{"id":90939,"date":"2026-10-29T10:00:00","date_gmt":"2026-10-29T04:30:00","guid":{"rendered":"https:\/\/www.taxaj.com/learn\/?p=90939"},"modified":"2026-10-29T10:00:00","modified_gmt":"2026-10-29T04:30:00","slug":"baddi-pharma-gst-inverted-duty-refund","status":"publish","type":"post","link":"https:\/\/www.taxaj.com/learn\/baddi-pharma-gst-inverted-duty-refund\/","title":{"rendered":"GST Refunds for Pharma Manufacturers in Baddi (2026): Inverted Duty After the 5% Medicine Rate"},"content":{"rendered":"<p class=\"wp-block-paragraph\"><strong>Since 22 September 2025 most medicines and formulations attract GST at 5%, down from 12%, while most active pharmaceutical ingredients, plastic and glass bottles and many packing materials remain at 18%. For a formulator in Baddi, Barotiwala or Nalagarh, that leaves input tax credit piling up faster than output tax can absorb it. The credit can be claimed back in cash as an inverted duty refund under section 54(3)(ii) of the CGST Act, using the formula in Rule 89(5), currently on credit on inputs only. Low-risk claims are being given 90% provisionally, and the 57th GST Council has recommended allowing refund of credit on input services from 1 November 2026.<\/strong> This guide explains how the refund works for a Himachal pharma unit and what to prepare.<\/p>\n<h2 class=\"wp-block-heading\">Why pharma units in Baddi now have inverted duty<\/h2>\n<figure class=\"wp-block-table\">\n<table>\n<thead>\n<tr>\n<th>Item<\/th>\n<th>GST before 22 Sep 2025<\/th>\n<th>GST from 22 Sep 2025<\/th>\n<\/tr>\n<\/thead>\n<tbody>\n<tr>\n<td>Medicines and formulations, including Ayurvedic, Unani, Siddha and homoeopathic<\/td>\n<td>12%<\/td>\n<td>5%<\/td>\n<\/tr>\n<tr>\n<td>36 specified life-saving drugs<\/td>\n<td>12% or 5%<\/td>\n<td>Nil<\/td>\n<\/tr>\n<tr>\n<td>Most APIs and key starting materials<\/td>\n<td>18%<\/td>\n<td>18% (some bulk drugs may fall in a 5% entry; check classification)<\/td>\n<\/tr>\n<tr>\n<td>Plastic bottles and containers; glass bottles<\/td>\n<td>18%<\/td>\n<td>18%<\/td>\n<\/tr>\n<tr>\n<td>Paper and paperboard cartons and boxes<\/td>\n<td>12%<\/td>\n<td>5%<\/td>\n<\/tr>\n<tr>\n<td>Job work on Chapter 30 pharma products<\/td>\n<td>Higher rate<\/td>\n<td>5%<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/figure>\n<p class=\"wp-block-paragraph\">The Himachal Drug Manufacturers Association told the press in September 2025 that the gap between 18% inputs and 5% formulations would leave MSME units with crores of rupees of credit stuck each. Himachal has around 650 pharma units, most of them in the Baddi-Barotiwala-Nalagarh belt of Solan district.<\/p>\n<h2 class=\"wp-block-heading\">Old credit after the rate cut<\/h2>\n<ul class=\"wp-block-list\">\n<li><strong>No reversal for the rate cut:<\/strong> the GST Council&#8217;s FAQ of September 2025 confirms that a reduction in rate does not require reversal of credit already in the ledger; it can be used or claimed as refund.<\/li>\n<li><strong>Nil-rated drugs are different:<\/strong> where a product became nil-rated, it is an exempt supply from 22 September 2025, so credit relating to it must be reversed under Rules 42 and 43. Nil-rated turnover does not generate an inverted duty refund.<\/li>\n<li><strong>Same inputs and outputs:<\/strong> a refund is not available where the input and output are the same goods. For a formulator buying APIs and packing to make tablets, the inputs and outputs differ, so this restriction does not usually bite.<\/li>\n<\/ul>\n<h2 class=\"wp-block-heading\">The Rule 89(5) formula<\/h2>\n<p class=\"wp-block-paragraph\">Maximum refund = (Turnover of inverted rated supply \u00d7 Net ITC \u00f7 Adjusted total turnover) \u2212 [Tax payable on inverted rated supply \u00d7 (Net ITC \u00f7 ITC availed on inputs and input services)]<\/p>\n<ul class=\"wp-block-list\">\n<li><strong>Net ITC<\/strong> means credit on inputs only: APIs, excipients, packing material and consumables. Credit on input services (testing, freight, rent, job work billed as a service) and capital goods is excluded. The Supreme Court upheld this exclusion in <em>VKC Footsteps<\/em> (2021).<\/li>\n<li><strong>The 2022 amendment<\/strong> to the second limb, which made the formula fairer, has been held by the Gujarat High Court to apply to earlier periods within the two-year limit, and the Supreme Court dismissed the department&#8217;s appeal in 2025.<\/li>\n<li><strong>Adjusted total turnover<\/strong> covers all your supplies in the state, including exempt supplies, so a unit that also sells nil-rated drugs gets a proportionately smaller refund.<\/li>\n<\/ul>\n<h2 class=\"wp-block-heading\">Filing the refund<\/h2>\n<ol class=\"wp-block-list\">\n<li>File Form GST RFD-01 on the portal for the period, after GSTR-1 and GSTR-3B for that period are filed. Periods can be grouped but not across financial years.