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A large formulator's central depot in Mumbai carrying pre-22-September-2025 stock at 12 percent input GST on landed cost, selling the same stock post-cutover at the new 5 percent output GST, must reconcile a depot-wise SKU-level stock-in-trade ITC ledger against a post-cutover output-invoice register at the new 5 percent rate. Section 15 valuation on ongoing bonus schemes and trade discounts must be split cleanly at the rate change date. The depot must document on the audit record that no Rule 42 or Rule 43 common-credit reversal is required because the pre-cutover ITC was validly claimed on 12 percent input at receipt and Section 16 does not reverse credit for a prospective output rate change. Manual reconciliation across a national depot network with 30-plus branches loses the batch-level ITC provenance, aggregates scheme accruals into blended credit notes at a single rate (which breaches Section 34), and mis-attributes the one-time inventory-rollover margin cushion to routine trading margin.
Freeze the opening stock ledger at end-of-day 21 September 2025 at the SKU by depot by receipt-batch level, keyed on the ITC claim date, the input rate at receipt, and the landed cost per unit. Ingest every post-cutover outward invoice against that stock and compute output GST at 5 percent under Section 15. Tie the closing stock quantity to the opening stock minus outbound plus fresh receipts and reconcile the ITC ledger against GSTR-3B at the GSTIN level — no reversal accrues against pre-cutover stock because Section 16 does not disturb validly claimed credit. Split every ongoing scheme accrual and post-supply discount into two rate buckets — pre-cutover invoices attract 12 percent credit notes under Section 34, post-cutover invoices attract 5 percent credit notes. Classify each scheme against Section 15(1), Section 15(2), or Section 15(3) — pre-agreement invoice-linked schemes qualify for Section 15(3) exclusion from GST base, volume-linked incentives without pre-agreement invoice link stay outside Section 15 and are treated as financial adjustments. Compute the working-capital position from the electronic credit ledger — the 7-percentage-point differential between 12 percent input and 5 percent output on rolling pre-cutover stock accrues to the ledger for a defined transition window until pre-cutover stock is exhausted.
Depot master with depot code, GSTIN, address, and warehouse type (central versus branch versus consignment); SKU master with HSN (3003 for bulk drugs, 3004 for formulations, 9018 to 9022 for medical devices), pack size, unit landed cost, and rate applicable at receipt; receipt-batch master keyed on GRN date, ITC claim date, input rate (12 percent pre-22 September 2025, 5 percent post), landed cost per unit, and quantity received; outward invoice register at the invoice-line level with SKU, quantity, transaction value, output GST rate, and — for scheme-linked lines — the reference to the underlying scheme master and the pre-agreement invoice link; scheme master keyed to scheme type (bonus quantity, trade discount, volume rebate), pre-agreement date, and Section 15 classification; credit-note register keyed to the original invoice reference so the credit-note rate always ties to the invoice rate; GSTR-1 and GSTR-3B feed for reconciling output tax remittance against the invoice register and input tax credit against the receipt-batch register; Section 54(3) refund workbook feed for ongoing inverted-duty refund cycles on packaging inputs and capital goods.
A cutover-date reconciliation pack — opening stock as at 21 September 2025 by SKU by depot by receipt batch with associated 12 percent input ITC crystallised in the electronic credit ledger; a rolling post-cutover stock consumption schedule mapping outbound quantities to pre-cutover receipt batches on a FIFO or weighted-average basis; a monthly output-invoice register at 5 percent GST with Section 15 valuation tie-back per invoice line; a scheme-linked credit-note register split into 12 percent (pre-cutover invoice) and 5 percent (post-cutover invoice) buckets under Section 34; a Section 15 classification schedule for each active scheme; a working-capital variance line showing the 7-percentage-point rollover cushion accruing to the electronic credit ledger during the transition window; and — for the audit file — a documented position note establishing that Rule 42 and Rule 43 are not engaged because the output supply remains taxable under HSN 3004 at the reduced 5 percent rate.
