Claiming refund of unutilized ITC on export of services: Complete legal framework and action plan

Case Study: Export service provider with ₹2 lakh unused GST credit

Priya Sharma is a freelance consultant providing business advisory services to multiple foreign clients through her sole proprietorship business registered under GST. Since all her clients are overseas, she receives payments in foreign currency without any GST component—her services qualify as zero-rated supply under Section 16 of IGST Act, 2017.

Over two years (2023-2025), Priya invested substantially in her business infrastructure:

• Laptops and workstations for client deliverables: ₹8 lakhs (GST: ₹1.44 lakhs)
• Testing phones and equipment: ₹2 lakhs (GST: ₹36,000)
• Office furniture and fixtures: ₹1.5 lakhs (GST: ₹27,000)
• Software subscriptions and tools: ₹1 lakh (GST: ₹18,000)
• Other business services: ₹0.5 lakh (GST: ₹9,000)

Total GST Paid: ₹2.34 lakhs

The Challenge: Since Priya makes only zero-rated exports (no output tax), she accumulates Input Tax Credit (ITC) with no corresponding tax liability to offset it. Her CA advised that she cannot claim refund without closing her GST registration, which seemed illogical—why should she sacrifice her registered status to recover legitimately paid taxes?

The Confusion: Online research revealed that businesses can claim refund of unutilized ITC under Section 54 of CGST Act within a 2-year window, but the procedural details remained unclear. Different sources provided conflicting guidance about eligibility, time limits, and documentation requirements.

The Core Issue: Priya represents thousands of export service providers who legitimately paid GST on business purchases but cannot utilize this credit because they generate zero tax liability. The accumulation of ITC blocks her working capital and creates tax inefficiency, yet refund procedures remain poorly understood even among some tax professionals.

What is unutilized ITC and why do export service providers face this issue?

Understanding zero-rated exports and ITC accumulation

Priya's situation arises from a fundamental feature of the GST system: while zero-rated exports generate no tax liability for the exporter, they do not prevent the exporter from claiming ITC on input supplies.

Section 16(1)(a) of IGST Act, 2017 defines zero-rated supply:

"Zero rated supply means any of the following supplies of goods or services or both, namely:—(a) export of goods or services or both."

Section 16(3) of IGST Act further provides:

"Subject to the provisions of sub-section (5), a registered person making zero rated supply shall be eligible to claim refund under either of the following options, namely:—(a) he may supply goods or services or both under bond or Letter of Undertaking, subject to such conditions, safeguards and procedure as may be prescribed, without payment of integrated tax and claim refund of unutilised input tax credit."

The mechanism works as follows:

• Input supplies purchased attract GST (CGST, SGST/IGST)
• These GST amounts are credited to your ITC account when invoices uploaded by suppliers in GSTR-1
• Output supplies (export services) carry 0% IGST—no output tax generated
• Result: ITC accumulates without matching output tax liability
• This accumulated ITC represents unutilized credit

Why this creates a unique problem:

For domestic businesses (taxable supplies):

• Output tax is typically 5%, 12%, 18%, or 28%
• Output tax offsets or reduces ITC
• Any remaining ITC can be carried forward to next month
• Refund rarely becomes necessary

For export service providers (zero-rated supplies):

• Output tax is 0%
• ITC cannot be offset against zero output tax
• ITC accumulates indefinitely without utilization opportunity
• Refund becomes the only mechanism to realize the credit

Section 54 of CGST Act specifically addresses this scenario by allowing refund of accumulated ITC for zero-rated suppliers.

How can you claim refund under section 54 of CGST Act?

Legal framework for ITC refund

Section 54(1) of CGST Act, 2017 provides the legal basis for refund claims:

"Subject to the provisions of sub-section (10), a registered person may claim refund of any unutilised input tax credit at the end of any tax period, in such manner and subject to such conditions and safeguards as may be prescribed."

For zero-rated suppliers specifically, Section 54(3)(b) states:

A registered person making zero rated supply of goods or services shall be entitled to refund of unutilized input tax credit carried forward to any tax period, in the manner specified in the relevant sub-section.

Conditions for Eligibility:

Section 54(4) specifies mandatory conditions:

"Refund shall be granted only if—
(a) the applicant is a registered person;
(b) no amount is pending recovery from the applicant;
(c) the application is made within two years from the end of the month in which such credit was accumulated;
(d) in case of refund of credit under sub-section (3)(b) (zero-rated supply case), the credit relates to supplies made during that tax period and is accumulated due to supplies other than taxable supplies or supplies of goods or services where the tax invoice has not been issued."

