A Concerning Trend on ITC Reversals under Circular No. 170/02/2022-GST Dated: 6th July, 2022
Summary: A troubling pattern is emerging where State GST officers are advising taxpayers to retroactively reverse old Input Tax Credit (ITC) by invoking Circular No. 170/02/2022-GST Dated: 6th July, 2022, even though the circular technically applies only from July 2022. This practice involves instructing taxpayers to artificially re-avail lapsed ITC from periods as far back as FY 2017-18 and then permanently reverse it in GSTR-3B Table 4B(1). The concern is that compelling taxpayers to re-avail credits already lapsed under Section 16(4), or which were not disclosed in GSTR-9, contradicts the time-bar framework of GST law. Furthermore, following these advisories creates immediate system-generated DRC-01C mismatches because the re-availed ITC does not exist in the current GSTR-2B. This entire exercise, potentially driven by state pressures over IGST settlement shares, forces unnecessary compliance burden and risks creating future disputes, particularly with new state advisories asking for disclosure in the legally redundant Table 4D(1). A unified clarification from the GST Council is necessary to ensure uniform treatment and protect compliant taxpayers from conflicting state instructions regarding past-period ITC
In recent months, a worrying trend has emerged across various industries — State GST officers are issuing directions to taxpayers to permanently reverse Input Tax Credit (ITC) by invoking Circular No. 170.
Let’s be clear:
If the ITC is genuinely ineligible, a permanent reversal in Table 4B(1) of GSTR-3B is fully justified. There is no dispute on that.
However, the concern arises from instances where advisory-cum-notices are being issued, instructing taxpayers to re-avail old ITC in Table 4A(5) and then permanently reverse it in Table 4B(1) — even for periods as far back as FY 2017-18 to FY 2021-22.
This is being done despite the fact that many taxpayers had already disclosed such credits as lapsed in their GSTR-9, and importantly, Circular 170 is applicable only from July 2022 onwards.
This raises a fundamental question:
Can past-period ITC now be revived and reversed?
Even where taxpayers did not explicitly disclose the ITC as lapsed in GSTR-9, there is no legal requirement under current GST law to re-report such old ITC. Forcing taxpayers to do so now would contradict Section 16(4) and the time-limit provisions under GST.
Worse still, if taxpayers comply with such advisories and artificially avail and reverse old ITC in the current period, the GST system will likely flag discrepancies, triggering DRC-01C notices because:
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The credits do not exist in the current GSTR-2B, and
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They are not part of the reclaimable ITC ledger.
This results in unnecessary mismatches and additional compliance burden for taxpayers merely following departmental instructions.
The Larger Question
Can Circular 170 be applied retrospectively when the concept of permanent reversal in Table 4B(1) didn’t even exist during those earlier years?
This practice seems to stem from the fact that states are not receiving their IGST settlement share from the Centre for such past-period credits — and the burden is being indirectly shifted to taxpayers.
Recent Twist – Table 4D(1) Disclosure
Some states have recently begun advising taxpayers to report ITC for FY 2017-18 to FY 2021-22 in Table 4D(1), claiming that “no consequences” will arise from such reporting.
But a key question arises:
If the ITC has already lapsed as per law, what is the purpose or value of such disclosure?
Such instructions risk creating confusion, unnecessary reconciliations, and potential future disputes.
Way Forward
If such divergent practices continue, it is imperative that the GST Council intervenes and issues a uniform clarification.
A central clarification would ensure:
√ Uniformity across states
√ Elimination of avoidable compliance strain
√ Protection of bona fide taxpayers
√ Clarity on the treatment of past-period ITC
Taxpayers should not be made to navigate conflicting state-level advisories on issues where both law and system design are already aligned.
Views are personal.
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