The provisional refund mechanism under GST allows for the immediate sanction of 90% of the claimed refund in certain cases. This comprehensive guide explains the provisional refund provisions, the risk-based mechanism introduced in 2025, and compliance requirements.
Understanding Provisional Refund
Legal Framework
Section 54(6) of the CGST Act requires the provisional refund of 90% of the total refund claimed, especially for zero-rated supplies by registered persons.
Risk-Based Provisional Refund Mechanism
The Central Board of Indirect Taxes and Customs (CBIC) issued Instruction No. 06/2025-GST, introducing a risk-based provisional refund mechanism under Rule 91(2) of the CGST Rules, 2017.
The 56th GST Council meeting recommended amendment in rule 91(2) to provide for sanction of 90% of refund claimed on a provisional basis by the proper officer on the basis of identification and evaluation of risk by the system.
How the Risk-Based Mechanism Works
Low-Risk Cases
For refund claims identified as low-risk by the GST system:
- 90% of the refund claimed is sanctioned on a provisional basis
- The proper officer can sanction the 90% provisional refund without further scrutiny
- The proper officer must adhere to existing timelines for acknowledgment
The instruction also extends this risk-based provisional sanction of 90% of the claimed amount to refunds filed on account of inverted duty structure (IDS) as an interim trade facilitation measure.
High-Risk Cases
- Refund applications not flagged as "low-risk" will undergo detailed scrutiny without provisional sanction
- High-risk cases undergo detailed scrutiny before sanction
Officer's Discretion
Where the proper officer is of the opinion that in a particular case, provisional refund should not be granted, he can, for reasons to be recorded in writing, instead of grant of refund on provisional basis, proceed with detailed examination of the application.
This power is meant to be used sparingly.
Applicability
Zero-Rated Supplies
The 90% provisional refund applies to refund claims on account of zero-rated supplies of goods or services.
Inverted Duty Structure
The risk-based provisional sanction of 90% applies to refunds filed on account of inverted duty structure (IDS) as an interim trade facilitation measure.
Applicable Date
The instruction applies to applications filed on or after October 1, 2025.
Exclusions
Certain categories of registered persons have been notified under Section 54(6) of the CGST Act who shall not be allowed refund on provisional basis for zero-rated supplies.
Refund Process Flow
Step 1: File Refund Application
File FORM GST RFD-01 for the refund claim.
Step 2: System Risk Assessment
The system identifies and evaluates the risk level of the application.
Step 3: Low-Risk Identification
If the application is identified as low-risk:
Step 4: Provisional Sanction
The proper officer sanctions 90% of the refund on a provisional basis.
Step 5: Issuance of RFD-02
The officer issues FORM GST RFD-02 (acknowledgement) or FORM GST RFD-03 (deficiency memo).
Step 6: Detailed Examination
The application continues to be processed for the remaining amount.
Step 7: Final Sanction
If the final admissible refund is less than the provisional amount, a show cause notice will be issued to the applicant.
Timeline
The proper officer must adhere to existing timelines for acknowledgment.
The extant timeline prescribed for the issuance of FORM GST RFD-02 or FORM GST RFD-03 continues to apply.
Key Points to Remember
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90% Provisional: 90% of the refund is sanctioned immediately for low-risk cases
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Risk-Based: The mechanism is based on system-identified risk evaluation
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Inverted Duty Covered: The mechanism extends to inverted duty structure refunds
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Exclusions Apply: Certain categories are excluded from provisional refund
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Final Adjustment: If final amount is less, show cause notice is issued
Common Mistakes to Avoid
Mistake 1: Assuming All Refunds Get 90% Provisional Only low-risk cases identified by the system get 90% provisional refund.
Mistake 2: Not Filing Complete Application Incomplete applications receive deficiency memos and do not get provisional sanction.
Mistake 3: Not Tracking Application Status Track the application to know if it has been flagged as low-risk or high-risk.
Best Practices
File Complete Applications: Ensure all documents and statements are complete.
Reconcile Regularly: Regular reconciliation helps ensure accurate refund claims.
Track Risk Status: Track whether the application is flagged as low-risk or high-risk.
Maintain Documentation: Keep records of all refund applications and sanctions.
Seek Professional Guidance: Provisional refund rules have complexities; professional advice is recommended.
The provisional refund mechanism under GST allows for immediate sanction of 90% of refund claims in low-risk cases. By understanding the risk-based mechanism and filing complete applications, businesses can accelerate their refund claims.
Need help with provisional refunds? Our GST experts provide comprehensive advisory and support.
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