Key Conditions Explained:

1. Must be Registered Person: You must have active GST registration—closing account is NOT required
2. No Recovery Pending: No tax/penalty amounts should be outstanding against your account
3. Two-Year Window: Must file within 24 months from end of month when ITC was accumulated
4. ITC Must Relate to Designated Period: For zero-rated supplies, ITC should relate to the current tax period

What is the two-year time limit and how does it apply to you?

Understanding the critical deadline

The 2-year window is a statutory time limit beyond which you lose the right to claim refund permanently.

Legal Basis:

Section 54(4)(c) clearly states:

"The application is made within two years from the end of the month in which such credit was accumulated."

Interpretation and Application:

Scenario 1: ITC accumulated in current month

• If ITC accumulated in September 2025
• 2-year window ends on: 31 October 2027
• You must file refund application by 31 October 2027

Scenario 2: ITC accumulated over multiple months

• If ITC accumulated from January 2023 to December 2024
• Different components have different deadlines
• January 2023 ITC deadline: 29 February 2025 (EXPIRED)
• December 2024 ITC deadline: 31 January 2027

Priya's Case:

If Priya's GST purchases were made over 2023-2025:

• Any ITC from 2023: Deadline already expired (by November 2025)
• Any ITC from early 2024: Deadline approaching (by November 2026)
• Any ITC from late 2024: Still within 2-year window (until late 2026)
• Any ITC from 2025: Full 2-year window available

Critical Action: Immediately identify when each ITC component was accumulated and prioritize filing for older credits before deadline expires.

Is closing GST registration required to claim refund?

No, one can claim the ITC refund without need to close the GST registration.

Regulatory Clarification:

CBIC Circular No. 150/05/2021-GST dated 26 May 2021 clarifies:GST Laws

"A registered person making zero-rated supplies can claim refund of ITC on a periodic basis without closing their GST registration. Refund can be claimed for any complete tax period or at the end of financial year as per Rule 89 of CGST Rules."

Therefore, Priya can claim refund while maintaining active GST registration.

What documents are required for refund application?

Complete Documentation Checklist for Section 54 Refund

Rule 89 of CGST Rules, 2017 prescribes the procedure and documents for refund application:

Mandatory Documents:

1. Refund Application (Form GST RFD-02 or RFD-03)
• For zero-rated supplies: Use Form GST RFD-02 (Common for all refunds except certain specific cases)
• Download from GST portal at www.gst.gov.in
• Fill with complete details:
• Registration number and period of claim
• Gross ITC available
• ITC utilized during period
• ITC utilized in subsequent periods (if any)
• Net unutilized ITC being claimed
• Exact amount of refund sought
• Declaration and authorized signatory
2. Bank Account Details
• Bank account where refund should be credited
• Account should be in your name (matching GST registration)
• Cancelled cheque copy
• IFSC code of bank
• Account holder declaration
3. GST Returns for Claiming Period and Preceding Three Months
• GSTR-3B for claiming month and three previous months
• Demonstrates ITC accumulation and non-utilization
• Shows zero output tax (confirming zero-rated supply nature)
4. List of Input GST Invoices (Supporting Schedule)
• Itemized list of all invoices on which ITC is being claimed
• Format: Date | Supplier GSTIN | Invoice Number | Description | ITC Amount
• Segregate by date and supplier
• Cross-reference with GSTR-2B entries
5. GSTR-2B Statements
• GSTR-2B for claiming month
• Confirms all ITC entries reflected in auto-draft statement
• Official proof of ITC availability
6. Documentation Proving Zero-Rated Supply Status
• Export invoices showing services supplied to foreign clients
• Proof of foreign remittance (FIRC, bank statements showing foreign currency credit)
• Shipping bills or export certification (if applicable)
• Letter of Undertaking (LUT) acceptance (if filed)
• Service completion certificates from foreign clients
7. Proof of No Outstanding Dues
• Income Tax Clearance Certificate (ITR compliance)
• GST compliance certificate (all returns filed timely)
• Details of any pending assessments or recovery proceedings
• Self-certification if no dues
8. CA Certificate (Recommended)
• Chartered Accountant's verification certificate
• Certifies:
• Accuracy of refund application
• ITC calculation correctness
• Compliance with GST provisions
• Supporting documents authenticity
• Lowers refund scrutiny risk
9. Additional Documents if Requested
• Details of export clients and contracts
• Service delivery records
• Payment receipts showing foreign exchange receipt
• Any correspondence with tax authorities

What is the step-by-step process to file refund application?

