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

Dear Experts,

I need your guidance on the following situation:

In May 2025, I reversed ITC of ₹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 quarterly 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”) in the next month, 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?

Replies (1)

Option 1 (File an appeal): This could be viable if you believe the reversal was incorrectly considered. It involves arguing your case based on the exclusion of capital goods ITC from "Net ITC " under Rule 89(4)(B).

Option 2 (Reclaim the ITC): This seems like a more straightforward approach if you believe the reversal was not part of refund eligibility anyway. 

From a departmental acceptance perspective, the appeal might involve more scruitiny but could be a way to contest the reversal's impact. Reclaiming the ITC might be more administrative but depends on how the department views the reversal in relation to refund eligibility. 

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