GST WEEKLY UPDATE :46/2025-26 (15.02.2026) By CA Vipul Khandhar

Reading Time: 6 minutes

-By CA Vipul Khandhar

1. Latest version of GePP Tool and Bulk IRN JSON preparation tool may be downloaded for enabling RSP based calculation: E way bill & E invoice:

Relaxation of validation w.e.f 01/02/2026 for certain HSNs where RSP based Calculation is applicable. Notification 20/2025:

• RSP-Based Valuation for Tobacco Goods under GST – A Compliance Snapshot (Effective 01.02.2026)

The Government has introduced a significant change in GST valuation for specified tobacco and tobacco-related products through Notification No. 19/2025–Central Tax and Notification No. 20/2025–Central Tax, both dated 31 December 2025.

With effect from 01 February 2026, valuation of notified goods will shift from the traditional transaction value model under Section 15 of the CGST Act to a Retail Sale Price (RSP)-based valuation mechanism.

1. Goods Covered Under RSP-Based Valuation

The following HSN codes are notified:

HSN	Description
2106 90 20	Pan Masala
2401	Unmanufactured tobacco (excluding tobacco leaves)
2402	Cigars, cheroots, cigarillos & cigarettes
2403	Other manufactured tobacco (excluding biris)
2404 11 00	Tobacco products for inhalation without combustion
2404 19 00	Nicotine substitute inhalation products

RSP printed on the package becomes the base for valuation.

2. Key Conceptual Change

Under the new mechanism:

• Taxable value is derived from RSP
• RSP is treated as tax-inclusive
• Actual sale price or discount is irrelevant for GST valuation
• Tax liability may exceed commercial margin in discounted supplies

This creates a clear distinction between:

• Statutory (RSP-based) taxable value
• Commercial transaction value

3. Computation Formula

For notified goods:

• Tax Amount = (RSP × GST Rate) / (100 + GST Rate)
• Deemed Taxable Value = RSP – Tax Amount

GST must be discharged strictly as per this formula.

4. Practical Reporting Challenge

GST systems (e-Invoice, e-Way Bill, GSTR-1) are designed on a transaction-value model and validate that:

Taxable Value + Tax ≤ Invoice Value

Under RSP-based valuation, reporting statutory taxable value directly may trigger system errors.

5. GSTN Reporting Clarification

To facilitate compliance, GSTN has prescribed the following reporting method:

For e-Invoice & e-Way Bill:

• Report Net Sale Value in the taxable value field
• Compute tax strictly as per RSP formula
• Report total invoice value as Net Sale Value + Tax

For GSTR-1 / IFF:

• Report Net Sale Value as taxable value
• Manually correct system-computed tax, if required
• Ensure tax discharged matches RSP-based computation

All values are to be self-assessed and verified by the taxpayer.

6. Compliance Implications

Taxpayers should carefully evaluate:

• Classification of notified HSNs
• Impact on margins and working capital
• Reconciliation between books and statutory liability
• Contractual pricing structures
• Internal ERP alignment

RSP-based valuation must be applied strictly where notified.

7. Conclusion

The shift to RSP-based valuation represents a targeted revenue-control measure for tobacco products. While the reporting relaxation provides operational flexibility, the statutory liability remains linked to RSP.

Businesses dealing in notified goods must recalibrate pricing, compliance systems, and tax computation mechanisms before 01 February 2026 to avoid reporting mismatches and litigation exposure.

2. AAR & Important Judgements:

(i) GSTAT Delhi (Principal Bench): Section 74 Proceedings Cannot Be Converted into Section 73 by Appellate Authorities:

(Applicant – M/s Sterling & Wilson Pvt. Ltd.)

In the present case, proceedings were initiated against the assessee under Section 74(1) of the CGST Act alleging fraud, suppression and intent to evade tax on account of mismatch between GSTR-1 and GSTR-3B returns.

During appellate proceedings, the First Appellate Authority (FAA) found that the essential ingredients of fraud or suppression were not established. However, instead of setting aside the

proceedings, the demand was sustained by treating the matter as one falling under Section 73 (non-fraud cases).

Aggrieved, the assessee approached the GSTAT Delhi (Principal Bench).

Core Issues:

1. Whether appellate authorities can convert Section 74 proceedings into Section 73 proceedings?
2. Whether Section 75(2) empowers appellate forums to modify the nature of adjudication?
3. What is the scope of powers of the Tribunal under Section 112 of the CGST Act?
4. Whether strict interpretation principles applicable to exemption notifications apply to reconciliation disputes?

 Tribunal’s Key Findings

1️. No Conversion of Section 74 into Section 73 by Appellate Authorities

The Tribunal categorically held:

• If proceedings are initiated under Section 74(1) (fraud/suppression cases) and fraud is not established,
• The appellate authority cannot simply convert the demand into Section 73 proceedings.

Once Section 74 is found inapplicable, the correct course of action is:

🔁 Remand the matter to the original Proper Officer for fresh adjudication under Section 73.

The appellate forum cannot re-characterize the very foundation of the show cause notice. 

2 Section 75(2) Does Not Authorize Conversion by Appellate Authority

The Revenue argued that Section 75(2) permits modification of the nature of demand.

