GST Council Opens Service Refunds, Leaves Old Credit Stuck

The GST Council on 8 October 2026 opened GST refunds on input services and plant and machinery, with cut-off dates that leave older unused credit in government hands.

Finance minister Nirmala Sitharaman’s panel, meeting in New Delhi, did not change tax rates. It moved on cash that last year’s rate cuts trapped inside factory ledgers, and only from dates still ahead.

The Refund the 2021 Judgment Blocked

In 2021 the Supreme Court, in Union of India v. VKC Footsteps India Pvt Ltd, backed the rule that inverted-duty refunds cover tax on input goods, not input services. VKC made footwear taxed at 5% while many of its purchases sat higher, and the credit on services had nowhere to go. The Court left the formula standing and asked the Council to look at it again as a policy choice.

On 8 October that choice arrived. The Council recommended a change to section 54(3) of the CGST Act so that inverted-duty refunds can include tax on services, and so that both exporters and inverted-duty manufacturers can recover tax on capital goods. The official note also cuts the time to acknowledge a claim from 15 days to 10 days, treats silence as acknowledgement, and has the system sanction 90% of a low-risk claim within three working days of that acknowledgement, down from seven.

Refunds of extra cash already sitting in the electronic cash ledger are to become fully automatic. A June 2026 Deloitte survey had ranked faster GST refunds as a top industry ask, and the process half of that ask is what can move on notifications. The eligibility half is the larger shift, because it reopens a door the 2021 judgment had kept shut.

This will ease working capital constraints for taxpayers and remove blockage of ITC on account of input services and capital goods in such cases.

Press Information Bureau, 57th GST Council note, 8 October 2026

The same note is explicit on timing. The refund of accumulated ITC on input services under inverted duty is for credit availed on or after 1 November 2026. Tax on plant and machinery, for exports and for inverted duty, is for credit availed on or after 1 April 2027, paid at one-sixtieth of the credit each month across 60 months.

Last Year’s Rate Cuts Trapped Factory Credit

The GST rate changes from 22 September 2025 collapsed the old four-slab map into 5% and 18%, with 40% on a short list of luxury and sin goods. Many finished goods that households buy moved to 5%. Inputs that still sit at the 18% standard rate did not move with them, so the gap between tax paid and tax charged widened in several plants.

Man-made fibre and yarn were an exception: those rates came down to 5%, which ended a long inversion in that chain. Pharmaceuticals, mass-market garments, footwear, packaged food and electric vehicles did not get the same clean alignment. Where the finished item is at 5% and the factory’s goods, freight, job work and software remain higher, unused credit builds every month.

Abhishek Jain, indirect tax national head and partner at KPMG in India, tied the 8 October decision to that leftover bill.

Including input services in inverted duty refunds from 1 November 2026, and plant and machinery from 1 April 2027, is a big step, and it will help fully achieve the objective of the recent rate rationalisation, which benefited consumers but left many businesses with accumulated credit.

Abhishek Jain, Partner, KPMG in India

Jain said FMCG, pharma and food can now monetise that credit and free working capital. Jitendra Motwani, tax partner at Trilegal, named textiles, footwear, pharmaceuticals and manufacturing as the chains where trapped credit should start to move once the law is changed. The consumer already got the cheaper shelf price. The factory is being told to wait for the dates.

Revenue has not collapsed in the meantime. Taxable supplies in the figures put out after the meeting rose 25.8%, from ₹40.19 lakh crore to ₹50.58 lakh crore. The effective tax rate on domestic supplies fell from 14.55% to 13.13%. GST revenue is up 11% in FY27, and 14.7% in June to August 2026. The state can afford to give cash back. It has chosen to give it back only on new credit.

Who Holds the Unrecoverable Tax?

A government note on the meeting counted the ledgers that cannot recover plant and services tax under today’s formula. About 38,700 taxpayers claim refunds on exports. About 13,100 of those still carry tax paid on plant and machinery. Among inverted-duty claimants, about 15,200 carry that machinery tax, and about 17,300 carry tax paid on input services.

WHO CARRIES THE STUCK TAX

Those counts are not rupee totals. They are the population that the new formula is built for. A large exporter with a new line of machines after 1 April 2027 will get the tax back slowly. A small unit whose last big purchase was in 2025 will not. The same cut applies to services: retainers, freight, job work and software billed before 1 November 2026 stay in the pool.

Revenue secretary Arvind Shrivastava said the Council’s approach had been export in character, and that the tax should recognise that. The note also eases four tests that had blocked some work from counting as an export, including supplies through an overseas branch and job work in India on goods owned by a foreign client. Duty-drawback claimants will be allowed GST refunds as well, and a cap that tied the claim to the domestic selling price is to go.

