Capital Goods ITC Refunds to Be Spread Over 60 Months

Exporters making eligible zero-rated supplies and businesses with an inverted duty structure may gain a new route to refund unutilised Input Tax Credit (ITC) on capital goods. The GST Council recommended this change at its 57th meeting on 8 October 2026. It proposed spreading the eligible capital-goods credit over 60 months and limiting the measure to ITC availed on or after 1 April 2027. The calculation and refund process will depend on the final law and rules.

Currently, ITC on capital goods is not eligible for refunds under these provisions. If businesses cannot use the credit against their output tax, it remains locked in the electronic credit ledger. The proposed change could ease this burden, although the phased payout means businesses will still need to plan their working capital carefully.

What has the GST Council recommended on capital goods ITC refunds?

The Council recommended changes to clause (ii) of the proviso to Section 54(3) of the Central Goods and Services Tax (CGST) Act and to the CGST Rules. 

Two of these changes deal with ITC that a business cannot use:

The Council also recommended that the system provisionally sanction 90% of zero-rated and inverted duty refund claims based on risk checks. It proposed removing the cap in Rule 89(4)(C) that limits the value of zero-rated goods to 1.5 times the value of similar goods sold in India.

These are recommendations. They take effect only after Parliament amends the CGST Act and the government notifies the rule changes. Until then, the current rules apply.

Why is ITC on capital goods not refundable today?

Section 54(3) of the CGST Act allows refunds of unutilised Input Tax Credit (ITC) in two situations, subject to applicable conditions: 

• Zero-rated supplies made without payment of IGST, such as eligible exports under a Letter of Undertaking (LUT) 
• And an inverted duty structure, where the GST rate on inputs exceeds the rate on output supplies.

Under the existing Rule 89 formulas, Rule 89(4) includes eligible ITC on inputs and input services when calculating refunds for zero-rated supplies. Rule 89(5) covers ITC on inputs but excludes input services and capital goods from inverted duty structure refunds.

In Union of India v. VKC Footsteps India Pvt. Ltd. (2021), the Supreme Court upheld the validity of excluding input services from the inverted duty structure refund formula.

The GST Council recommended changes at its 57th meeting on 8 October 2026. The proposals would allow refunds of capital goods ITC for zero-rated supplies and inverted duty structure cases, with refunds spread over 60 months. They would also allow refunds of input services ITC under the inverted duty structure for credit availed on or after 1 November 2026. Capital goods ITC would qualify from 1 April 2027.

These remain recommendations and require the relevant legal amendments to take effect.

Which businesses can claim the capital goods ITC refund?

The refund will cover two groups once the law changes:

• Exporters of goods or services and suppliers to SEZ units who supply without paying tax under LUT or bond
• Businesses whose output is taxed at a lower rate than their inputs, such as some textile, footwear and pharmaceutical units

Exporters who pay Integrated Goods and Services Tax (IGST) on exports and then claim it back can already use capital goods ITC to pay that IGST. So the change matters most for businesses on the LUT route and for inverted duty units.

What limits apply to capital goods ITC refunds?

Several conditions will determine how much credit a business can claim:

• ITC on capital goods availed before 1 April 2027 will not qualify under the proposed refund mechanism.
• Credit blocked under Section 17(5), or otherwise inadmissible, cannot be included in the refund claim.
• Refunds under the inverted duty structure remain subject to applicable statutory conditions and exclusions.
• The usual ITC eligibility conditions continue to apply. The credit must be admissible under the CGST Act and Rules, including applicable invoice, return-reporting and supplier-compliance requirements.
• Capital goods used for both taxable and exempt supplies may require proportionate reversal under Rule 43. Any reversal attributable to the relevant period must be deducted when calculating the eligible refund.

Note: These refund changes are GST Council recommendations and will take effect only after the relevant amendments are implemented. 

How will the 60-month refund spread work?

The Council has not released the formula yet. The simplest reading is that one-sixtieth of the eligible credit becomes refundable each month for five years.

Suppose an exporter avails ₹36 lakh of ITC on a packaging line in May 2027. Assuming the eligible credit is spread equally over 60 months, the ₹36 lakh credit would be counted towards the refund in the following instalments:

The amount actually refunded may be lower. If the existing Rule 89 formulas are extended to capital goods, the refund will be limited to the share linked to zero-rated or inverted duty turnover. An exporter with half its turnover from exports could then get back about half of each monthly share.

The 60-month period is not new to GST. Rule 43 already treats capital goods as having a useful life of five years when splitting common credit between taxable and exempt use. Section 18(6) also reduces the credit to be paid back on the sale of used capital goods by five percentage points for every quarter of use.

What is still unclear about the new refund rule?

Some details will come only with the amended rules:

• Whether the monthly share is equal or calculated differently
• Whether a business files for the share every month or adds it to a periodic refund claim
• What happens to the balance if the asset is sold, scrapped or moved to exempt use within 60 months
• How the two-year time limit for refunds under Section 54(1) applies to credit that becomes refundable in parts
• Whether the 90% provisional refund will cover the capital goods share

Businesses should avoid building cash flow plans on any one reading until the Central Board of Indirect Taxes and Customs (CBIC) notifies the rules.

What should businesses do before 1 April 2027?

Most of the preparation is about clean records:

• Keep an asset-wise register for capital goods with invoice number, date, supplier GSTIN, taxable value and ITC availed.
• Book capital goods ITC separately from ITC on inputs and input services, since each has different refund rules and start dates.
• Track ITC on input services in inverted duty cases from 1 November 2026, as this becomes refundable earlier.
• Match every capital goods invoice with GSTR-2B before availing credit. A mismatch is a common reason for refund rejection.
• Plan large equipment purchases with the date in mind. Credit availed in March 2027 will not qualify, while credit availed in April 2027 may.

Conclusion

Treat the capital goods refund as a slow receivable and not as quick cash. A ₹36 lakh credit returns in small parts over five years, and only if the asset, the invoice and the turnover data all hold up when the claim is checked. The businesses that gain most will be those that can show, asset by asset, when credit was availed and how the asset was used.

That trail starts with how purchases are booked. In TallyPrime, setting the type of supply as capital goods on a fixed asset ledger keeps this credit separate from inputs and services in GSTR-3B, which gives you an asset-wise record to build a refund claim on.