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

Rajasthan High Court Strikes Down Restrictive GST Refund Circular for Inverted Duty Structure Claims

The High Court of Judicature for Rajasthan at Jodhpur, presided over by Justices Dinesh Mehta and Sangeeta Sharma, has delivered a significant ruling concerning the rights of taxpayers under the Goods and Services Tax (GST) regime. The Court declared a specific clause of a Central Board of Indirect Taxes and Customs (CBITC) circular to be illegal and unconstitutional, affirming that administrative directives cannot curtail statutory refund rights.

Background of the Dispute

The petitioner, Shree Arihant Oil and General Mills, is a manufacturer of edible oils. Under the inverted duty structure—where the tax rate on inputs exceeds that of the final output—taxpayers are entitled to claim a refund of accumulated Input Tax Credit (ITC) under Section 54 of the Central Goods and Services Tax (CGST) Act, 2017.

In July 2022, the government issued a notification placing certain goods under a "negative list," effectively barring ITC refund claims for those specific items effective from July 18, 2022. However, the CBITC subsequently issued Circular No. 181/13/2022-GST on November 10, 2022, which appeared to restrict refund claims for the period prior to the notification only to those applications filed before July 18, 2022. The petitioner challenged this, arguing that the circular created an unreasonable and discriminatory barrier to their statutory right to reclaim taxes paid.

Arguments from the Parties

The petitioner, represented by Senior Counsel Sanjeev Johari, contended that since the notification only took effect on July 18, 2022, manufacturers were entitled to refunds on goods purchased up to that date. They argued that the circular’s attempt to impose a cut-off date for filing applications was contrary to the two-year limitation period provided by the CGST Act.

Conversely, counsel for the Central Goods and Service Tax Department and the State maintained that the circular was a necessary clarification. They argued that the restriction on refund claims was a valid administrative policy decision, and that the petitioner was bound by the stipulations laid out in the November 2022 document.

Legal Analysis and Judicial Reasoning

The High Court conducted a rigorous analysis of the intersection between administrative circulars and statutory law. The bench observed that the right to claim a refund for input tax paid under an inverted duty structure is an "indefeasible right" that accrues at the time of purchase.

The Court noted that the circular effectively created two classes of taxpayers: those who filed before the cut-off date and those who did not, without any intelligible differentia. Relying on the constitutional guarantee of equality under Article 14, the Court held that the circular was not only arbitrary but also violated the substantive rights granted by the CGST Act. Furthermore, the bench aligned itself with similar findings by the Gujarat High Court and the Andhra Pradesh High Court, the latter of which was upheld by the Supreme Court of India.

Key Observations

The judgment contained several pivotal observations regarding the supremacy of statutory law over executive instructions:

• "The restriction imposed by the said notification would be applicable in respect of all refund applications filed on or after 18.07.2022, and would not apply to the refund applications filed before 18.07.2022." (Citing the challenged Circular).
• "Input Tax Credit is an indefeasible right of an assessee, which accrues to it on the date when the goods were bought."
• "Curtailment of an assessee’s right to claim refund upto 18.07.2022... is illegal and contrary to section 54 of the Act of 2017."
• "Point No. 2 of the Circular... is declared illegal and arbitrary being violative of Article 14 of the Constitution of India."

Decision and Practical Implications

The High Court allowed the writ petition, explicitly quashing the offending paragraph of the November 2022 circular. The respondents have been ordered to process the petitioner’s refund applications within three months, without adhering to the restrictive criteria previously imposed. This ruling serves as a vital precedent for businesses nationwide, reinforcing that administrative circulars cannot override the explicit provisions of a statute, particularly where fundamental fiscal rights are concerned. Future refund claims will now be governed by the statutory timeline of two years, rather than the arbitrary cut-off previously imposed by the CBITC.