When a Later Refund Restriction Confronts ITC Accumulated Under the Earlier Law
Section 54(3) of the CGST Act, 2017 permits a refund of unutilised input tax credit accumulated under an inverted duty structure, where the GST rate on inputs exceeds that on outward supplies, subject to prescribed conditions and restrictions. However, an important legal question arises when the Government subsequently restricts such refunds through a notification effective from a specified future date. Can a taxpayer be denied a refund of ITC accumulated before that date merely because the refund application was filed after the restriction came into force? This distinction between the period of credit accumulation and the date of filing forms the central controversy in the present case.
The Hyderabad Bench of the GST Appellate Tribunal examined this issue in Kedia Agro v. Principal Commissioner, Hyderabad GST Commissionerate, 2026- VIL- 248- GSTAT- HYD, decided on 27.10.2026. The appellant had accumulated ITC from May 2020 to March 2021, whereas Notification No. 09/2022- Central Tax (Rate), dated 13. 07. 2022, introduced a restriction on refunds for specified goods, including edible oils, with effect from 18.07.2022. Although the credit related to an earlier period, the Department rejected the refund claim because the fresh application was filed on 25.03.2023, relying on the subsequent notification and CBIC Circular No. 181/13/2022- GST dated 10.11.2022.
The Tribunal held that a prospective refund restriction could not be extended to ITC accumulated before its commencement merely because the application was filed subsequently. An administrative circular could not enlarge the notification's scope by introducing a filing- date restriction affecting earlier accumulated credit. Accordingly, the Tribunal set aside the rejection orders and remanded the matter for fresh consideration in accordance with law and applicable judicial precedents. The decision highlights an important distinction: the filing date is relevant to statutory limitation, but it cannot, by itself, determine the applicability of a subsequent restriction to credit accumulated during an earlier period.
Section 54(3) Recognises Refund of Unutilised ITC Subject to Statutory Restrictions
Section 54(3) of the CGST Act, 2017 permits a registered person to claim a refund of unutilised input tax credit at the end of a tax period, subject to prescribed conditions. However, the first proviso restricts such refunds to two specified situations. The first concerns zero-rated supplies made without payment of tax, while the second relates to an inverted duty structure, where the GST rate on inputs exceeds that on outward supplies, excluding nil-rated or fully exempt supplies. Thus, the right to refund is recognised by the statute but is not unconditional.
Clause (ii) of the first proviso further empowers the Government, on the recommendations of the GST Council, to notify supplies of goods or services for which a refund arising from an inverted duty structure will not be available. This power enables the Government to exclude specified supplies from the refund mechanism. However, any restriction introduced through a notification must operate within the authority granted by Section 54(3) and in accordance with its prescribed commencement date. An administrative circular cannot independently enlarge that restriction beyond the notification's lawful scope.
The distinction becomes important when ITC has accumulated before a restrictive notification comes into force, but the refund application is filed subsequently. The date of filing cannot, by itself, make a prospective restriction applicable to an earlier period of credit accumulation. At the same time, the taxpayer must independently satisfy the statutory conditions relating to refund eligibility, limitation and prescribed procedure. The present dispute therefore concerns the applicability of a subsequent restriction to earlier accumulated credit, rather than any unconditional right to refund.
Recent Amendments Extend Inverted Duty Structure Refunds to Input Services and Capital Goods
An important development has taken place regarding refunds of accumulated ITC under an inverted duty structure. At its 57th meeting on 08.10.2026, the GST Council recommended extending the scope of such refunds to include ITC on input services and capital goods, which were earlier excluded from the refund computation under Rule 89(5). Pursuant to these recommendations, Notification No. 05/2026-Central Tax dated 26.10.2026 amended Rule 89 of the CGST Rules, including the substitution of Rule 89(5). Under the amended framework, eligible ITC availed on input services on or after 01.11.2026 is included in the refund computation. Further, eligible ITC on capital goods availed on or after 01.04.2027 is to be considered proportionately over 60 months, subject to the prescribed conditions.
These amendments represent an important expansion of the refund mechanism by recognising credit accumulated on input services and capital goods, in addition to inputs. However, the basic requirement of an inverted duty structure under Section 54(3)(ii) remains unchanged. The GST rate on inputs (i.e., goods) must exceed the rate applicable to outward supplies. A higher tax rate on input services alone does not establish an inverted duty structure. Once the statutory conditions are satisfied, eligible ITC on input services and capital goods may also be taken into account in calculating the refund under the amended provisions. These amendments are prospective and do not alter the legal position applicable to the refund period considered by the Tribunal.
Refund Eligibility and Limitation Must Be Examined Separately
Section 54(1) of the CGST Act generally prescribes a two-year limitation period from the relevant date for filing refund applications, while Section 54(3), read with Rule 89 of the CGST Rules, governs the refund of unutilised ITC arising from an inverted duty structure. The period of credit accumulation determines whether a subsequent refund restriction applies, whereas the statutory relevant date governs limitation. Actual refund entitlement remains subject to the prescribed eligibility and procedural requirements.