The 56th meeting of the GST Council on 3 September 2025 recommended a landmark rate rationalisation across pharmaceuticals. All drugs and medicines under HSN 3003 (bulk drugs) and HSN 3004 (formulations) moved from the existing 12 percent slab to a flat 5 percent output rate; specified life-saving drugs in the cancer, HIV, tuberculosis, and rare-disease schedule moved to nil rate; medical devices under HSN 9018 to 9022 moved from 18 percent to 5 percent. The effective date was 22 September 2025. For a large formulator’s national depot network — persona-illustration: a Cipla-scale operator with a Mumbai central depot carrying an aggregate stock-in-trade of the order of Rs 240 crore on landed cost as at 21 September 2025 — the immediate operational question at midnight of the cutover was: pre-cutover stock was received under invoices bearing 12 percent input GST and that credit was validly claimed under Section 16 of the CGST Act 2017 at the time of receipt; from 22 September 2025 the same stock is sold at 5 percent output GST under Section 15. What does the reconciliation look like? Does Rule 42 or Rule 43 kick in and force a reversal of the 12 percent input credit already claimed? This is pharma inventory GST rate switch 22 September 2025 reconciliation — a discipline that begins on the cutover midnight and runs until the last unit of pre-cutover stock leaves the branch depot network.
Quick reference
| Aspect | Detail |
|---|---|
| Rate change decision date | 3 September 2025 (56th GST Council meeting) |
| Rate change effective date | 22 September 2025 |
| Formulations HSN | 3004 (medicaments in measured doses) |
| Bulk drugs HSN | 3003 (mixtures and non-formulation drugs) |
| Old formulation output rate | 12 percent CGST plus SGST |
| New formulation output rate | 5 percent CGST plus SGST |
| Pre-cutover input rate on landed cost | 12 percent (formulations) |
| Post-cutover input rate on fresh receipts | 5 percent (formulations) |
| Governing ITC provision | Section 16 CGST — no reversal for prospective output-rate change |
| Governing valuation provision | Section 15 CGST |
| Common-credit reversal — engaged? | No. Rule 42 and Rule 43 apply where output is exempt; taxable-to-taxable rate change does not engage the rule |
| Credit-note rate rule | Section 34 CGST — credit note bears the same rate as the original invoice |
| One-time margin cushion on rollover | Approximately 7 percentage points on pre-cutover stock (12 percent input paid, 5 percent output collected) |
| Ongoing inverted-duty refund | Section 54(3) CGST plus Rule 89(5) — packaging inputs at 12/18 percent against 5 percent output |
| Refund formula amendment | Notification 14/2022-Central Tax dated 5 July 2022 (Net ITC excludes input services and capital goods) |
| Life-saving drugs schedule | Nil rate — creates Rule 42/43 exposure on shared inputs |
The reconciliation in one paragraph
A national formulator’s depot network operating under the pre-22-September-2025 rate structure carried its stock-in-trade at a landed cost that included 12 percent input GST claimed as input tax credit under Section 16 of the CGST Act 2017. That credit was validly availed on the input invoice — the four Section 16 conditions (tax invoice on record, physical receipt of goods, tax paid to government by the supplier, return filed by the recipient) were met at the time of the input supply. From 22 September 2025 the same stock is sold under output invoices bearing 5 percent output GST under Section 15 valuation. The reconciliation surface is a stock-in-trade ledger at the SKU by depot by receipt-batch level, frozen as at end-of-day 21 September 2025 at the 12 percent input rate, then rolled forward against post-cutover outward invoices at 5 percent — with a documented position note in the audit file establishing that Rule 42 and Rule 43 of the CGST Rules 2017 are not engaged because the output supply remains taxable (only the rate is reduced) and Section 16 does not disturb validly claimed credit for a prospective output-rate change. On the Section 15 valuation side, every ongoing bonus scheme and trade-discount arrangement crossing the cutover boundary must be split at the invoice level — credit notes against pre-cutover invoices under Section 34 bear 12 percent, credit notes against post-cutover invoices bear 5 percent, and aggregating both into a single blended credit note is a Section 34 breach. The one-time working-capital effect is a rollover margin cushion of approximately 7 percentage points on the pre-cutover stock as it exits inventory, accruing to the electronic credit ledger until the pre-cutover stock is exhausted (typically 60 to 90 days depending on branch depot stock-turn).