<\/li>\n<li>Attach Statement 1 (the Rule 89(5) calculation) and Statement 1A (the invoice-wise details).<\/li>\n<li>Upload the declarations under section 54(3) and the undertaking on unjust enrichment; claims above \u20b92 lakh need a chartered accountant&#8217;s certificate.<\/li>\n<li>File within two years of the due date of the GSTR-3B for the period in which the claim arose.<\/li>\n<li>Answer any deficiency memo quickly; the refund is decided by one officer for CGST, SGST and IGST together.<\/li>\n<\/ol>\n<p class=\"wp-block-paragraph\">Our guide to <a href=\"https:\/\/www.taxaj.com\/learn\/gst-refund-for-inverted-duty-structure-application-process\/\" target=\"_blank\" rel=\"noopener\">inverted duty refunds<\/a> walks through the portal screens.<\/p>\n<h2 class=\"wp-block-heading\">The 90% provisional refund<\/h2>\n<ul class=\"wp-block-list\">\n<li><strong>Since October 2025:<\/strong> under CBIC Instruction 06\/2025-GST, applications filed on or after 1 October 2025 that the system scores as low risk receive 90% of the claim provisionally, and the Instruction extends this to inverted duty claims as an interim measure. Others go through detailed scrutiny.<\/li>\n<li><strong>Finance Act 2026:<\/strong> section 54(6) has been amended to cover inverted duty refunds by law, but the change takes effect from a date to be notified, and it had not been notified when we checked.<\/li>\n<li><strong>Who is excluded:<\/strong> applicants who have not completed Aadhaar authentication cannot get provisional refunds.<\/li>\n<li><strong>If the final amount is lower<\/strong> than the provisional sanction, the department issues a notice to recover the excess.<\/li>\n<\/ul>\n<h2 class=\"wp-block-heading\">What the 57th GST Council recommended (8 October 2026)<\/h2>\n<ul class=\"wp-block-list\">\n<li>Inverted duty refunds to include credit on <strong>input services<\/strong> availed on or after 1 November 2026.<\/li>\n<li>Refund of credit on <strong>capital goods<\/strong> for inverted duty and export claims, spread over 60 months, for credit availed on or after 1 April 2027.<\/li>\n<li>Automatic 90% provisional refunds for inverted duty and export claims, with a shorter acknowledgement period and system-readable data in RFD-01.<\/li>\n<li>Removal of the block on credit for <strong>free samples<\/strong> and for goods <strong>destroyed on expiry<\/strong>, both large items for pharma companies.<\/li>\n<li>For exporters, removal of the Rule 89(4)(C) cap and omission of Rule 96(10).<\/li>\n<\/ul>\n<p class=\"wp-block-paragraph\">These are recommendations; each takes effect only once notified. Keep records of input services from November 2026 by invoice so that you can include them as soon as the change is in force.<\/p>\n<h2 class=\"wp-block-heading\">Exporters from Baddi<\/h2>\n<ul class=\"wp-block-list\">\n<li><strong>Export with IGST paid:<\/strong> the shipping bill and a correctly filed GSTR-1 and GSTR-3B work as the refund claim, processed through ICEGATE. Match the invoice values in GSTR-1 with the shipping bills to avoid holds.<\/li>\n<li><strong>Export under LUT:<\/strong> renew the LUT each financial year and claim unused credit through RFD-01 under the Rule 89(4) formula.<\/li>\n<li><strong>Advance authorisation or EOU units:<\/strong> watch for the notification omitting Rule 96(10), recommended by the 57th Council with effect from 2017.<\/li>\n<\/ul>\n<h2 class=\"wp-block-heading\">Refunds are scrutinised: keep the trail clean<\/h2>\n<p class=\"wp-block-paragraph\">In September 2026 CGST Shimla&#8217;s preventive wing arrested the managing director of a pharma company in Sirmaur district over refunds claimed on credit from non-existent suppliers, where e-way bill and toll records showed no movement of goods. The case was not in Baddi, but it shows what officers test: that every purchase has a real supplier, an e-way bill, transport and payment by bank, and that inputs consumed match production.<\/p>\n<h2 class=\"wp-block-heading\">State incentives and refunds<\/h2>\n<p class=\"wp-block-paragraph\">Under the Himachal Pradesh Industrial Investment Policy, 2019, eligible units get reimbursement of a share of net SGST paid in cash. A unit whose output tax is mostly covered by credit pays little SGST in cash, so the incentive and the refund pull in different directions; work out both before deciding how to use credit.<\/p>\n<h2 class=\"wp-block-heading\">Checklist for a Baddi formulator<\/h2>\n<ol class=\"wp-block-list\">\n<li>Map every product to its HSN and post-September 2025 rate, and flag nil-rated drugs.<\/li>\n<li>Reverse credit relating to nil-rated drugs from 22 September 2025.