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

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.