What the scenario looks like in India
The Indian formulations market is served by an operating template that clusters around a small number of integrated formulator plus API leaders and a larger tier of speciality and biosimilar players. At the integrated tier the reference-scale operators — Sun Pharmaceutical Industries, Dr Reddy’s Laboratories, Cipla, Aurobindo Pharma, Lupin, Zydus Lifesciences (Cadila Healthcare), Torrent Pharmaceuticals, Alkem Laboratories, Glenmark Pharmaceuticals, Cadila Pharmaceuticals — each run a manufacturing footprint across Baddi (Himachal), Ahmedabad-Vadodara (Gujarat), Hyderabad-Vishakhapatnam corridor (Telangana and Andhra Pradesh), Halol (Gujarat), Bachupally and Bollaram (Hyderabad), Kurkumbh (Maharashtra), Verna (Goa), and Ankleshwar (Gujarat), with formulation SKUs feeding a national depot network typically anchored on a Mumbai or Ahmedabad central depot with 25 to 40 branch depots at state level. At the speciality and biosimilars tier — Biocon Biologics, Divi’s Laboratories, Piramal Pharma, Ipca Laboratories, Ajanta Pharma, Suven Pharmaceuticals, Neuland Laboratories, Natco Pharma, Laurus Labs, Granules India, Strides Pharma Science, JB Chemicals and Pharmaceuticals — the depot footprint is narrower but the SKU mix skews to higher-value speciality formulations where the rate-switch working-capital effect is proportionately larger.
The illustrative persona anchoring this article is a Cipla-scale depot manager at the Mumbai central depot carrying an aggregate pre-cutover stock-in-trade of the order of Rs 240 crore on landed cost as at end-of-day 21 September 2025. The stock is a mix of formulations under HSN 3004 (the primary volume) plus a smaller residue of bulk drug movements under HSN 3003 and a small medical device line under HSN 9018 to 9022. Every receipt batch in that Rs 240 crore has an associated input tax credit balance in the electronic credit ledger against the depot’s GSTIN — the 12 percent input GST on formulations was claimed under Section 16 at the time each GRN was posted, and the credit sits in the ledger against future output liabilities. The rate switch does not cost the depot the 12 percent — the depot did not pay 12 percent as a cost, it paid 12 percent as tax and recovered it as credit. What changes on 22 September 2025 is only the output-side rate applied to fresh outward invoices against that stock.
The regulatory overlay — Section 16, Section 15, Rule 42/43, Section 34
The core position is anchored on Section 16 of the CGST Act 2017. Section 16 fixes the eligibility and conditions for taking input tax credit — a registered person is entitled to take credit of the input tax charged on any supply of goods or services used in the course or furtherance of business, subject to the four conditions of possession of a tax invoice, receipt of goods, tax having been actually paid to the government by the supplier, and filing of the recipient’s own return. Each condition attaches to the input supply — the date of the input tax invoice, the date of physical receipt of goods, the supplier’s tax payment cycle for that supply period, and the recipient’s return period for that same window. A subsequent change in the output rate on the same goods at a later date does not disturb credit already validly availed. This is the anchor position that the depot’s audit file must document at the first year-end following the rate change.
Rule 42 and Rule 43 of the CGST Rules 2017 govern the reversal of input tax credit where a common input is used partly for taxable supplies and partly for exempt supplies — the reversal is computed on a turnover ratio and reflects the proportion of the credit attributable to the exempt limb. Rule 42 covers inputs and input services; Rule 43 covers capital goods. Rule 42 and Rule 43 are triggered by the presence of an exempt output — not by a rate change on a taxable output. A move from 12 percent to 5 percent on HSN 3004 formulations does not convert the output into an exempt supply; the output remains taxable, only at the reduced rate. Rule 42 and Rule 43 are therefore not engaged by the 22 September 2025 formulation rate change. Separately, the specified life-saving drugs schedule that moved to nil rate on 22 September 2025 (cancer, HIV, tuberculosis, rare-disease drugs on the Council-notified schedule) does create Rule 42/43 exposure on shared inputs — a formulator manufacturing a mix of taxable formulations plus nil-rated life-saving drugs from a shared plant must run Rule 42 on any input consumed in common. That is a distinct reconciliation surface from the 12-to-5-percent switch on the general formulation base.
