Rajasthan High Court Strikes Down GST Circular Unfairly Limiting Inverted Duty Structure Refund Claims - 2025-09-08

Rajasthan High Court Strikes Down GST Circular Unfairly Limiting Inverted Duty Structure Refund Claims

In a significant ruling for businesses grappling with tax compliance, the High Court of Judicature for Rajasthan at Jodhpur has struck down a central government circular that attempted to restrict refund claims for Input Tax Credit (ITC). The bench, comprising Justice Dinesh Mehta and Justice Sangeeta Sharma, declared that the restriction imposed by the Central Board of Indirect Taxes and Customs (CBITC) was arbitrary and contrary to the provisions of the Central Goods and Services Tax (CGST) Act, 2017.

The Dispute Over Refund Claims

The petitioner, Shree Arihant Oil and General Mills, a firm engaged in the manufacturing of edible oil, found itself in an "inverted duty structure" scenario. This occurs when the tax rate on inputs exceeds the tax rate on the final product, leading to an accumulation of unutilized ITC. While the firm sought refunds under Section 54 of the CGST Act for taxes paid on raw materials purchased before July 18, 2022, the government stalled the applications based on a subsequent circular issued in November 2022.

The CBITC circular argued that the restriction on claiming ITC for certain goods in the inverted duty category applied to all applications filed on or after July 18, 2022, effectively barring claims for taxes paid prior to that date if the application was not filed immediately.

Legal Arguments and Judicial Scrutiny

The petitioner argued that the limitation period for filing refund claims under the CGST Act is two years. By imposing a barrier that effectively forced taxpayers to file claims before the notification even became enforceable, the circular impinged upon the statutory rights of the assessee.

The court scrutinized the circular against the backdrop of Article 14 of the Constitution, noting that it created an unreasonable classification between taxpayers based solely on the date of their application filing. "No assessee can be expected to file claim of refund of the tax for the period paid upto 18.07.2022 on 18.07.2022 itself," the court observed.

Key Observations from the Court

The High Court emphasized that the right to ITC is an indefeasible right that cannot be extinguished by an administrative circular. Notable observations include:

• "The restriction imposed vide Notification No. 09/2022-Central Tax (Rate) dated 13.07.2022 on refund of unutilised input tax credit... would apply prospectively only."
• "The clarification which has the effect that the assessees shall be granted refund only if the application has been filed prior to 18.07.2022 is contrary to the basic Notification... so also section 54 of the Act of 2017."
• "Input Tax Credit is an indefeasible right of an assessee, which accrues to it on the date when the goods were bought."

A Final Verdict for Taxpayers

The court ultimately allowed the writ petition, declaring point number two of the November 2022 circular illegal and arbitrary. The respondents have been directed to process the petitioner’s refund applications within three months, without relying on the invalidated portions of the circular.

This ruling provides much-needed relief to manufacturers across the country, reinforcing the principle that executive circulars cannot override statutory entitlements granted by the legislature. The decision aligns with similar findings by the Gujarat and Andhra Pradesh High Courts, further cementing a judicial consensus against the retrospective or discriminatory denial of tax credits.