules, 2017 – applicable when goods are exported under a Letter of Undertaking (LUT) without payment of IGST. The exporter is entitled to claim refund of the accumulated input tax credit attributable to such zero-rate supplies.
2. Rule 96 of the CGST Rules, 2017 – applicable where the exporter opts to pay IGST on export supplies and thereafter claims refund of the IGST so paid through the shipping bill route.

Thus, an exporter of goods generally avails refund either under Rule 89(4) (LUT route) or Rule 96 (IGST route).

On the other hand, Rule 89(5) deals with refund of unutilised ITC in cases of inverted duty structure, where the rate of GST on inputs is higher than the rate of GST on output supplies.

While in theory exporters could also face an inverted rate scenario, the Central Board of Indirect Taxes and Customs (CBIC) has clarified through circulars that refund of accumulated ITC on account of inverted duty structure is not admissible in respect of zero-rated supplies, since such supplies are governed by the specific provisions of Rule 89(4) and Rule 96.

Below are the CBIC circulars and primary sources that support (and operationalize) the position that exporters of goods should claim refunds under Rule 89(4) (LUT route) or Rule 96 (IGST route), while Rule 89(5) applies to the separate bucket of inverted duty structure (not to zero-rated exports):

• Circular No. 125/44/2019-GST (18-11-2019) – The master “refund” circular. It treats zero-rated refunds under Rule 89(4)/Rule 96 and inverted refunds under Rule 89(5) on separate tracks, with procedure, formulae and scrutiny guidance for each (see sections on zero-rated supplies, and separately on inverted duty).
• Circular No. 175/07/2022-GST (06-07-2022) – On export of electricity: expressly confirms that export (a zero-rated supply) is to be computed under Rule 89(4); reproduces the Rule 89(4) formula for such cases. This is a clear exemplar of exports being processed under 89(4), not 89(5).
• Circular No. 181/13/2022-GST (10-11-2022) – Clarifies Rule 89(5) mechanics (prospective effect of the amended formula; specific product-based restrictions). The circular’s scope and examples pertain to inverted duty refunds, reinforcing that 89(5) operates in that silo—not for zero-rated exports.

Exporters of goods should claim refund either (a) under Rule 89(4) (refund of unutilised ITC for zero-rated supplies under LUT/Bond) or (b) under Rule 96 (refund of IGST paid on export through the shipping-bill route).

Rule 89(5) refunds are designed for inverted duty structure situations and are not the vehicle for zero-rated exports; CBIC’s circular framework consistently processes these two categories separately, with distinct formulas, documents and workflows.

Accordingly, the position is clear:

• Exporters of goods may claim refund under Rule 89(4) (refund of unutilised ITC on zero-rated supplies under LUT) or under Rule 96 (refund of IGST paid on export supplies).
• Refunds under Rule 89(5) relating to inverted duty structure is not available for exports, as zero-rated supplies have been carved out separately in law and are governed exclusively by Rules 89(4) and 96.

This interpretation ensures that refund claims by exporters are aligned with the legislative framework and the clarifications issued by CBIC, thereby avoiding overlap or duplication between the provisions for zero-rated supplies and inverted duty refunds.

Emerging Scenario post GST Rate Rationalization and Exemptions

From the above it is understood that the recent rationalization of GST rates, effective from 22nd September 2025 adds further nuances to the export refund landscape.

• Impact on Refund Claims:
  • Reduced GST rates on inputs and outputs alter Input Tax Credit (ITC) accumulation patterns, often reducing the quantum of unutilized ITC eligible for refund under Rule 89.
• Complexity in Refund Calculation:
  • Rate changes and exemptions require exporters to recalibrate their refund calculations carefully, especially since Rule 89’s refund formula excludes capital goods ITC and depends on turnover ratios impacted by the revised rate schedule.
• Compliance and Documentation:
  • Expansion of exemptions makes documentation more critical, requiring exporters to accurately classify goods and services to justify refund claims and avoid rejections.
• Liquidity Implications:
  • While the rationalization reduces tax incidence and refunds due, it may temporarily affect exporters who had built up ITC under the erstwhile higher rates, especially for zero-rated supplies under LUT where delays are harder to absorb.

Restoring Export Competitiveness: GST Reforms India Can’t Delay

One of the foundational promises of India’s Goods and Services Tax (GST) was to keep exports free from domestic tax burdens — ensuring tax neutrality and empowering Indian businesses to compete globally. Yet, in the wake of the 2025 GST rate rationalisation, that promise is quietly eroding.

While the rationalisation has simplified tax slabs and lowered rates for consumers, it has unintentionally created liquidity issues for exporters. Reduced refund claims, blocked Input Tax Credit (ITC) on capital goods, and dead capital in inverted duty structures are forcing exporters to carry systemic tax costs — a burden their global competitors don’t bear.

To stay aligned with the core GST objective of zero-rated exports and support India’s ambition of becoming a global export powerhouse, a set of urgent policy interventions is needed.

Four Policy Fixes to Restore GST’s Export Neutrality

1. Refund Accumulated ITC from Rate Cuts

• Exporters should be allowed to claim refunds for ITC that has accumulated due to rate reductions on zero-rated supplies. When GST rates drop but refund eligibility doesn’t adjust accordingly, businesses face working capital blockages — especially harmful in high-volume, low-margin export sectors.

2. Allow Capital Goods ITC Refunds Under LUT

• Currently, exporters who supply under a Letter of Undertaking (LUT) cannot claim ITC refunds on capital goods. Expanding refund eligibility would reduce upfront capital burdens and improve liquidity — particularly for MSMEs scaling up operations.

3. Expand Inverted Duty Refund Eligibility

• The inverted duty structure (where input taxes are higher than output taxes) continues to restrict cash flow in key export-oriented sectors. The government should broaden the sectors eligible for refunds under this structure, aligning tax policy with export realities.

4. Introduce a Transitional ITC Encashment Scheme

• To cushion the impact of recent rate cuts, a transitional scheme allowing businesses to encash stock ITC accumulated prior to rate rationalisation would offer immediate relief. This would also simplify compliance and improve GST sentiment across industry.

Conclusion: Don’t Let Exporters Pay for Simplicity

The 2025 GST reforms were a step toward a simpler, more efficient tax regime — but for exporters, the gains are mixed. If the government does not recalibrate its policy approach, it risks compromising the very neutrality that GST was built upon.

Exporters can’t afford “dead capital.” Without prompt reforms, Indian businesses will continue to face liquidity issues and global price disadvantages, undermining our broader export goals.

A responsive and reform-minded government must act decisively. These targeted interventions can help India fully realize the vision of a next-generation GST that supports export growth, economic resilience, and competitiveness on the world stage.