In the present case, the Tribunal found that the fresh application filed on 25.03.2023 for ITC accumulated during May 2020 to March 2021 was within limitation. The Department, however, rejected it by applying the restriction effective from 18.07.2022 solely because the application was filed subsequently. The Tribunal held that the prospective restriction could not be extended to earlier accumulated credit merely by reference to the filing date. Thus, a timely application does not automatically establish refund entitlement, but a later restriction cannot retrospectively defeat an otherwise eligible claim.
Notification No. 09/2022 Introduced a Prospective Restriction Affecting the Appellant
Notification No. 09/2022-Central Tax (Rate), dated 13.07.2022, amended Notification No. 05/2017-Central Tax (Rate), dated 28.06.2017, by extending the restriction on refund of accumulated ITC under an inverted duty structure to specified goods under Chapters 15 and 27, including various edible oils. The amendment took effect from 18.07.2022.
The appellant, engaged in the edible oil business, had accumulated ITC from May 2020 to March 2021, well before the amendment. Its original refund application, dated 18.06.2022, was also filed before the restriction took effect. However, after withdrawing that application, the appellant filed a fresh claim on 25.03.2023. The Department rejected the claim by applying the subsequent restriction based on the fresh filing date, even though the notification did not expressly render earlier accumulated credit ineligible for refund. The central issue was whether an administrative circular could lawfully extend the prospective restriction to such credit.
An Administrative Circular Cannot Extend the Scope of a Prospective Notification
CBIC Circular No. 181/13/2022-GST, dated 10.11.2022, issued under Section 168(1) of the CGST Act, clarified that the restriction introduced by Notification No. 09/2022-Central Tax (Rate) would apply to all refund applications filed on or after 18.07.2022, irrespective of when the ITC had accumulated. Consequently, refund eligibility depended on the filing date rather than the period of credit accumulation, potentially treating taxpayers with identical accumulated credit differently.
The Tribunal, relying on relevant judicial precedents, found this approach legally unsustainable. An administrative circular cannot enlarge the scope of a prospective notification or impose retrospective consequences unsupported by the statute. Circulars may clarify the law for uniform administration, but cannot introduce additional restrictions or extinguish refund entitlements otherwise available under the applicable statutory framework.
The Filing Date Cannot Alter the Legal Position Governing Earlier Accumulated ITC
The appellant's ITC accumulated between May 2020 and March 2021, before the refund restriction took effect on 18.07.2022. However, the Department rejected the claim because the appellant filed the fresh application on 25.03.2023. The Tribunal distinguished between the period of credit accumulation, which governed the applicability of the subsequent restriction, and the filing date, which governed compliance with the prescribed limitation period. Relying on several High Court decisions, it held that a later administrative circular could not deny a refund of earlier accumulated credit merely because the application was filed after the restriction commenced.
Importantly, entitlement to ITC does not automatically confer entitlement to its refund. While availment of ITC is subject to statutory conditions, refund of unutilised credit is separately governed by Section 54(3) and the applicable rules. The decision protects an otherwise eligible refund claim from the retrospective application of a subsequent restriction, without dispensing with the statutory requirements for sanctioning the refund.
Withdrawal of an Earlier Application Does Not Automatically Extinguish the Underlying Claim
The Department placed considerable emphasis on the fact that the taxpayer had initially filed its refund application before 18.07.2022 but withdrew it on 25.07.2022. According to the Department, the subsequent application filed on 25.03.2023 was a fresh application and therefore had to be examined under the restrictions applicable on its filing date. The earlier application, having been withdrawn, could not be relied upon to preserve the benefit of the previous legal position.
The taxpayer, however, maintained that the refund related to ITC accumulated during May 2020 to March 2021 and that the fresh application was filed within the prescribed limitation period. The relevant issue was not whether the withdrawn application continued to exist, but whether the later notification could govern the underlying credit accumulated before its commencement.
The Tribunal accepted the taxpayer's position on whether the restriction applied. The subsequent filing date did not alter the period during which the ITC had accumulated. Since the fresh application was found to be within limitation, its rejection solely on the basis of the later filing date was unsustainable. The decision does not establish that withdrawal is immaterial for every procedural purpose; rather, it holds that withdrawal and refiling did not justify applying the prospective restriction to credit accumulated in an earlier period.
The Jurisdictional High Court Rejected Retrospective Application Through a Circular
In Gemini Edibles and Fats India Limited v. Assistant Commissioner of Central Tax , 2025-VIL-113-AP, decided on 29.01.2025, the Andhra Pradesh High Court held that the restriction effective from 18.07.2022 could not deny refund of ITC accumulated before that date merely because the application was filed subsequently. It accordingly struck down the relevant clarification in Circular No. 181/13/2022-GST to the extent that it extended the restriction retrospectively.
