Clarification Required – ITC Reversal (Capital Goods) Causing Negative Net ITC & Refund Rejection

[Smriti Das]

Dear Experts,

I need your guidance on the following situation:

In May 2025, I reversed ITC of Rs. 12 lakhs in Table 4B(1) of GSTR-3B under the head “As per Rules 38, 42 & 43 of CGST Rules and Section 17(5)”.

This reversal amount pertains entirely to GST on capital goods purchased during FY 2024–25.

We are a 100% export unit exporting goods without payment of IGST (under LUT) and we claim refund of unutilized ITC on a monthly basis through RFD-01.

However, when I applied for refund for Apr–May 2025, my refund claim was rejected, stating that my Net ITC was negative due to the reversal made in May 2025 (which is correct since the reversal amount was large).

Now, since the reversal pertains only to capital goods (which are anyway not part of “Net ITC” as defined in Rule 89(4)(B)), I am confused about the proper course of action.

I am considering two alternatives and would appreciate expert advice on which would be legally sound and practically advisable:

1. File an Appeal:

Argue that the reversal made in May 2025 pertains to ITC on capital goods and blocked credits under Section 17(5), which are already excluded from “Net ITC” as per Rule 89(4)(B). Hence, such reversals should not be considered again for deduction while computing the refund amount.

2. Reclaim the ITC:

Reclaim the reversed ITC in Table 4A(5) (“All other ITC”) of a subsequent month (say June 2025), since it relates to capital goods ITC reversal which is not part of refund eligibility anyway.

Requesting views from professionals —

Which option is more appropriate in this situation, both from a legal interpretation and departmental acceptance perspective?

AI Summary

Challenge refund denial after capital goods ITC reversal under Rule 89(4)(b); appeal with detailed workings advised A taxpayer reversed Rs.12 lakh ITC in May under Rules 38/42/43 and Section 17(5) relating solely to capital goods, then faced refund rejection because net ITC turned negative; capital goods reversal is excluded from 'Net ITC' under Rule 89(4)(b). Practically and procedurally, pursuing an appeal with detailed workings to demonstrate that the reversal should not reduce refundable Net ITC is the safer route, while reclaiming the same credit in a later return risks being treated as a double claim and provoking scrutiny or audit objections.