Deficiency memos: why claims come back, and how to stop it

A refund application that comes back with a deficiency memo has not been rejected. It has been returned. The difference matters legally, but for a finance team the practical effect is similar: the claim goes back to the start, the money stays with the government for longer, and someone has to rebuild the file.

In our experience, most deficiency memos are avoidable. They rarely turn on a question of law. They turn on a missing document, a formula applied with the wrong inputs, or a statement that does not tie to the returns.

What a deficiency memo is

Rule 90 of the CGST Rules sets out how a refund application is acknowledged. Under Rule 90(3), where the proper officer finds deficiencies in the application, the officer communicates them in Form GST RFD-03 through the common portal, within 15 days of the application being filed. The applicant must then file a fresh refund application after rectifying the deficiencies.

If no deficiency is communicated in that window, the application is treated as complete and the officer issues an acknowledgement in Form GST RFD-02. The 15-day window is therefore the scrutiny point that decides whether the claim moves forward or returns.

What the fresh application means for the time limit

Section 54(1) of the CGST Act requires most refund claims to be filed within two years of the relevant date. A fresh application filed after a memo could, in principle, fall outside that window. The Explanation to Rule 90(3), inserted by Notification 14/2022-Central Tax with effect from 5 July 2022, addresses this: the time from the date of filing the original application to the date the deficiency memo is communicated is excluded when computing the two-year period for the fresh application.

That protects a timely claim, but only partly. The clock stops for the scrutiny period, then runs again from the memo date. A team that takes three months to rebuild the file has spent three months of its remaining limitation. Some high courts have treated a rectified application as a continuation of the original claim, and have questioned memos raised for reasons that are not true deficiencies in the documents. Those positions are useful in a dispute, but they are not a plan. The safer course is to refile quickly.

Where claims fall short

The gaps differ by refund type, but they repeat. The table below sets out the ones we see most often.

A note on the inverted duty formula

Notification 14/2022-Central Tax, effective 5 July 2022 (the same notification that inserted the Explanation to Rule 90(3)), amended the Rule 89(5) formula. The term "tax payable on such inverted rated supply" is now multiplied by the ratio of Net ITC to ITC availed on inputs and input services. The change stops output tax paid out of input services credit from reducing the refund unfairly. Claims still computed on the older formula are a frequent cause of memos and of short-paid refunds.

A worked example

Take a manufacturer with an inverted duty claim for a quarter. It filed on 10 March. On 22 March, the officer issued RFD-03: Statement 1A did not match GSTR-2B for 14 invoices, and the calculation had included credit on a capital purchase. The relevant date for the claim fell 23 months before the original filing.

Under the Explanation, the 12 days from 10 March to 22 March are excluded. The company therefore has about one month, counted from 22 March, to refile within the two-year limit. If the finance team treats the memo as routine and refiles in June, the claim is out of time. If it reconciles the 14 invoices, removes the capital goods credit and refiles in April, it is safe. The legal protection is real, but it is narrow, and it rewards speed.

What the memo costs even when the claim survives

• Time. The fresh application restarts the processing cycle, including the 60-day window for the refund order under Section 54(7).
• Interest. Interest on delayed refunds under Section 56 generally runs from the date of a complete application, so a memo can push that date back.
• Attention. The same people who should be preparing next quarter's claim spend weeks rebuilding the last one.

A prevention checklist

None of this is complicated. It is simply detailed, and detail is where volume work breaks down.

1. Reconcile before you file

   Tie every statement to GSTR-1, GSTR-2B and GSTR-3B for the period. A mismatch is the fastest route to a memo.

2. Link each document to each invoice

   For exports, every invoice should have its FIRC or BRC. For SEZ supplies, every invoice should have its endorsement.

3. Recompute the formula

   Apply the amended Rule 89(5) formula and show the working. Exclude credit on capital goods.

4. Check the claim period

   Confirm the period has not been claimed before and that the relevant date is within two years.

5. Attach the declarations

   Include the undertakings and certificates required under Rule 89(2) and the relevant circulars.

6. Refile fast if a memo comes

   Answer every point in RFD-03 and refile within weeks, not months.

What changes for the finance team

The practical shift is from filing and waiting to filing only when the file is complete. That means a short internal review before every submission, with a named owner who confirms that each item in the checklist above has been checked. It also means keeping the supporting documents in one place, organised by claim period, so that a memo can be answered in days.

Finance controllers should also track memos as a metric. If more than a small share of claims come back, the cause is almost always a process gap, not an unreasonable officer. Recording the reason for each memo usually shows the same two or three issues repeating, and those can be fixed at source: in how export receipts are recorded, how SEZ endorsements are collected, or how the Rule 89(5) working is built.

Where TraCarta fits

In our GST Refund Recovery practice, systems do the matching: invoices to realisation certificates, statements to returns, endorsements to supplies. Specialists review the file before it goes to the portal, and handle any memo that still arrives. Clients receive each claim's status in a monthly refund tracker (see what you receive). If your refunds keep coming back, talk to us.

General information only, not tax advice. Check the current law and your facts before acting.