Section 15 of the CGST Act 2017 fixes the value of taxable supply as the transaction price. Section 15(2) lists the inclusions in the transaction value and Section 15(3) permits the exclusion of post-supply discounts satisfying the pre-agreement, invoice-linkage, and recipient-side ITC-reversal conditions. On the cutover date the depot must review three categories of Section 15 adjustment on the ongoing scheme register — bonus-quantity schemes (buy-one-get-one and buy-ten-get-one offers to distributors) where the agreement predates the supply and the discount is invoice-linkable; trade discount slabs published in the price schedule where the slab is unambiguous at the time of supply; and volume-linked incentive rebates settled at the end of the quarter without a pre-agreement invoice link. The first two qualify for Section 15(3) exclusion or Section 15(1) transaction-value reduction; the third stays outside the GST base and is treated as a post-supply financial adjustment. Section 34 of the CGST Act 2017 requires a credit note issued against a scheme accrual to bear the same GST rate as the original tax invoice — pre-cutover invoices attract 12 percent credit notes, post-cutover invoices attract 5 percent credit notes, and aggregating a full quarter’s scheme accrual into a single blended credit note at either rate is a Section 34 breach.
A worked example — Cipla-scale Mumbai central depot on the cutover midnight
Illustrative — the following figures represent the operating pattern of a national formulator’s central depot of the scale that operators such as Cipla, Sun Pharmaceutical Industries, or Lupin run at Mumbai, Ahmedabad, or Bhiwandi. Public disclosures do not reveal branch-depot inventory positions; cross-verify against your own stock ledger and electronic credit ledger extract before action.
A national formulator’s Mumbai central depot closes the day on 21 September 2025 with an aggregate stock-in-trade of Rs 240 crore on landed cost. The composition — Rs 210 crore in formulations under HSN 3004 (the primary volume line, moving at 12 percent input rate to 5 percent post-cutover), Rs 22 crore in bulk drugs under HSN 3003 (also moving from 12 percent to 5 percent), and Rs 8 crore in medical devices under HSN 9018 to 9022 (moving from 18 percent to 5 percent). Against this Rs 240 crore of landed cost, the depot’s electronic credit ledger carries the corresponding input tax credit — approximately Rs 27.4 crore on the formulations (Rs 210 crore at 12 percent), Rs 2.64 crore on bulk drugs, and Rs 1.44 crore on medical devices — aggregating to approximately Rs 31.5 crore of ITC crystallised in the ledger against the pre-cutover stock.
The depot’s average stock-turn on formulations is approximately six turns a year, translating to an average holding period of two months. That is the transition window — approximately 60 days from 22 September 2025 during which the pre-cutover stock progressively exits inventory against outward invoices bearing the new 5 percent output GST. Over that 60-day window the depot progressively dispatches formulations against post-cutover invoices at 5 percent output on the transaction value.
An illustrative post-cutover outward invoice on 23 September 2025 dispatches 10,000 units of a HSN 3004 formulation SKU at a transaction value of Rs 42 per unit — invoice-line value Rs 4,20,000, output GST at 5 percent Rs 21,000. The same SKU received on 12 September 2025 at a landed cost of Rs 34 per unit carried input tax of Rs 4.08 per unit at 12 percent (Rs 40,800 aggregate on the batch of 10,000 units) — validly claimed to the electronic credit ledger under Section 16 at the time of receipt. The depot’s per-invoice reconciliation for this outbound line is: output tax collected at 5 percent Rs 21,000, remitted through GSTR-3B in the September 2025 return; input tax credit on the same batch at 12 percent Rs 40,800, sitting in the electronic credit ledger from the receipt period, offsetting other output liabilities in the ledger. There is no Section 16 reversal against this line — the credit stays valid.
Rolled up across the Rs 210 crore formulation stock at the 12-percent-to-5-percent switch, the working-capital cushion accruing to the electronic credit ledger over the 60-day transition is approximately Rs 210 crore × (12 percent minus 5 percent) = Rs 14.7 crore of the Rs 31.5 crore aggregate pre-cutover ITC that will offset a lower prospective output tax base on the same physical stock. Once pre-cutover stock is exhausted (around 21 November 2025 on the two-month stock-turn), the depot’s fresh receipts land at 5 percent input GST for 5 percent output GST — the input-output rate matches on the formulation leg and the working-capital accumulation stops. On the packaging inputs (blister foil, cartons, inserts at 12 or 18 percent) and on capital goods (packaging lines, cold-chain refrigeration), the input rate remains above the 5 percent output rate — an ongoing inverted-duty position that the depot files under Section 54(3) and Rule 89(5) prospectively.
