GST Refund for Pharmaceutical Manufacturers

The pharmaceutical industry in India has one of the most intricate GST frameworks amongst all industries. Manufacturers often accumulate large amounts of unutilised
ITC that cannot be offset due to higher rates applicable to inputs than to finished goods.

This blog explains how GST refunds work for pharmaceutical manufacturers in India, focusing on ITC accumulation and the inverted duty structure.

GST Refund Pharmaceutical Manufacturers India

Refunds arise primarily due to the inverted tax rate structure
Both formulation companies and API manufacturers are affected
Refund claims are filed using Form RFD-01 on the GST portal
Processing timelines are governed by Section 54 of the CGST Act
Provisional refunds of 90% are available in eligible cases

Impact of GST 2.0 Pharmaceutical Industry Reforms on Refunds

The GST 2.0 pharmaceutical industry reforms implemented in 2024-2025 have come with their challenges and opportunities.

The automatization of the refund processing procedure, the enhancement of the RFD-01 processes, and the CGST Instruction 6/2025 have simplified compliance with the
enhancement of focus on documentation.

GST Impact on the Pharmaceutical Industry in India and Cash Flow Challenges

Common ITC impact scenarios for pharma manufacturers:

API procurement at 18% GST creates large input credit pools
Pharma packaging materials also attract 18% GST
Output supply of medicines at 5% results in a consistent net ITC surplus
This surplus cannot be fully utilised through the output tax liability
Refund becomes the only route to recover these credits

Updated GST Rates on Medicines and Pharma Products 2026

In 2026, the GST rates on the major pharma categories will be summarised as shown in the following table:

Category	GST Rate
Life-saving drugs Nil GST	0%
Essential medicines	5%
API GST rate	18%
Pharma packaging	18%
Medical devices GST rate 5%	5%
GST on ayurvedic medicines	5%
Contract manufacturing GST rate 5%	5%
KSM Key Starting Materials GST	18%

HSN codes relevant for pharma manufacturers:

HSN 3003: Medicaments consisting of mixed products for therapeutic or prophylactic use, not in measured doses
HSN 3004: Medicaments in measured doses, including those in transdermal administration forms
HSN 2941: Antibiotics
HSN 3002: Human blood, vaccines, toxins, cultures
HSN 9018: Medical instruments and devices

How to Calculate GST on Medicine for Manufacturers

Refund formula for inverted duty structure under Rule 89(5):

Refund Amount = (Net ITC x Turnover of Inverted Rated Supply) / Adjusted Total Turnover

Practical illustration:

Component	Amount (Rs.)
Net ITC on inputs	50,00,000
Turnover of the inverted rated supply	80,00,000
Adjusted total turnover	1,00,00,000
Eligible refund (formula)	40,00,000

Key GST 2.0 Reforms Affecting the Pharma Industry 2026

The 56th GST Council pharma decisions focused on rate rationalisation and reducing ITC accumulation pressure across the pharmaceutical value chain.

Key outcomes from the 56th GST Council for pharma:

Rate rationalisation for several life-saving drug categories
Reduction in GST on certain critical API categories under consideration
Clarity on the contract manufacturing GST rate 5% and job work classification
Streamlined refund processing timelines for inverted duty claimants
Impact on the generic drug manufacturer: ITC refund timelines are reduced

Life Saving Drugs Nil GST and Reduced Rates Impact

Zero-rated domestic supply does not automatically qualify for an ITC refund under Section 54
Manufacturers must assess whether supplies qualify as exempt or zero-rated
Input services ITC cannot be claimed in the refund computation under Rule 89(5)
Reduced-rate supplies impact the adjusted turnover calculation in the refund formula

Understanding Inverted Duty Structure, Pharma, and ITC Refund Issues

The root cause of the ITC refund for pharma manufacturers in India is the rate differential between input procurement and output supply.

Primary causes:

API 18% GST on procurement vs 5% GST on finished medicines
Pharma packaging 18% GST on procurement vs 5% on finished output
KSM Key Starting Materials GST at 18% adds to input credit accumulation
Input services exclusion Rule 89(5) further complicates full credit recovery
Multiple tax periods of accumulation before a single refund claim is filed

Input services exclusion Rule 89(5):

Rule 89(5) explicitly excludes input services from the Net ITC calculation
Only ITC on goods (inputs) qualifies for inclusion in the refund formula
Incorrectly including input services ITC leads to a refund rejection
Manufacturers must segregate input ITC from input service ITC in ledger management

Claim your inverted duty GST refund with MyGSTRefund – India’s trusted pharma GST experts.

ITC Accumulation Under Rule 89(5) Pharma Formula

Component	Description
Net ITC	ITC on inputs only (excludes input services and capital goods)
Turnover of Inverted Supply	Taxable turnover at a lower rate (e.g., 5%)
Adjusted Total Turnover	Total turnover minus exempt, nil-rated, and zero-rated
Refund Formula	(Net ITC x Inverted Turnover) / Adjusted Total Turnover
Maximum Refund	Capped at formula output; excess ITC lapses unless exported

Real Example of Bulk Drug GST Refund Calculation

Parameter	Value
ITC on API and other inputs	Rs. 1,20,00,000
ITC on input services (excluded)	Rs. 20,00,000
Net ITC for Rule 89(5)	Rs. 1,00,00,000
Inverted supply turnover	Rs. 4,00,00,000
Adjusted total turnover	Rs. 5,00,00,000

Refund calculation:

Eligible refund = (1,00,00,000 x 4,00,00,000) / 5,00,00,000
Eligible refund = Rs. 80,00,000
Less: ITC already utilised against output tax = Rs. 15,00,000
Net refund claimable = Rs. 65,00,000