Pending Refunds Have Already Shrunk

The industry complaint that officers sit on files is weaker than it was. Parliament was told of Central Tax refunds pending beyond 90 days in a 2026 Lok Sabha reply covering central formations only, as on 31 March of each year. The pile is smaller on both claim count and rupees.

CENTRAL TAX CLAIMS STILL OPEN AFTER 90 DAYS

Another 64 central claims, worth ₹163.60 crore, sat between 60 and 90 days at the end of 2025-26. State formations are a separate stack, so this is not an all-India total. It is still the wrong picture for a story that treats delay as the main leak. The leak that the 8 October package actually targets is legal: services and capital goods were written out of the inverted-duty formula, and GST 2.0 then poured more credit into that blocked pipe.

Speed was already being built in. The 56th Council had recommended sanction of 90% of refund claimed as provisional on a risk check for zero-rated supplies. From 1 October 2025, CBIC told its field offices to give inverted-duty claims the same 90% treatment as an interim step, ahead of a full change in the Act. IGST paid on exported goods already moves through a Customs link with little human handling. What 8 October adds on speed is a shorter acknowledgement, a deemed acknowledgement, a three-working-day order, and a fully automatic cash-ledger route.

When Do GST Service Refunds Start?

Input-service refunds under inverted duty start for credit availed on or after 1 November 2026. Plant and machinery waits until 1 April 2027, then pays at one-sixtieth of the credit each month for 60 months. Nothing in the Council note pays out the stock of services and machinery credit already sitting on books.

WHEN THE CASH IS ALLOWED TO MOVE

1. 13 September 2021: Supreme Court upholds the bar on input-service refunds under inverted duty in VKC Footsteps.
2. 22 September 2025: Two-slab rates take effect after the 56th Council, and several output rates fall below input rates.
3. 1 October 2025: CBIC extends 90% provisional refunds to inverted-duty claims as an interim field instruction.
4. 8 October 2026: 57th Council recommends putting services and capital goods into the refund formula, with later start dates.
5. 1 November 2026: Recommended start for inverted-duty refunds of input-service credit availed from this date.
6. 1 April 2027: Recommended start for plant and machinery credit availed from this date, at one-sixtieth a month for 60 months.

A machine bought in March 2027 still yields no refundable capital-goods credit under that design. A machine bought in April 2027 yields a thin monthly slice, and the last slice of that month’s credit arrives 60 months later. Factories that had hoped for a lump-sum clearing of the post-2025 pile will not get it. They will get a cleaner rule for the next invoice.

Practitioners are already telling clients to tag credit by date. Ledgers will need a split at 1 November 2026 for services and at 1 April 2027 for capital goods, because a mixed claim will be easy to reject. Public explainers after the meeting also folded the two dates into one “five-year monthly payout from November,” which is not what the note says. Services and machinery are different clocks.

Section 54 Still Has to Move Through Parliament

Sitharaman said 99 per cent of rate and process issues had been addressed, and that rates would now be taken up once a year. The refund of services credit still starts only on 1 November 2026, and only for credit availed from that date. Several other 8 October decisions, including the end of arrest powers under GST and a prosecution floor raised from ₹1 crore to ₹5 crore, also need the CGST Act, not a portal patch.

WHAT STILL NEEDS A CHANGE IN LAW

• Section 54(3): Services and capital goods enter the inverted-duty and zero-rated refund formula only after the Act is amended, and states must mirror that in SGST law.
• Start dates: 1 November 2026 and 1 April 2027 are the Council’s recommended on-switches, and they bite only once the notices are issued.
• Rules and the portal: The 10-day acknowledgement, deemed acknowledgement, system 90% sanction and automatic cash-ledger refund can move faster, through rules and GSTN design.
• Until then: Pending claims run on the present formula, which still stops at input goods for inverted duty and still keeps plant and machinery out.

The general penalty is to fall from ₹25,000 to ₹10,000, and no notice is to go out below ₹10,000, but those too wait on the statute. Sitharaman said she expected states and businesses to accept the process package and that it would settle over the next year. For a textile job-worker or a pharma packer staring at a fat credit ledger, the year that matters is the one that starts on 1 November, and only for invoices dated from that morning.

Old unused credit stays in the pool. New services credit can come back in cash after 1 November 2026, once the Act is changed. New machinery credit waits until 1 April 2027, then leaves at one-sixtieth a month.

Disclaimer: This article is news reporting and analysis of GST Council recommendations, and it is for information only. It is not tax advice, legal advice, or a view on any specific refund claim, return, or notice. Readers who need to file or recast a claim should consult a qualified chartered accountant or indirect-tax lawyer, and should wait for the notified text of the CGST and SGST changes. Figures, dates and statuses are those given in the Council note, the Press Information Bureau releases, the parliamentary reply and the other primary materials cited, and they can change when the law is drafted and the portal is updated.