Common reconciliation breakages
Five breakages recur across formulator depot networks running the 22 September 2025 rate switch, and each carries a specific audit or ledger exposure.
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Rule 42/43 reversal claim opened by the auditor. The most common audit line at the first year-end after the rate change is a reviewer asking whether Rule 42 or Rule 43 was triggered on pre-cutover stock. The answer is no — the output supply remains taxable, only the rate is reduced. The depot’s file must carry a documented position note citing Section 16 (credit conditions attach to the input supply, not to the output rate) and citing Rule 42/43 (engaged only where output is exempt, not where output is taxable at a reduced rate). Without the pre-drafted position note, the audit query drifts into a Section 74 exposure.
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Blended credit notes on cross-boundary scheme accruals. A quarterly bonus-quantity scheme running July to September 2025 with settlement in October 2025 straddles the rate change boundary. Depots that issue a single blended credit note at either 12 percent or 5 percent for the entire quarter breach Section 34 — the credit note must bear the same rate as the original invoice. The correct reconciliation splits the credit note at the invoice level: pre-22 September 2025 invoices attract 12 percent credit notes, post-22 September 2025 invoices attract 5 percent credit notes. The scheme-linkage register must retain the original invoice reference on every credit-note line.
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Section 15 mis-classification of volume-linked incentive rebates. A distributor volume-linked rebate settled at the end of the quarter without a pre-agreement invoice link does not satisfy Section 15(3) — the discount was not agreed at or before the time of supply and is not linkable to specific invoices. The depot cannot treat the rebate as a reduction of taxable value and cannot issue a Section 34 credit note bearing GST for such a rebate. The correct treatment is a post-supply financial adjustment outside the GST base. Depots that force these rebates through Section 34 credit notes with GST adjustment open a Section 74 exposure at audit.
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Weighted-average cost drift on the stock-in-trade ledger. Some depots collapse the receipt-batch dimension into a single weighted-average cost per SKU. This works for accounting purposes but destroys the ITC provenance required to defend the pre-cutover 12 percent credit at audit. The reconciliation discipline is a receipt-batch-level ledger at the SKU by depot level — every batch keyed on GRN date, ITC claim date, input rate at receipt, and landed cost per unit — carried forward through FIFO or weighted-average consumption against outward invoices.
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Failure to open the ongoing Rule 89(5) refund cycle prospectively. The 22 September 2025 rate change closes a large fraction of the pre-existing inversion on the formulation leg (both formulation input and formulation output now at 5 percent for fresh receipts), but the packaging inputs at 12 to 18 percent and capital goods at 18 percent against 5 percent formulation output continue to accumulate inverted-duty credit prospectively. Depots that assumed the rate change eliminated the inversion entirely stop filing GST RFD-01 and lose the prospective refund. The correct posture is a continuing monthly or quarterly Section 54(3) refund cycle under the Notification 14/2022-Central Tax amended Rule 89(5) formula.
How a reconciliation platform handles this
A purpose-built pharma reconciliation platform freezes the depot’s stock-in-trade ledger at end-of-day 21 September 2025 at the SKU by depot by receipt-batch level, keys every batch to its input rate and ITC claim date, and rolls the ledger forward against post-cutover outward invoices at 5 percent output GST — with the audit-file position note on Section 16 and Rule 42/43 pre-drafted and attached to the year-end deliverable. It splits every ongoing scheme accrual and post-supply discount into pre-cutover and post-cutover invoice buckets under Section 34, classifies each scheme against Section 15(1), 15(2), or 15(3), and prevents blended credit notes at source. It ties the electronic credit ledger monthly against GSTR-3B, exposes the working-capital rollover cushion as a distinct variance line separate from routine trading margin, and generates the ongoing Rule 89(5) refund workbook for packaging inputs and capital goods under the Notification 14/2022 amended formula. Match rate improvement of 51 to 88 percent on the stock-to-invoice reconciliation, combined with an ISO 27001:2022 posture and DPDP Act 2023 aligned data handling, is what makes the platform an infrastructure investment for a national formulator or a mid-size speciality operator rather than a workbook substitute.
