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

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.