Supplying goods or services outside India or to Special Economic Zone units without payment of integrated tax under a Letter of Undertaking or Bond allows businesses to preserve working capital. However, since no outward tax is paid, the input tax credit accumulated on raw materials, packaging, professional fees, and freight remains locked in the Electronic Credit Ledger. Section 54(3) creates a legal mechanism to convert this idle balance into bank disbursements. For service exporters, see our detailed guide on export of services without payment of tax LUT, and for inverted tax structures, review our analysis of GST refund inverted duty structure formula.
Statutory basis under Section 54(3) and Rule 89(4)
Section 54(3) of the Central Goods and Services Tax Act establishes that a registered person may claim a refund of any unutilized input tax credit at the end of any tax period where the credit has accumulated on account of zero-rated supplies made without payment of tax. The statutory provisions are published on the official legal repository at Section 54, CGST Act.
To quantify the exact refundable balance, Rule 89(4) prescribes the governing algebraic formula. The complete rules can be reviewed directly at Rule 89, CGST Rules. Procedural guidelines and filing circulars are also maintained by the department on the GST Portal Refund Manual and the GST Common Portal.
Capital goods exclusion: A frequent mistake during refund audits is including ITC on capital machinery, computers, or office equipment. Rule 89(4) strictly limits Net ITC to inputs and input services. Claiming capital goods credit triggers immediate rejection in Form GST RFD-06 and recovery demands.
The Rule 89(4) refund calculation formula
The mathematical computation under Rule 89(4) is structured as follows:
Each variable in this formula carries precise statutory definitions defined in sub-rule (4):
- Net ITC: The total input tax credit availed on inputs and input services during the relevant tax period under Form GSTR-3B Table 4(A). It excludes credit on capital goods as well as credits claimed under sub-rules (4A) and (4B) (such as deemed exports or merchant export notifications).
- Turnover of zero-rated supply of goods: The value of zero-rated supply of goods made during the relevant period without payment of tax under LUT. Under clause (C), this value is capped at 1.5 times the value of like goods domestically supplied by the same supplier or other suppliers.
- Turnover of zero-rated supply of services: Payments received during the period for zero-rated services where supply is completed, plus advances received for services completed in the period, minus advances received in prior periods where services are completed in the current period.
- Adjusted Total Turnover: The total turnover in a State or Union territory as defined under Section 2(112), excluding the value of exempt supplies other than zero-rated supplies, turnover of inward supplies liable to reverse charge under Section 9(3) or 9(4), and any turnover covered under sub-rules (4A) or (4B).
Documentation requirements per CBIC circulars
Circular No. 125/44/2019-GST and Circular No. 135/05/2020-GST set out the comprehensive documentary framework for verifying claims without physical office visits:
- Annexure-B statement of invoices: An itemized schedule listing invoice numbers, dates, HSN/SAC codes, taxable values, and credit availed, reconciled against inward Form GSTR-2B.
- Shipping bills and export declarations: For physical goods, a copy of the shipping bill or bill of export with corresponding export general manifest (EGM) details.
- FIRC or BRC for services: For export of services, Foreign Inward Remittance Certificates or bank realization certificates confirming receipt of foreign convertible exchange within legal limits.
- Undertaking under Section 54(3): A mandatory declaration confirming that the applicant has not been prosecuted for any offence under the Act or existing law where tax evaded exceeds ₹2,50,000.
GSTR-2B invoice matching requirement: Under Circular No. 135/05/2020-GST, refund processing officers cannot sanction credit on invoices not reflected in your Form GSTR-2B. Reconcile all purchase vouchers before applying.
Worked example: export under LUT refund calculation
Consider Zenith Engineering Solutions LLP, an industrial valve exporter based in Coimbatore. For the quarter ending September 2026, the firm operates purely under LUT and prepares its quarterly refund claim.
