Gujarat High Court Holds GST Refund Restriction Notification Applies Prospectively; Quashes Circular Denying Refunds for Pre-Notification Periods

Background and Context
The petitioner, a company engaged in manufacturing and trading edible oils under Chapter 15 of the HSN, challenged the rejection of its refund applications for accumulated input tax credit (ITC) under the inverted duty structure provisions of the Central Goods and Services Tax Act, 2017 (CGST Act). The petitioner argued that while its products became ineligible for refund of accumulated ITC only after Notification No. 09/2022–Central Tax (Rate) came into effect on 18 July 2022, the ITC accrued prior to this date remained eligible for refund under Section 54(3) of the CGST Act.

The petitioner’s refund applications, covering periods before the notification, were rejected by the authorities based on Circular No. 181/13/2022-GST dated 10 November 2022. The authorities held that refund applications filed after 18 July 2022, even if pertaining to periods before the notification, were not eligible for refund due to the prospective restriction imposed by the notification.

Legal Issue
The core issue before the Gujarat High Court was whether the restriction on refund of unutilized ITC under Notification No. 09/2022–Central Tax (Rate) could be applied to refund applications filed after 18 July 2022, even if the refund period related to a time before the notification’s effective date.

Court’s Reasoning and Findings
The Court noted that the impugned rejection orders relied on the clarificatory paragraph of Circular No. 181/13/2022-GST, which stated that the restriction would apply to all refund applications filed on or after 18 July 2022, regardless of the period to which the refund pertained. The Court referred to its earlier decision in Patanjali Foods Limited v. Union of India, where it had struck down a similar provision in the same circular, holding that such a restriction was arbitrary, discriminatory, and ultra vires Section 54 of the CGST Act as well as Article 14 of the Constitution.

The Court emphasized that Section 54(1) of the CGST Act prescribes a two-year limitation period for filing refund applications and that the notification introducing the restriction was expressly prospective. The Court held that refund claims for periods prior to 18 July 2022, if filed within the statutory limitation period, could not be denied merely because the application was filed after the notification’s effective date. The circular’s attempt to create an artificial classification based on the date of filing the refund application, rather than the period to which the refund pertained, was found to be impermissible.

Decision and Relief
The Gujarat High Court quashed and set aside the impugned rejection orders dated 24 February 2023 and 30 January 2023, and struck down paragraph 2(2) of Circular No. 181/13/2022-GST. The Court directed the authorities to process the petitioner’s refund applications (except one found to be time-barred) in accordance with law within twelve weeks. The refund application for the period September 2018 to November 2018 was held to be barred by limitation and the rejection order for that claim was upheld.

Conclusion
This judgment reaffirms that restrictions on refund of unutilized ITC under the inverted duty structure cannot be applied retrospectively to deny claims for periods prior to the notification, provided the applications are filed within the statutory limitation period. The Court’s decision ensures that taxpayers’ substantive rights under Section 54 of the CGST Act are protected from arbitrary administrative circulars.