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

Does Rule 89(4) Net ITC exclude past GSTR-3B reversals or include all reversals shown in refund-period GSTR-3B? A taxpayer sought a consolidated refund of compensation cess ITC for zero-rated exports under Rule 89(4); GSTR-3B showed a large past-period ITC reversal in one month, producing a negative monthly Net ITC. The adjudicating officer excluded the past-period reversal from the Rule 89(4) Net ITC computation and allowed most of the refund; the tax department appeals relying on a circular paragraph requiring GSTR-3B reversals in the refund period be deducted from Net ITC. Key issues: whether Net ITC must reflect only ITC availed for the relevant refund period or all reversals shown in the refund-period GSTR-3B; precedents on construal of para 43; aggregation across months in a consolidated claim; and practical defenses focusing on nexus, objective of the rule, and avoidance of double recovery.