| Metric / Variable | Statutory Term | Value (INR) |
|---|---|---|
| Actual export of goods turnover (FOB value) | Zero-rated goods supply | ₹1,20,00,000 |
| Domestic sales of identical valve models | Domestic benchmark | ₹60,00,000 |
| 1.5x domestic turnover threshold cap | 1.5 × domestic value | ₹90,00,000 |
| Qualifying zero-rated goods turnover | Eligible export goods turnover | ₹90,00,000 |
| Export of engineering design services (FIRC received) | Zero-rated services supply | ₹30,00,000 |
| Domestic taxable supply turnover | Domestic turnover | ₹60,00,000 |
| Adjusted Total Turnover (₹90,00,000 + ₹30,00,000 + ₹60,00,000) | Adjusted Total Turnover | ₹1,80,00,000 |
| Eligible ITC on raw materials & components (inputs) | Inputs credit | ₹14,00,000 |
| Eligible ITC on testing & freight services (input services) | Input services credit | ₹4,00,000 |
| ITC on CNC machining lathe (capital goods, excluded) | Capital goods (inadmissible) | ₹6,00,000 |
| Qualifying Net ITC (₹14,00,000 + ₹4,00,000) | Net ITC | ₹18,00,000 |
Applying the statutory formula under Rule 89(4):
- Qualifying Zero-Rated Turnover = Qualifying Goods (₹90,00,000) + Services (₹30,00,000) = ₹1,20,00,000.
- Adjusted Total Turnover = ₹1,80,00,000.
- Turnover Ratio = ₹1,20,00,000 / ₹1,80,00,000 = 0.6667 (or 66.67%).
- Maximum Refund Sanctionable = Ratio (0.6667) × Net ITC (₹18,00,000) = ₹12,00,000.
Notice that because actual goods export (₹1,20,00,000) exceeded 1.5 times domestic value (₹90,00,000), the turnover was restricted to ₹90,00,000. Had there been no domestic sales cap restriction, the refundable amount would have been ₹15,00,000. Understanding this ceiling helps accountants budget cash disbursements accurately.
Step-by-step portal filing procedure in Form GST RFD-01
To file your refund application on the GST common portal, execute the following sequence:
- Log in to the GST portal and navigate to Services → Refunds → Application for Refund.
- Select the reason: Refund of unutilized ITC on account of exports without payment of tax.
- Choose the relevant tax period range (monthly or quarterly) and click Create Refund Application.
- Download the offline utility for Statement 3, enter invoice and shipping bill details, generate the JSON file, and upload it.
- Fill in Statement 3A: enter Net ITC, Turnover of zero-rated supplies, and Adjusted Total Turnover. The system automatically computes the eligible refund amount.
- The portal evaluates the lowest of three limits: the formula calculation, the balance in the Electronic Credit Ledger at the time of filing, and the balance at the end of the tax period.
- Attach supporting PDF documents (Annexure-B, FIRCs, shipping bills, and bank statements).
- Submit the application using DSC or EVC. Upon submission, the portal debits your credit ledger and generates an Application Reference Number in Form GST RFD-02.
Related guides
- GST refund of tax paid under wrong head: Section 77 and Section 19 correction guide
- How to calculate input tax credit and the order in which it is set off
- GSTR-9 Table 7 Rule 37 ITC reversal: 180 days non-payment and reclaim
- ITC kya hai? Input tax credit ka matlab, shartein aur GSTR-2B se rishta
Frequently asked questions
Can you claim refund of ITC on capital goods under Rule 89(4)?
No. Under the definition of Net ITC in Rule 89(4) of the CGST Rules, refund of unutilized credit on zero-rated supplies made under LUT is strictly restricted to inputs and input services. Capital goods credit is excluded from the refund formula.
What is the 1.5 times domestic turnover cap for zero-rated goods?
Under Rule 89(4)(C), the turnover of zero-rated supply of goods is capped at 1.5 times the value of like goods domestically supplied by the same supplier or similarly placed suppliers. If export turnover exceeds this threshold, the formula restricts the qualifying zero-rated turnover to the capped value.
When does the Electronic Credit Ledger get debited during refund filing?
The portal automatically debits the Electronic Credit Ledger at the time of submitting Form GST RFD-01. The debit equals the refund amount claimed, up to the available credit balance across CGST, SGST, and IGST heads.
What is the time limit for filing a refund application in Form GST RFD-01?
Under Section 54(1) of the CGST Act, you must file your refund claim before the expiry of two years from the relevant date. For exports of goods, the relevant date is generally the date on which the ship or aircraft leaves India or the truck crosses the land customs border.
Verify inward ITC in GSTR-2B before applying for refunds
Tax officers cross-reference Annexure-B invoice schedules against your supplier GSTR-2B filings. Identify missing supplier invoices and unlinked tax lines before submitting your refund claim. Your GSTR-2B and purchase register files are read in your browser and never uploaded to any server.
Last checked: 18 October 2026. Sources: Section 54, CGST Act, Rule 89, CGST Rules, GST Portal Refund Manual, GST Common Portal.