The Supreme Court dismissed the Revenue's Special Leave Petitions on 09.05.2025, reported as 2025-VIL-30-SC, leaving the High Court's decision undisturbed, though it did not necessarily constitute a declaration of law under Article 141. Relying upon this judgment, the Tribunal recognised that refund claims involving ITC accumulated before 18.07.2022 cannot be rejected solely because they were filed subsequently, provided the statutory conditions relating to eligibility, limitation and verification are satisfied.
Several High Courts Have Rejected Filing Date-Based Refund Restrictions
In Patanjali Foods Limited v. Union of India, 2025-VIL-213-GUJ, decided on 12.02.2025, the Gujarat High Court held that the circular's filing-date distinction was arbitrary, discriminatory, ultra vires Section 54 of the CGST Act and contrary to Article 14 of the Constitution. The Rajasthan High Court expressed similar views in Shree Arihant Oil and General Mills, 2025-VIL-956-RAJ; the Allahabad High Court in Vaibhav Edible Private Limited, 2025-VIL-1238-ALH; and the Calcutta High Court in Adani Wilmar Limited, 2026-VIL-224-CAL. These decisions consistently recognised that a prospective refund restriction effective from 18.07.2022 could not be extended to earlier accumulated ITC merely because the refund application was filed subsequently. The Tribunal relied upon this consistent judicial approach in rejecting the Department's interpretation
A Proposed Review Petition Cannot Justify Disregarding Existing Judicial Decisions
The Department submitted that it contemplated a review petition against the Supreme Court's dismissal of the Special Leave Petitions in Gemini Edibles. However, the Tribunal found that no documentary evidence of any review proceedings had been produced.
The Tribunal therefore declined to accept this unsubstantiated submission as a ground for departing from the existing High Court judgments. A mere proposal to seek review could not justify sustaining the rejection of the appellant's refund claim in disregard of the applicable judicial precedents.
A Refund Rejection Cannot Survive When Its Sole Legal Foundation Is Unsustainable
The Tribunal examined the reasons recorded by the Original Adjudicating Authority and the First Appellate Authority. It found that the refund claim had been rejected solely because the fresh application was filed after 18.07.2022 and the authorities considered the restriction explained in Circular No. 181/13/2022-GST applicable. The authorities had thereby extended the effect of the notification to ITC accumulated during an earlier period.
The Tribunal noted that the notification itself did not contain any stipulation extinguishing refund eligibility for earlier accumulated credit on account of a subsequent filing date. The circular, however, had introduced precisely such a restriction. Since several High Courts had struck down the relevant clarification, orders founded exclusively on that interpretation could not be sustained.
Setting Aside the Rejection Does Not Amount to Automatic Sanction of Refund
The Tribunal allowed the appeal and set aside the orders passed by the Original Adjudicating Authority and the First Appellate Authority. However, it did not direct unconditional payment of ₹61,47,671. Instead, it directed the Original Adjudicating Authority to reconsider and decide the refund claim afresh in accordance with law and the applicable judicial precedents.
This distinction is important. The Tribunal conclusively rejected the proposition that the claim could be denied solely because it was filed after 18.07.2022. Nevertheless, the competent authority remained responsible for examining the claim under the statutory refund provisions, including the eligibility and quantum of accumulated ITC and other applicable requirements. The Tribunal also directed that the taxpayer's interest claim be examined under the relevant legal provisions during the fresh refund proceedings.
The operative relief was therefore the removal of an unlawful ground of rejection and restoration of the refund claim for lawful reconsideration, not an unconditional declaration that the entire claimed amount was immediately payable. This distinction preserves the statutory verification process while ensuring that the taxpayer is not deprived of consideration of its claim through retrospective application of a subsequent restriction.
Prospective Refund Restrictions Cannot Defeat Earlier Eligible Claims
The judgment establishes an important principle that a restriction introduced through a prospective notification cannot be applied to ITC accumulated before its commencement merely because the refund application was filed later. The period during which the credit accumulated, the effective date of the notification and the statutory conditions governing refund eligibility must be considered separately. A circular issued under Section 168 of the CGST Act may clarify the implementation of the law, but cannot extend the scope of a notification or impose a restriction that the statute does not authorise. The filing date, therefore, cannot be the sole ground for denying an otherwise eligible refund claim relating to an earlier period.
The decision offers valuable guidance to taxpayers, GST professionals and adjudicating authorities dealing with refund claims under an inverted duty structure. The accrual of ITC, the statutory entitlement to refund, the limitation period for filing an application and the commencement of a subsequent restriction are separate legal considerations. Confusing these requirements may lead to rejection of an otherwise admissible claim. However, the Tribunal did not direct automatic payment of the refund; it set aside the rejection orders and required fresh examination in accordance with law. Thus, while earlier accumulated credit remains protected against the retrospective application of a subsequent restriction, the actual refund must still satisfy the prescribed conditions relating to eligibility, limitation, computation and verification.
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