Cross-cluster bridges and where to read next
The 22 September 2025 rate rationalisation is unpacked at the Council-decision level in the 56th GST Council pharma drugs and medical devices 5 percent transition briefing. The mirror scenario for goods dispatched pre-cutover but received post-cutover is covered in the straddle invoice pharma pre and post 22 September 2025 reconciliation walkthrough. The ongoing prospective inverted-duty refund cycle on packaging inputs and capital goods against 5 percent formulation output is unpacked in the Rule 89(5) inverted-duty refund pharma formulations complete guide. For the same Notification 14/2022-Central Tax refund-formula amendment applied in a different HSN chapter, read the Agro cross-cluster reference on dairy inverted-duty refund under Rule 89(5) post GST 2.0. The methodology framework for a rate-change reconciliation programme — cutover checklist, position notes, audit deliverables — is captured in Terra Insight’s own reconciliation playbook for monthly close in India and in the design-layer reconciliation failure-mode analysis pillar. The commercial pillar for the entire pharma cluster is pharma reconciliation software India; the broader authority is reconciliation software India.
The five FAQs below address the operational questions Indian formulator depot managers and finance controllers asked most often in the days immediately after the 22 September 2025 cutover.
Content authored by practitioners with experience at Amazon India, Intuit QuickBooks, and the Tata Group. Meet the team →
- ▸ Section 16, Central Goods and Services Tax Act 2017 — Eligibility and conditions for taking input tax credit. A registered person is entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of business. Credit validly availed at the tax rate in force on the date of supply of the input is not disturbed by a subsequent rate change on the output supply. The four eligibility conditions — tax invoice, receipt of goods, tax actually paid to the government, and return filed — attach to the date of the input supply, not to the output-side rate.
- ▸ Section 15, Central Goods and Services Tax Act 2017 — Value of taxable supply. The value of supply is the transaction price, being the price actually paid or payable, where supplier and recipient are unrelated and price is the sole consideration. Section 15(2) enumerates inclusions — taxes other than GST, incidental expenses, interest for delayed payment, subsidies linked to price, and post-supply discounts allowed only where they are recorded in an agreement entered into at or before the time of supply and specifically linked to relevant invoices. Section 15(3) permits exclusion of post-supply discounts satisfying the pre-agreement, invoice-linkage, and ITC-reversal-by-recipient conditions.
- ▸ Rule 42 and Rule 43, Central Goods and Services Tax Rules 2017 — Manner of determination of input tax credit in respect of inputs or input services (Rule 42) and capital goods (Rule 43) partly used for taxable supplies including zero-rated supplies and partly for exempt supplies. Reversal is triggered where the same input is used for both taxable and exempt outputs, computed on a turnover ratio. A prospective rate change on a taxable output supply from 12 percent to 5 percent does not convert the output into an exempt supply — Rule 42 and Rule 43 are not engaged by such a rate change.
- ▸ 56th GST Council Meeting Recommendations dated 3 September 2025 (rate rationalisation effective 22 September 2025) — The 56th meeting of the GST Council recommended rate rationalisation across pharmaceuticals — all drugs and medicines (HSN 3003 and HSN 3004) moved from the existing 12 percent slab to a flat 5 percent output rate; specified life-saving drugs in the cancer, HIV, tuberculosis, and rare-disease schedule moved to nil rate; medical devices under HSN 9018 to 9022 moved from 18 percent to 5 percent. Effective date: 22 September 2025. CBIC FAQ Q10, Q25, and Q51 issued alongside the rate notifications acknowledge the deepened inverted duty structure and pledge expedited Section 54(3) refund processing.
- ▸ Section 54(3), Central Goods and Services Tax Act 2017 — Refund of any unutilised input tax credit at the end of any tax period. Refund is permitted in two situations — zero-rated supplies without payment of tax, and where credit has accumulated on account of the rate of tax on inputs being higher than the rate of tax on output supplies. The 22 September 2025 pharma rate move from 12 percent to 5 percent on formulation output while several inputs (packaging materials, capital goods, contract manufacturing services) continue at 12 or 18 percent creates a continuing prospective inversion recoverable through the Rule 89(5) refund cycle.