Complete procedural guide for filing section 54 refund

Step 1: Login to GST Portal and Navigate to Refund Section

• Visit www.gst.gov.in
• Login with your credentials (email and password)
• Navigate to: Services > Returns > File Refund > Request Refund
• Click "Create New Application"

Step 2: Select Refund Type and Period

• Refund Type: "Refund of unutilized ITC" (Section 54)
• Financial Year: Select year in which ITC accumulated
• Tax Period: Select specific month/quarter for which claim is made
• Continue to next section

Step 3: Fill Refund Application (Form GST RFD-02)

Part A: Basic Information

• GSTIN (auto-filled)
• Registration type (Ordinary/Composition/SEZ etc.)
• Refund period
• Original date of ITC accumulation

Part B: ITC Details

• Opening balance of ITC (carried from previous period)
• Add: ITC available during claiming period (from GSTR-2B)
• Less: ITC utilized in current period (output tax paid)
• Less: ITC utilized in subsequent periods (claimed in later returns)
• Net: Unutilized ITC available for refund

Calculation Example (Priya's Case):

Opening ITC Balance (April 2024): ₹50,000
Add: ITC available (April 2024): ₹1,96,000
Less: ITC utilized in Apr 2024: ₹0 (zero output tax)
Less: ITC in subsequent periods: ₹0 (no future offset)
Unutilized ITC for refund: ₹2,46,000

Part C: Bank Details

• Account holder name
• Bank name
• IFSC code
• Account number
• Verification with cancelled cheque

Part D: Declaration

• Declare truthfulness of information
• Acknowledge penalties for false information
• Authorized signatory with name and designation

Step 4: Upload Supporting Documents

Portal will request documents in specified order:

1. GSTR-3B for claiming and previous three months
2. GSTR-2B for claiming month
3. Bank account proof (cancelled cheque)
4. List of invoices in prescribed Excel format
5. Export documentation proving zero-rated supplies
6. CA certificate (if CA-prepared)
7. Any other relevant documents

File Upload Requirements:

• Format: PDF, JPG, or Excel as applicable
• File size: Maximum 5 MB per file
• Clear and legible scans
• Document references to matching invoices

Step 5: Digital Signature and Submission

• Use DSC (Digital Signature Certificate) for authorization
• If no DSC available, can use Aadhaar OTP-based authorization
• Review all details carefully before final submission
• Submit application
• System generates ARN (Application Reference Number)
• Screenshot ARN for your records

Step 6: Print Acknowledgment and Retain Records

• Download acknowledgment receipt
• Note ARN and filing date
• Print copy for physical records
• Maintain all supporting documents for future reference

What happens after you file the refund application?

Post-Filing Timeline and Processing Stages

Section 54(7) of CGST Act specifies processing timeline:

"The proper officer shall examine the application filed under this section and the conditions specified in sub-section (4) and shall, subject to sub-section (8) and (9), pass an order allowing or rejecting the claim."

Processing Stages:

Stage 1: Initial Scrutiny (Days 1-7)

• GST portal confirms receipt
• Application data verified for completeness
• Automated checks for:
• Two-year deadline compliance
• No outstanding dues
• Correct application form used

Stage 2: Document Verification (Days 7-30)

• Officer examines uploaded documents
• Reconciles GSTR-2B with invoice details
• Verifies export transaction genuineness
• Checks supplier invoice authenticity

Stage 3: Substantive Review (Days 30-60)

• Officer may seek clarifications through portal messages
• Common queries:
• Proof of foreign payment receipt
• Explanation of specific invoices
• Service delivery documentation
• Client details and contracts

Stage 4: Order Pass (Days 60-90)

• Officer issues order approving or rejecting refund
• Order downloadable from portal
• Refund transfer initiated if approved

Stage 5: Refund Crediting (Days 90-120)

• Refund amount transferred to submitted bank account
• Bank processing typically 3-5 working days
• Verification receipt available on portal

Realistic Timeline Summary:

• Best Case: 60-90 days (straightforward cases, complete documentation)
• Normal Case: 90-120 days (minor clarifications required)
• Complex Case: 120-180 days (extensive scrutiny, export verification needed)

What if your refund application is rejected?

Understanding rejection grounds and appeal mechanism

Section 54(9) of CGST Act provides for rejection:

"The proper officer shall pass an order rejecting the claim if—
(a) the applicant fails to satisfy any of the conditions specified in sub-section (4);
(b) any information furnished in the application is found to be false or incorrect."

