TaxTMI 
TaxTMI 
Transitional Credit and Refund under GST - When the Credit Exists but the Refund Still Fails
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....ransitional Credit and Refund under GST - When the Credit Exists but the Refund Still Fails<br>By: - Raj Jaggi<br>Goods and Services Tax - GST<br>Dated:- 26-8-2026<br>When Transitional Credit Meets the Test of Proof and Limitation The transition from the erstwhile indirect tax regime to GST was intended to preserve legitimate accumulated credits through Section 140 of the CGST Act, 2017. Yet, nearly nine years after GST was introduced, disputes continue over how such transitional credit can be utilised or claimed as a refund. A recent decision of the Kerala High Court in M/s AVT McCormick Ingredients Pvt. Ltd. v. Union of India & Others, 2026 (8) TMI 1388 - KERALA HIGH COURT, presents an interesting illustration. The controversy conce....
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....rned transitional credit originating under the erstwhile Kerala VAT regime, carried forward through TRAN-1 and subsequently included in a GST refund claim. The case, however, ultimately turned not merely on the character of transitional credit, but also on proof of its availability at the relevant point of transition and the consequences of allowing the statutory appellate remedy to become time-barred. From the VAT Ledger to the Electronic Credit Ledger The petitioner exported spice extracts and oleoresins and was registered under the erstwhile Kerala Value Added Tax Act, 2003. After the introduction of GST, it obtained GST registration and sought to transition the excess input tax credit lying in its VAT ledger into its Electronic Cr....
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....edit Ledger by filing Form GST TRAN-1. According to the petitioner, TRAN-1 was filed in November 2017, and the transitional credit was reflected in the Electronic Credit Ledger on 27.12.2017. When a refund of input tax credit was claimed for November 2017, the transitional component was also included. The Department, however, took the view that transitional credit was not credit earned during the relevant refund period and therefore did not qualify as "Net ITC" for purposes of Rule 89(4) of the CGST Rules. Reliance was also placed upon Circular No. 37/11/2018-GST dated 15.03.2018. The dispute becomes easier to understand when the refund figures are examined. In its refund claim for November 2017, the petitioner showed SGST Net ITC of ....
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....Rs. 78,29,523. However, the SGST input tax pertaining to November 2017, as reflected in GSTR-3B and the supporting statement, was only Rs. 29,84,970. The higher amount arose because the petitioner had also included transitional SGST credit of Rs. 49,54,739 carried forward from the erstwhile VAT regime. This transitional credit was reflected in the Electronic Credit Ledger only on 27.12.2017. The adjudicating authority therefore took the view that it could not form part of the Net ITC for November 2017 for computing refund under Rule 89(4). The Real Question - Can Transitional Credit Enter the Refund Computation? The controversy initially appears to hinge on a simple question: can transitional credit carried forward from the pre-GST re....
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....gime be denied consideration for a refund merely because it was not credit freshly earned during the relevant GST period? The petitioner maintained that once eligible credit from the earlier VAT regime had been validly carried forward and formed part of the Electronic Credit Ledger, it could not be ignored when considering the refund claim. To support this contention, the petitioner relied upon the Gujarat High Court decision in M/s Ford India Pvt. Ltd. v. Union of India, 2024 (12) TMI 570 - GUJARAT HIGH COURT, where the treatment of transitional credit appearing in the Electronic Credit Ledger had been considered. Reliance was also placed upon M/s Intas Pharmaceuticals Ltd. v. Union of India, 2024 (1) TMI 1398 - GUJARAT HIGH COURT. On t....
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....his basis, the petitioner sought to establish that the transitional origin of the credit, by itself, should not deprive it of consideration for refund. The Kerala High Court, however, examined the matter from a different and more fundamental perspective. According to the Court, the crucial question was not merely when the transitional credit appeared in the Electronic Credit Ledger, but whether the petitioner could establish that such credit represented the eligible closing balance of the erstwhile regime as on 30.06.2017, which was required to be carried forward as the opening balance under GST from 01.07.2017. The Court therefore examined the nature and origin of transitional credit under Section 140 of the CGST Act read with Rule 117 ....
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....of the CGST Rules, rather than treating its subsequent appearance in the Electronic Credit Ledger as sufficient by itself. Transitional Credit Is an Opening Balance, Not a Fresh Credit This is perhaps the most significant principle emerging from the judgment. Section 140 deals with transitional arrangements for input tax credit. The Court explained that the closing balance of eligible credit under the erstwhile regime as on 30.06.2017 is carried forward to GST and becomes the opening balance of unutilised input tax credit as on 01.07.2017. In other words, transitional credit does not conceptually arise on the later date when a portal entry appears. Its statutory source lies in the eligible closing credit existing immediately before GS....
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....T. This distinction is important. A credit originating under the earlier regime does not become a November or December 2017 credit merely because TRAN-1 was filed, processed, or reflected electronically during those months. If validly transitioned under Section 140, its character is that of an opening balance brought into the GST regime. The judgment thus recognises an important conceptual proposition: the date of electronic reflection and the statutory origin of transitional credit are not necessarily the same. But Entitlement Must Still Be Proved Recognition of this principle, however, did not result in relief to the petitioner. The Court found a crucial evidentiary deficiency. The petitioner had not produced a copy of the dec....
