Past-Period ITC Reversals & “Net ITC” Computation under Rule 89(4) – GST Refunds

[RAHUL MODI]

We are handling a GST refund matter involving accumulated Compensation Cess ITC under Rule 89(4) of the CGST Rules for zero-rated exports without payment of tax.

In the refund period’s GSTR-3B, there appear ITC reversal entries amounting to ? 2 crore. These reversals relate entirely to prior-period ITC on domestic supplies, not to the relevant period’s zero-rated turnover.

During adjudication, the proper officer verified our records, excluded these past-period reversals from the “Net ITC” figure in the Rule 89(4) formula, and sanctioned most of the claim.

In appeal, however, the department relies on Para 43 of CBIC Circular No. 125/44/2019-GST to argue that any ITC reversed in GSTR-3B of the refund period must automatically be deducted from “Net ITC” — regardless of whether the reversal pertains to the relevant period’s credit or earlier periods.

We had applied for refund for the entire financial year as one consolidated claim. The reversal in question occurred in a single month where the ITC availed was ? 7 lakh, but the past-period reversal was ? 2 crore — resulting in a negative Net ITC for that month in the GSTR-3B.

Our specific questions:

1. How have appellate authorities or courts interpreted Para 43 in such situations, especially where the reversal clearly pertains to earlier periods and is unrelated to the refund period’s zero-rated supplies?
2. Are there precedents holding that “Net ITC” under Rule 89(4) should be confined to ITC availed in the relevant period only, excluding past-period adjustments?
3. In cases where the refund claim covers multiple months (e.g., full-year claim) but a large past-period reversal in one month creates a negative Net ITC for that month, can the department legally offset this against other months in the claim period?
4. Practical defence tips for PH/appeal?

AI Summary

GST Refund Disputes on ITC Reversals Under Rule 89(4) and CBIC Circular No. 125/44/2019-GST Para 43 A taxpayer claimed a GST refund for zero-rated exports under Rule 89(4), including accumulated Compensation Cess ITC, but the refund period's GSTR-3B showed ITC reversals of Rs. 2 crore related to prior periods, not the refund period's zero-rated turnover. The adjudicating officer excluded these past-period reversals from the 'Net ITC' calculation and allowed most of the refund. On appeal, the department argued, based on CBIC Circular No. 125/44/2019-GST Para 43, that any ITC reversed in the refund period's GSTR-3B must be deducted from 'Net ITC,' regardless of the reversal's period. The taxpayer questioned whether appellate authorities have interpreted Para 43 to restrict 'Net ITC' to the refund period's ITC only, excluding past-period reversals, and whether a large past-period reversal causing a negative monthly Net ITC can be offset against other months in a consolidated refund claim. They also sought practical defense strategies for appeals in such cases.