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?

[Sadanand Bulbule]

Filing an appeal with supporting workings would be departmentally safer.

However, reclaiming may look like double claim. Better to avoid as it may invite audit objection or mismatch issues.

[KASTURI SETHI]

Appeal is better option and also safer than option (2) above. Agree with Sh. Sadanand Bulbule, Sir.

[Smriti Das]

Thank you for your valuable reply. Could you please tell whether the ground on which I am saying I will file an appeal is correct or not ?

[KASTURI SETHI]

The basis of filing an Appeal is O.K. but you need the services of an expert CA or CMA for drafting Appeal, it being an accounting matter.

[Shilpi Jain]

Why are you reversing ITC on capital goods? Are you ineligible for that credit itself?

I understand that under LUT you cannot claim refund of CG credit, but just for that reversal is not warranted.

Also pls note that the eligible refund is claimed considering the ITC balances also.

You should consider consulting an expert before taking any further step in this regard.

[Smriti Das]

Actually I reversed the ITC so that in my accounts I can add that GST in the price of asset and claim full depreciation on that, as I am not getting ITC refund in that GST in any way

[K Revanth Krishna]

Net ITC as per Rule 89(4) shall mean input & input servicesavailed during the relevant period.

ITC can be said to be availed as per the clarification in Circular No. 79/53/2018 para 11 - the amount which is entered in the electronic credit ledger. In the instant query, though Capex credit reversal impacted as negative in GSTR-3B however the reversal quantum would be offset with ITC of goods & services of the May 25 thereby the said Net ITC has been accrued to credit ledger indirectly (Without full amount of reversal of capex credit). Hence, it can be said that Net ITC of inputs and input services shall be deemed to be availed.

Comparison of previously availed capex credit and current reversal of capex shows a difference to the extent of May 25 related ITC on inputs and input services which depicts that ITC has been availed.

But department will go by the strict analysis and state that NET ITC shall be considered only when it is credited to the credit ledger.

With the omission of Rule 96(10)- You also have an option of making exports with payment of tax in which capital goods related credit can be claimed.

Options in my view: 

1. Net ITC rejected can be appealable.
2. For the transaction already happened - Remain the Capex credit capitalised to asset and thereby claim depreciation under IT Act. Else, re-avail the Capex credit subsequently and use the credit for exports with payment of tax subject to litigation on GSTR-3B disclosure + DRC-01C & Electronic credit reversal and re-claimed statement difference.
3. Future capex credit can be used for exports with payment of tax. Analyse the turnover proportion required and raise monthly invoice under with payment of tax which can be encashed directly through ICEGATE rather filing a refund claim. 

AI Summary

Capital goods ITC exclusion: reversal should not reduce Net ITC for refund, appeal advised over reclaiming. Reversal of capital goods ITC in GSTR-3B produced negative Net ITC and triggered refund rejection for an exporter under LUT; parties argue that capital goods and blocked credits are excluded from the statutory Net ITC for refund purposes. Commentators recommend filing an appeal challenging inclusion of the reversal in refund computation as the safer route, caution against reclaiming the reversed credit in a later month due to double-claim and mismatch risks, and note the department may treat Net ITC as amounts actually entered in the electronic credit ledger.