OK figured it out (under linux mostly)
1. unpack update.img e.g. using imgrepackerRK from
xda-developers, linux version didn't work, used windows one under wine
2. system image is too big, some things need to be removed, so:
mount -o loop,rw /path/to/system.img /mnt
remove what is unnecessary (i did /adobe and some apps)
check with df -h that used space is under 512M or remove more
umount /mnt
now that there is space enough reformat image:
e2fsck -f ./system.img
resize2fs -M ./system.img
3. push system image to sdcard, perhaps with adb:
adb push system.img /sdcard/
4. reboot into recovery (TWRP) and flash:
flash_image system /sdcard/system.img
then reboot into system.
Play store does not work however, at least on inkbook onyx.