How is the refund of unutilised ITC calculated for export of services?

When you export services under a Letter of Undertaking (LUT), you charge no IGST, but you still pay GST on your own costs: office rent, software, professional fees, subcontractors. Because exports are zero-rated, that credit is not lost. If you cannot use it against tax on domestic sales, you can claim it back in cash.¹²

The amount is not simply your credit balance. Rule 89(4) of the Central GST (CGST) Rules sets a formula that allocates credit between export and other turnover. This guide explains each term for a service business, works through an example, and notes the changes notified on 26 October 2026.³⁶ The filing process is in GST refund on export of services.

What is the refund of unutilised ITC on zero-rated supply of services?

The refund of unutilised input tax credit (ITC) on zero-rated supply is the cash refund of GST credit that an exporter under bond or LUT cannot use against tax on domestic supplies.¹²

• IGST section 16(2): allows input tax credit for making zero-rated supplies, even if the supply would otherwise be exempt.¹
• IGST section 16(3): lets a registered person who exports under bond or LUT claim a refund of unutilised input tax credit under section 54 of the CGST Act.¹
• CGST section 54(3): allows a refund of unutilised credit at the end of any tax period in only two cases: zero-rated supplies made without payment of tax, and an inverted duty structure.²

The refund turns export-related credit into cash instead of leaving it in the ledger.

Who can claim a refund of unutilised ITC on zero-rated supplies?

A registered person who exports under bond or LUT without paying IGST can claim the refund; a supplier making only domestic supplies cannot.¹²

The table draws on section 16 of the IGST Act and section 54(3) of the CGST Act.¹² For the other export route, see export of services with IGST paid.

How do you claim a refund of unutilised ITC for export of services?

You claim the refund by working out the rule 89(4) formula for the relevant period, checking the credit ledger caps, and filing the application with the supporting statements on the GST portal.³⁵⁷

1. Relevant period: the period for which the claim is filed; the portal lets you combine several tax periods, even across two financial years, in one application.³⁵
2. Formula: work out the maximum refund under rule 89(4) and show it in Statement 3A.³⁵
3. Caps: check the end-of-period and filing-date ledger balances.⁵
4. Documents: prepare the statements and declarations in Annexure-A to Circular No. 125/44/2019-GST.⁷
5. Filing: when you file, rule 89(3) requires the electronic credit ledger to be debited by the amount claimed.³

What documents and deadlines apply to an ITC refund claim for exports?

Annexure-A to CBIC Circular No. 125/44/2019-GST lists the documents for a refund of unutilised ITC on exports without payment of tax, and the claim must be filed within two years of the relevant date.²⁷

The table draws on the circular and section 54.²⁷ The invoice details in Statement 3 must match the export invoices in your GSTR-1.⁵

What happens if an ITC refund claim is wrong or exceeds the credit ledger?

If the claim exceeds what the ledger can support, only the lower amount can be claimed: the GST portal FAQs say the amount is the lowest of three figures.⁵

1. Formula: the maximum refund from the formula, shown in Statement 3A.⁵
2. End-of-period balance: the balance in your electronic credit ledger at the end of the tax period, at the aggregate level across IGST, CGST and SGST.⁵
3. Filing-date balance: the balance in each tax head of the electronic credit ledger on the date you file.⁵

For example, the portal FAQ says that if the formula allows ₹1,00,000 and the end-of-period balance is ₹1,50,000, but the ledger on filing holds CGST ₹80,000, SGST ₹10,000 and IGST nil, only ₹90,000 can be claimed.⁵ Using credit to pay domestic tax before you file reduces what you can claim.

From 1 November 2026, Notification No. 05/2026-Central Tax sets the order of the ledger debit: integrated tax first, then central tax and State tax equally, with any shortfall in one taken from the other.⁶

How is the refund of unutilised ITC calculated under rule 89(4)?

Rule 89(4) of the CGST Rules calculates the refund for zero-rated supplies made under bond or LUT as:³

Refund Amount = (Turnover of zero-rated supply of goods + Turnover of zero-rated supply of services) × Net ITC ÷ Adjusted Total Turnover

The result is the maximum refund admissible. For a pure service exporter, the goods term is zero.³

What does each term in the rule 89(4) formula mean for a service exporter?

Each term has a specific definition in rule 89(4).³

• Net ITC: the input tax credit availed on inputs and input services during the relevant period.³ The GST portal FAQs say the portal fills this in automatically and you can only reduce it. It excludes ITC on capital goods and transitional credit.⁵
• Turnover of zero-rated supply of services: rule 89(4)(D) defines it as the aggregate of payments received during the relevant period for zero-rated supply of services, and zero-rated services completed during the period for which payment was received in advance in an earlier period, reduced by advances received for zero-rated services not completed during the period. It is a receipts-based figure, not the total of export invoices raised.³
• Adjusted Total Turnover: the sum of the turnover in your State under section 2(112) of the CGST Act, excluding turnover of services, plus the zero-rated services turnover worked out above and your non-zero-rated supply of services. Exempt supplies other than zero-rated supplies are excluded.³⁴
• Relevant period: the period for which the claim is filed.³

What does a worked rule 89(4) calculation look like?

Say a branding agency in Bengaluru files its refund for April to June 2026, with no advances and no exempt supplies. The figures are illustrative; the treatment follows rule 89(4).³

Adjusted Total Turnover is ₹30,00,000 + ₹10,00,000 = ₹40,00,000. The maximum refund is ₹30,00,000 × ₹3,00,000 ÷ ₹40,00,000 = ₹2,25,000.³

The remaining ₹75,000 of Net ITC is treated as relating to domestic turnover, and stays in the ledger to pay tax on domestic invoices.³

What changes are coming to rule 89(4) for capital goods?

Notification No. 05/2026-Central Tax amends rule 89(4) with effect from 1 April 2027, so Net ITC will also include "the input tax credit on capital goods attributable to the relevant period".⁶

• Which capital goods: only capital goods whose ITC is availed on or after 1 April 2027 count.⁶
• Spread: the credit is spread at one-sixtieth per month over sixty months from the month it was availed, less any reversals.⁶
• Declaration: from 1 April 2027 the notification also adds a declaration to rule 89(2), confirming that the capital goods have not been disposed of and are used for the zero-rated supplies.⁶
• Background: this follows the 57th GST Council's recommendation of 8 October 2026 to allow refund of ITC on capital goods for zero-rated supplies.⁸

Until then, GST on equipment remains outside the export refund formula, though you can still use it against tax on domestic supplies.³

What are the common mistakes that reduce or delay an ITC refund?

The common mistakes are using invoice values instead of receipts and spending the credit before filing.³⁵

• Using invoice value instead of receipts: for zero-rated services turnover, rule 89(4)(D) is based on payments received.³
• Including capital goods ITC in Net ITC: for periods before the April 2027 change.³⁵
• Leaving domestic turnover out of Adjusted Total Turnover: this inflates the refund and invites a deficiency memo or rejection.³
• Spending the credit before filing: this caps the claim at the lower ledger balance.⁵
• Missing the deadline: the two-year limit runs from the relevant date in Explanation 2(c) to section 54, which for services is generally the date payment is received.²

The formula is mechanical, but deciding what counts as an input service, a capital good or an advance depends on your books. A chartered accountant (CA) can reconcile the figures before you file.