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?

[Vijay kumar]

I think para 37 of Circular 25 clarifies this issue as follows:

37. In case of refunds pertaining to items listed at (a), (c) and (e) in para 3 above, the common portal calculates the refundable amount as the least of the following amounts:

a) The maximum refund amount as per the formula in rule 89(4) or rule 89(5) of the CGST Rules [formula is applied on the consolidated amount of ITC, i.e. Central tax + State tax/Union Territory tax +Integrated tax];

b) The balance in the electronic credit ledger of the applicant at the end of the tax period for which the refund claim is being filed after the return in FORM GSTR-3B for the said period has been filed; and

c) The balance in the electronic credit ledger of the applicant at the time of filing the refund application.

Accordingly, reversed amount stands excluded from refund. 

[Shilpi Jain]

These aspects will have to be settled in courts. The issue here is whether to go plain by the provision of law which states that ITC to be taken as per what is availed in the returns or in this case when there is an absurd result, whether one should go behind the objective and purpose of the provision and then compute the ITC and refund accordingly,

Also in the month in which the reversible credit was taken, whether benefit of any refund was claimed - this is to chk that the exchequer is not in double loss.

[UDHAYKUMAR KANDASAMY]

Will there be any difference with regard to IDS refund in case if ITC was reversed on account of Rule 37A during a particular month?

Whether the eligible refund will be reduced under IDS? Since the amount of refund under IDS will be determined by "Net ITC" which includes only ITC on inputs.

For Example:-

Gross ITC = Rs.1000/-

ITC on Inputs = Rs.900/-

ITC on Input Services = Rs.100/-

ITC on Capex = Rs. Nil

ITC reversed on account of Rule 37A = Rs.100/-

Output Liability on IDS goods = Rs.910/-

Adjusted and Inverted Turnover Both Rs.20000/-

There is no Outward supplies other than IDS Supplies.

Departmental officer is informing that since ITC availed in 3B after reversal is Rs.900/- hence we have to consider lower of the 2B or 3B ITC for refund purpose.

However as per Rule 89(5) Refund will be

= 900 / 20000 X 20000 - (910/1000*900) = Rs.900 - Rs.819 = Rs.81/-

what to do at this scenario?

Thanks

AI Summary

Net ITC computation under GST refund rules: dispute over whether past-period ITC reversals must reduce refund claims. Interpretation of Net ITC for GST refund claims under Rule 89(4) and the effect of ITC reversals shown in GSTR-3B during the refund period, particularly where the reversals relate to earlier tax periods and not to the zero-rated supplies for which refund is claimed. The discussion concerns whether Para 43 of the CBIC circular requires all reversals reflected in the refund period return to be deducted from Net ITC, whether consolidated claims may offset a negative monthly figure against other months, and how related refund computations are affected by Rule 37A reversals and electronic credit ledger balances.