<\/li>\n<li>Separate credit on inputs, input services and capital goods in the books.<\/li>\n<li>Reconcile purchases with GSTR-2B every month before filing GSTR-3B.<\/li>\n<li>File refund claims period by period, well inside the two-year limit.<\/li>\n<li>Track the notifications implementing the 57th Council&#8217;s refund changes.<\/li>\n<\/ol>\n<h2 class=\"wp-block-heading\">Frequently asked questions<\/h2>\n<h3 class=\"wp-block-heading\">What is the GST rate on medicines after September 2025?<\/h3>\n<p class=\"wp-block-paragraph\">5% for most medicines and formulations, down from 12%, with 36 specified life-saving drugs at nil from 22 September 2025.<\/p>\n<h3 class=\"wp-block-heading\">Can a pharma company claim refund of credit on APIs at 18%?<\/h3>\n<p class=\"wp-block-paragraph\">Yes, as an inverted duty refund under section 54(3)(ii), using the Rule 89(5) formula, which counts credit on inputs such as APIs and packing.<\/p>\n<h3 class=\"wp-block-heading\">Is credit on input services refundable?<\/h3>\n<p class=\"wp-block-paragraph\">Not under the current formula. The 57th GST Council has recommended including input services availed from 1 November 2026, subject to notification.<\/p>\n<h3 class=\"wp-block-heading\">Do I have to reverse credit because the rate fell to 5%?<\/h3>\n<p class=\"wp-block-paragraph\">No. A rate cut does not require reversal. Reversal applies only to the extent the product became nil-rated or exempt.<\/p>\n<p class=\"wp-block-paragraph\">TAXAJ&#8217;s Himachal team prepares inverted duty and export refund claims, reconciliations and replies to deficiency memos for manufacturers across the state. Talk to our <a href=\"https:\/\/www.taxaj.com\/ca-in-manali\" target=\"_blank\" rel=\"noopener\">Himachal office<\/a> or see our <a href=\"https:\/\/www.taxaj.com\/gst-returns\" target=\"_blank\" rel=\"noopener\">GST return and compliance service<\/a>.<\/p>\n<div class=\"wp-block-buttons is-layout-flex wp-block-buttons-is-layout-flex\">\n<div class=\"wp-block-button\"><a class=\"wp-block-button__link wp-element-button\" href=\"https:\/\/wa.me\/918802912345?text=I%20run%20a%20pharma%20unit%20in%20Baddi%20and%20need%20help%20with%20a%20GST%20refund\" target=\"_blank\" rel=\"noopener\">WhatsApp our team<\/a><\/div>\n<div class=\"wp-block-button is-style-outline\"><a class=\"wp-block-button__link wp-element-button\" href=\"tel:+918802812345\">Call 88028 12345<\/a><\/div>\n<\/div>\n<p class=\"has-small-font-size wp-block-paragraph\"><em>Last updated 26 October 2026. Sources: GST Council, 56th meeting press release and FAQ (September 2025); Notification 9\/2025-Central Tax (Rate); Notifications 13\/2025 and 14\/2025-Central Tax; CGST Act, 2017, section 54 and Finance Act, 2026; CGST Rules 42, 43, 89 and 91; Circulars 125\/44\/2019 and 135\/05\/2020; CBIC Instruction 06\/2025-GST; Union of India v. VKC Footsteps (Supreme Court, 2021); Ascent Meditech v. Union of India (Gujarat High Court); PIB release on the 57th GST Council meeting (8 October 2026); HP Industrial Investment Policy, 2019; reports in The Tribune (September 2025) and Medical Dialogues (September 2026). General information only; check your product classification and refund computation with us before filing.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>How pharma formulators in Baddi-Barotiwala-Nalagarh can recover GST credit stuck after medicines moved to 5%: the Rule 89(5) formula, what counts as Net ITC, documents for RFD-01, the 90% provisional refund, nil-rated drugs, exports, and the changes recommended by the 57th GST Council.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"_kad_post_transparent":"","_kad_post_title":"","_kad_post_layout":"","_kad_post_sidebar_id":"","_kad_post_content_style":"","_kad_post_vertical_padding":"","_kad_post_feature":"","_kad_post_feature_position":"","_kad_post_header":false,"_kad_post_footer":false,"_kad_post_classname":"","footnotes":""},"categories":[5],"tags":[],"class_list":["post-90939","post","type-post","status-publish","format-standard","hentry","category-income-tax"],"_links":{"self":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/90939","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/comments?post=90939"}],"version-history":[{"count":1,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/90939\/revisions"}],"predecessor-version":[{"id":90977,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/posts\/90939\/revisions\/90977"}],"wp:attachment":[{"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/media?parent=90939"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/categories?post=90939"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.taxaj.com/learn\/wp-json\/wp\/v2\/tags?post=90939"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}