Common Rejection Grounds:

1. Time Limit Expired
• Application filed after 2-year deadline
• No remedy available—credit permanently lost
• Prevention: File within 24 months from accumulation month-end
2. Outstanding Tax/Penalty Dues
• Any GST or income tax demand pending
• Any penalty not paid
• Remedy: Clear all dues first, then reapply
3. Incomplete Documentation
• Missing invoices or export proof
• Unverifiable foreign payments
• Remedy: Obtain missing documents and file fresh application with complete documents
4. False Information in Application
• Invoice details don't match GSTR-1
• Claimed exports not substantiated
• ITC calculation errors
• Remedy: Correct errors, file rectification application with explanation
5. Suspicious Export Pattern
• Sudden large exports without business history
• Foreign clients unable to verify
• Payment through suspicious channels
• Remedy: Provide comprehensive documentation and business explanation

Appeal Mechanism - Section 54(10) and Section 107:

If refund is rejected, you can appeal:

Step 1: First Appeal to Commissioner (Appeals)

• File appeal under Section 107 of CGST Act
• 10% pre-deposit of disputed refund amount (mandatory)
• Time limit: 3 months from rejection order
• Form: GST APL-01

Example: If ₹2 lakh refund rejected:

• Pre-deposit required: ₹20,000 (10%)
• Must be paid before appeal acceptance
• Will be adjusted if appeal succeeds
• Forfeited if appeal rejected

Step 2: Second Appeal to GSTAT (if unsuccessful)

• GST Appellate Tribunal appeal
• Additional 20% pre-deposit (on top of first appeal deposit)
• Time limit: 4 months from Commissioner's order

Step 3: High Court Jurisdiction

• Constitutional remedy through writ petition
• Article 226 jurisdiction
• No mandatory pre-deposit for constitutional remedies
• Last resort for legal challenges

What are the precautions and best practices?

Actions to protect your refund claim and ensuring smooth processing:

Precaution 1: Meticulous Documentation Maintenance

What to Document:

• All export invoices with client signatures/acceptance
• Payment receipts showing foreign currency credit
• Email correspondence with clients proving service delivery
• Project completion reports or deliverables
• Client letters acknowledging services

Why It Matters:

• Department verifies export authenticity before refund approval
• Zero-rated claims attract higher scrutiny due to refund component
• Complete documentation establishes credibility

Precaution 2: Timely Filing Before Deadline

Create Reminder System:

• Mark 2-year deadline for each ITC component
• File application 3-4 months before deadline
• Buffer for any clarifications or resubmission

Why It Matters:

• Expired deadline means permanent credit loss
• No exception for any reason (technical issues, personal emergencies)
• Filing early provides time for clarification responses

Precaution 3: Accurate ITC Calculation

Verification Steps:

• Match GSTR-2B entries with actual invoices
• Verify ITC amounts against invoice tax components
• Reconcile with your books of accounts
• Have CA verify calculations

Why It Matters:

• Miscalculation gives grounds for rejection
• Overstated claims invite investigation
• Understatement loses eligible refund amount

Precaution 4: Separate Export and Domestic Records

Recommended System:

• Maintain separate books for export services vs. domestic
• Track ITC separately for each category
• Clearly identify which invoices support export claims
• Segregate in your records and refund application

Why It Matters:

• Prevents confusion between zero-rated and taxable supplies
• Simplifies verification by department
• Demonstrates organized compliance

Precaution 5: Professional CA Involvement

CA's Role:

• Verify refund eligibility before filing
• Prepare accurate calculations and schedules
• Upload supporting documents correctly
• Provide CA certificate for verification
• Handle clarification responses

Why It Matters:

• Reduces rejection risk significantly
• Ensures compliance with technical requirements
• Provides representation if issues arise
• Professional certificate adds credibility

Precaution 6: Continuous Compliance

Maintain:

• Timely GST return filing (avoid arrears)
• Clear all penalties and dues promptly
• File ITR regularly (no income tax defaults)
• Update address and other registration details
• Respond to any GST department queries immediately

Why It Matters:

• "No outstanding dues" is mandatory condition
• Compliance history strengthens refund case
• Department more favorable to compliant taxpayers

Conclusion: Claiming your legitimate ITC refund

You have every legal right to claim refund of unutilized ITC when you export services to foreign clients generating zero tax liability. The law specifically provides for this through Section 54 of CGST Act, and registration closure is absolutely not required—continuing as registered actually strengthens your position.

Action for the reader: Identify your ITC components approaching the 2-year deadline and file refund applications before these deadlines expire. Waiting only risks losing your credit entirely.

References

• Section 16(1)(a), Integrated Goods and Services Tax Act, 2017
• Section 16(3), Integrated Goods and Services Tax Act, 2017
• Section 54, Central Goods and Services Tax Act, 2017
• CBIC Circular No. 150/05/2021-GST dated 26 May 2021
• Rule 89, Central Goods and Services Tax Rules, 2017
• Sections 107 and 109, Central Goods and Services Tax Act, 2017

Official Resources:

• GST Portal: https://www.gst.gov.in
• CBIC Website: https://cbic-gst.gov.in
• GST Laws: https://cbic-gst.gov.in/gst-acts.html

Disclaimer: This article provides general guidance based on GST laws as of November 2025. Individual cases may vary. Consult qualified chartered accountants for case-specific advice.