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....laration in Form GST TRAN-1 and had also failed to place satisfactory material establishing the credit in its Electronic Credit Ledger as on 01.07.2017. The Court held that a refund could be allowed only if the amount claimed was satisfactorily established as credit available at the relevant transitional point. This gives the judgment its practical significance. A statutory entitlement to carry forward transitional credit and an entitlement to obtain a refund of a particular amount are related but not identical enquiries. The taxpayer must establish the factual foundation linking the erstwhile credit balance to the amount transitioned into GST and ultimately included in the refund claim. Thus, merely pointing to a later credit entry i....
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....n the Electronic Credit Ledger may not always be sufficient. The underlying trail-from the closing balance under the earlier law to TRAN-1 and thereafter to the Electronic Credit Ledger-assumes considerable importance. The Second Hurdle - When the Appeal Becomes Time-Barred The judgment carries an equally important lesson on remedies. The order rejecting the refund was appealable under the statutory mechanism. The petitioner, however, approached the High Court after the statutory period for filing an appeal had expired. It argued that the adjudicating authority had acted on the basis of a departmental circular that would also bind the appellate authority; pursuing the statutory appeal would therefore have been futile. The High Cour....
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....t did not accept the belated invocation of writ jurisdiction. Referring to Sections 107 and 108 and settled Supreme Court jurisprudence, it emphasised that a person who permits the statutory remedy to become unavailable by failing to invoke it within the prescribed period cannot ordinarily use Article 226 to revive the lost remedy. The principle is particularly relevant under GST because Section 107 prescribes a structured and limited appellate timeline of three months, extendable by only one month. A taxpayer cannot ordinarily allow that mechanism to expire and thereafter treat writ jurisdiction as an alternative appellate forum. Article 226 Is Wide, but It Does Not Erase Statutory Limitation The High Court drew support from A.V. ....
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....Venkateswaran, Collector of Customs v. Ramchand Sobhraj Wadhwani and another [1961 (4) TMI 83 - Supreme Court], where the Supreme Court had disapproved the use of writ jurisdiction by a person who had lost the statutory remedy for failure to act within time. The Court also referred to the more recent Supreme Court decision in Rikhab Chand Jain v. Union of India, 2025 (11) TMI 1377 - Supreme Court. Though Article 226 itself carries no prescribed statutory limitation period, writ jurisdiction must be invoked within a reasonable period. Significantly, the limitation prescribed for the alternative statutory remedy may indicate what constitutes such a reasonable period. The proposition does not mean that Article 226 disappears merely becau....
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....se an appeal is available. Jurisdictional errors or flagrant violations of law or principles of natural justice may still justify writ intervention in an appropriate case. However, there is an important difference between bypassing an alternative remedy in exceptional circumstances and attempting to resurrect an appellate remedy after the statutory limitation has expired. Finality of Litigation Is Also a Matter of Public Policy The Court carried the limitation principle further by invoking the maxim interest reipublicae ut sit finis litium, which, in simple terms, means that it is in the public interest that litigation should come to an end. The Court relied on Assistant Commissioner (CT) LTU v. Glaxo Smith Kline Consumer Health Ca....
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....re Ltd., 2020 (5) TMI 149 - Supreme Court, where the Supreme Court explained that the breadth of the High Court's constitutional jurisdiction does not permit the statutory limitation governing the prescribed remedy to be routinely disregarded. Entertaining such challenges as a matter of course would undermine the legislative scheme itself. Applying these principles, the Kerala High Court declined to exercise its discretionary jurisdiction to revive a cause of action that had become unenforceable by limitation. The writ petition was consequently dismissed. A Two-Layer Test for Transitional Credit Refunds The judgment reveals that disputes over transitional credit refunds require two distinct questions to be kept separate. The....
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.... first concerns substantive entitlement: was eligible credit actually available under the erstwhile regime as on 30.06.2017, so as to form the opening transitional balance under GST from 01.07.2017? The second concerns proof and remedy: can the taxpayer establish the necessary documentary trail, and has the rejection of the refund been challenged through the prescribed remedy within the permissible time? A strong case on the legal character of transitional credit may still fail if the factual foundation is inadequately established. Equally, a potentially arguable refund claim may become practically unenforceable if the taxpayer allows the statutory appellate remedy to lapse. Transitional Credit Survives the Transition, but Proof an....
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....d Limitation Still Matter AVT McCormick Ingredients should not be understood as laying down a general rule that transitional credit cannot be considered for refund. The judgment recognises that eligible unutilised credit lying under the erstwhile tax regime as on 30.06.2017 is carried forward into GST and becomes the opening credit balance from 01.07.2017. Thus, the fact that such credit may have appeared in the Electronic Credit Ledger at a later date does not, by itself, change its transitional character. The petitioner, however, could not obtain relief because an entitlement to transitional credit must also be supported by proper evidence. The Court found that the petitioner had not produced Form GST TRAN-1 or other satisfactory ma....
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....terial to establish the relevant credit position as on 01.07.2017. The difficulty was further compounded by the fact that the statutory period for filing an appeal against the refund rejection had already expired before the High Court's writ jurisdiction was invoked. The judgment therefore carries a wider practical message for refund disputes: entitlement alone is not enough; it must be supported by evidence and pursued through the appropriate remedy within time. Transitional credit may validly travel from the earlier tax regime into GST, but the taxpayer must establish its documentary trail. Equally, where a refund is rejected, the strength of the underlying claim cannot ordinarily compensate for failure to challenge that rejection ....
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....within the statutory time. In refund litigation, entitlement, evidence and limitation must therefore move together *** =============<br> Scholarly articles for knowledge sharing by authors, experts, professionals ....