The Tribunal rejected this contention, observing:

• CBIC Circular No. 254/11/2025-GST clarifies that no Proper Officer has been specifically assigned for action under Section 75(2).
• Therefore, re-determination under Section 73 can only be undertaken by the original Proper Officer who issued the Section 74 notice.
• Appellate authorities cannot assume original adjudicatory jurisdiction.

Thus, Section 75(2) does not empower the FAA or Tribunal to convert proceedings from fraud to non-fraud category and re-compute liability. 

3 Scope of Powers under Section 112 – Tribunal Has Plenary Jurisdiction

The Revenue objected that factual issues cannot be raised in second appeal.

The Tribunal rejected this objection and clarified:

• Section 112 of the CGST Act grants plenary jurisdiction to GSTAT.
• The Tribunal is the final fact-finding authority.
• Section 112 is distinct from Section 100 of the CPC, which restricts second appeals to substantial questions of law.

Accordingly, GSTAT can examine both facts and law comprehensively. 

4 Distinction from Supreme Court Rulings on Strict Interpretation

The Revenue relied on:

• Commissioner of Customs v. Dilip Kumar & Co.
• Hamida v. Rashid

The Tribunal distinguished these rulings, holding:

• Principles of strict interpretation apply to exemption notifications.
• The present dispute concerns reconciliation between GSTR-1 and GSTR-3B, accounting treatment, and alleged short payment.
• It is not a case of exemption interpretation but a reconciliatory dispute.

Therefore, strict interpretation doctrine was held inapplicable. 

5 Reconciliation Dispute – Opportunity Must Be Granted

The Tribunal observed:

• The FAA itself recorded absence of fraud or suppression.
• Transactions were recorded in books of accounts.
• Dispute arose due to:
  • Non-reflection of credit/debit notes,
  • Mismatch in returns,
  • Inability to establish ITC reversal by recipients.

The matter was essentially reconciliatory in nature.

Accordingly, the assessee must be given opportunity to:

• Amend returns,
• Submit reconciliation statements,
• Furnish supporting documentation.

Final Decision

The GSTAT:

• Set aside the orders sustaining demand under Section 73,
• Affirmed that Section 74 was inapplicable,
• Remanded the matter to the Proper Officer for fresh adjudication under Section 73,

Granted liberty to the assessee to file amendments and supporting documents.

(ii) Hon’ble Karnataka High Court: Refund Under Inverted Duty Structure Cannot Be Denied Merely Because Certain Inputs & Outputs Attract Identical GST Rates:

(Applicant – M/s South Indian Oil Corporation)

Core Legal Issue

Whether refund under Section 54(3)(ii) of the CGST Act can be denied merely because some inputs and output supplies attract the same rate of tax, despite the existence of accumulated ITC arising due to an inverted duty structure?

🧾 Findings of the Karnataka High Court

The Karnataka High Court held in favour of the assessee and laid down the following important principles:

1 No Mandatory Comparison of Principal Input & Output Rates

The Court clarified that Section 54(3)(ii) does not require comparison of tax rates between the principal input and the principal output supply.

What is relevant is:

• Whether accumulated ITC exists; and
• Whether such accumulation arises due to rate inversion.

The presence of some inputs attracting the same GST rate as outputs does not defeat the refund claim if overall accumulation is attributable to inverted rate structure.

2 Circular Cannot Curtail Statutory Benefit

The Revenue relied upon Circular No. 135/05/2020-GST dated 31.03.2020, which restricted refund in cases where input and output rates were identical.

The Court rejected this reliance and held:

• The circular was inapplicable to the facts of the case.
• Administrative circulars cannot override or restrict statutory provisions.
• Section 54(3)(ii) being a substantive statutory right cannot be curtailed by executive clarification.

3 Deletion by Circular 173/05/2022 is Clarificatory & Retrospective

The Court noted that the restrictive portion of Circular 135/2020 was subsequently deleted by Circular No. 173/05/2022-GST dated 06.07.2022.

The deletion was held to be:

• Clarificatory in nature, and
• Therefore applicable retrospectively.

This strengthened the assessee’s entitlement to refund even for earlier periods.

4 Reliance on Earlier Precedent

The High Court followed its earlier ruling in the case of Indian Oil Corporation Ltd., reiterating that refund cannot be denied by reading additional conditions into Section 54(3)(ii).

Key Takeaways for Taxpayers & Professionals

✔ Refund under inverted duty structure depends on existence of accumulation due to rate inversion, not on mechanical rate comparison.

✔ Administrative circulars cannot restrict statutory entitlement under Section 54(3)(ii).

✔ Clarificatory amendments or deletions in circulars may operate retrospectively.

✔ Rejection orders based solely on Circular 135/2020 are vulnerable to challenge.

Disclaimer:

This publication contains information for general guidance only. It is not intended to address the circumstances of any particular individual or entity. Although the best of endeavour has been made to provide the provisions in a simpler and accurate form, there is no substitute to detailed research with regard to the specific situation of a particular individual or entity. We do not accept any responsibility for loss incurred by any person for acting or refraining to act as a result of any matter in this publication.