High Risk Pharma Segments Facing GST Refund Issues

Segment	Risk Level	Reason
API manufacturers	High	18% input GST on KSMs and intermediates; output at 12-18%
Formulation companies	Medium	18% input GST on APIs and packaging; output at 5%
Generic drug manufacturers	Medium-High	Large ITC accumulation on API procurement
Ayurvedic medicine manufacturers	Medium	Input at 12-18%; output at 5%
Pharma exporters	Low	The IGST refund for the pharma exporter route is available
SEZ suppliers	Low	SEZ supplies GST refund for pharma through the LUT mechanism
Contract manufacturers	Medium	Job work input ITC recovery depends on the principal

Eligibility Criteria for GST Refund Pharmaceutical Industry

Section 54(6) CGST Act: Subsidiary refund of 90% allowed to exporters and claimants of inverted duty who have not been charged with an offence in the last five years.
ITC refund to pharma manufacturers should not have been subjected to adverse GST audit findings in the current year.
All relevant tax periods should have GSTR-1 and GSTR-3B that are reconciled.
No pending demand or recovery proceedings under the CGST Act

Conditions for LUT letter of undertaking pharma:

Pharma exporters supplying without payment of IGST must file LUT annually
LUT letter of undertaking pharma must be in force before a zero-rated supply is made
Non-compliance with LUT conditions can result in an IGST payment demand on exports
LUT is applicable for both goods exports and services exports

90% Provisional Refund GST for the Pharma Sector

The following categories of applicants are eligible for 90% provisional refund of GST:

Exporters: Both goods exporters and service exporters filing under LUT
Inverted duty structure pharma claimants: Manufacturers with consistent ITC accumulation
Compliant taxpayers: Those with a clean audit history and no pending prosecution
First-time applicants: Eligible if all compliance conditions are met

Common Reasons for GST Refund Rejection in Pharma

Reason	Fix
Incorrect RFD-01 pharma application filing	Use updated offline utility; reconcile before submission
Missing an unjust enrichment certificate for the pharma	Obtain the CA certificate; attach with all non-export refund claims
Mismatch in GSTR-1 and GSTR-3B	Reconcile monthly; file amendments before refund application
Blocked ITC claims included	Review Section 17(5) list; exclude blocked credits from computation
Documentation errors	Maintain invoice-wise ITC records; attach proof of payment

Step-by-Step Process to Claim GST Refund for Pharma Manufacturers

Step	Action
Step 1	Calculate the eligible refund using the Rule 89(5) formula
Step 2	File RFD-01 pharma application on the GST portal
Step 3	Upload supporting documents, including invoices, returns, and ITC ledger
Step 4	Await officer verification and PFMS verification of the GST refund
Step 5	Track refund status on the GST portal using the ARN number
Step 6	Receive the refund amount in your registered bank account via PFMS

Key timelines to track:

RFD-01 acknowledgement: Within 15 days of filing
Provisional refund (90%): Within 7 days of acknowledgement for eligible cases
Final refund order: Within 60 days of complete application
Appeal filing deadline: Within 3 months of the refund rejection order

Documents Required for GST Refund Formulation Company

GST returns: GSTR-1, GSTR-3B for all relevant tax periods
Purchase invoices: All input tax invoices corresponding to the ITC claimed
ITC ledger: Electronic credit ledger statement showing available ITC
Sales invoices: Output supply invoices for the refund period
Bank details: Cancelled cheque or bank certificate for PFMS verification
Unjust enrichment certificate: CA certificate for domestic refund claims
LUT copy: For export refund claims without IGST payment
Refund computation workings: Formula-based calculation with supporting data

How MyGSTRefund Supports Pharmaceutical Manufacturers With GST Refunds

MyGSTRefund streamlines GST refund calculations for pharmaceutical manufacturers, especially in cases of an inverted duty structure

Enables seamless end-to-end refund filing with reduced manual intervention
Provides real-time tracking of refund applications to improve cash flow planning
Includes advanced reconciliation tools to validate ITC claims and avoid mismatches
Helps identify eligible refund amounts while minimizing the chances of rejection
Delivers expert assistance to ensure faster processing and accurate GST compliance

Frequently Asked Questions

1. What Is GST Refund Pharmaceutical Manufacturers India?
GST refund for pharmaceutical manufacturers in India is the refund of accumulated input tax credit owing to increased GST levied on inputs as compared to output medicines.

2. Why Do Pharma Companies Face an Inverted Duty Structure?
Pharma companies have an inverted duty structure since inputs such as APIs and packaging receive duty rates of 18% GST, and finished medicines receive a duty rate of
5.

3. How to Claim ITC Refund for Pharma Manufacturers?
In order to claim an ITC refund, pharma manufacturers have to submit Form RFD-01, having computed the amount of refund under Rule 89(5).

4. What Is Rule 89(5) Pharma Refund Formula?
The formula of rule 89(5) is Refund = Net ITC x Turnover of inverted rated supply/ Adjusted total turnover. It incorporates ITC on inputs, but not services and capital goods.

5. What Is 90% Provisional Refund GST?
90% provisional refund, GST enables the qualified taxpayers to get the majority of their refund within 7 days of acknowledgement.

6. Are Life Saving Drugs Nil GST Eligible for Refund?
Life-saving drugs under Nil GST are exempt supplies; therefore, the ITC on them is not refundable.

7. What is the GST Rate on Medicines in India in 2026?
India has varying rates of GST on medicine, with Nil GST on life-saving drugs, 5 per cent on essential drugs, and 18 per cent on APIs and packaging.