[Analysis] Can ITC balance in credit ledger be used for paying Pre-deposit amount for filing a GST appeal?

Taxmann’s Advisory and Research Team – [2022] 143 taxmann.com 117 (Article)

Under the GST laws, pre-deposit is a pre-requisite for filing the appeal before the appellate authorities. The question is whether such payment can be made using the balance available in the electronic credit ledger.

The Orissa High Court held that the credit balance in the electronic credit ledger cannot be used for paying the pre-deposit amount. However, recently the Bombay High Court and the Allahabad High Court have held it otherwise. This article attempts to share the views of Taxmann’s Advisory and Research Support Team on this issue in view of the contradictory judgements.

1. Introduction

The appellate proceedings under the tax laws generally require a taxpayer to deposit a certain percentage of disputed tax in advance to the authorities. The payment of this amount is a pre-requisite for filing the appeal before the appellate authorities. Once this amount is paid, the remaining amount of demand is stayed till the conclusion of the proceedings. The pre-deposit provision under the tax laws acts as a stoppage of unnecessary adjudication which may be preferred by the taxpayers to delay the payment of the demand amount.

Under the GST laws, the pre-deposit amount for filing an appeal can be made through the electronic cash ledger. The doubt comes where such payment is intended to be made using the credit balance available in the electronic credit ledger. The question is whether such payment can be made using the balance available in the electronic credit ledger.

Dealing with this issue, the Orissa High Court held that the credit balance in the electronic credit ledger cannot be used for paying the pre-deposit amount. However, recently the Bombay High Court and the Allahabad High Court have held it otherwise (i.e. credit balance in electronic credit ledger can be used for paying the pre-deposit amount).

This article attempts to share the views of Taxmann’s Advisory and Research Support
Team on this issue in view of the contradictory judgements.

2. Relevant Legal Provisions

Section 107 (6) (b) of the CGST Act¹ provides the condition for payment of the pre- deposit amount for filing an appeal before the Appellate Authority. The relevant provision reads as under:

No appeal shall be filed under sub-section (1), unless the appellant has paid —

(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and

(b) a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, subject to a maximum of twenty-five crore rupees, in relation to which the appeal has been filed:

In respect of utilization of the amount available in the electronic credit ledger, Section 49(4) of the CGST Act provides that such amount can be used for making payment of output tax. The relevant provision reads as under:

(4) The amount available in the electronic credit ledger may be used for making any payment towards ‘output tax’ under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restriction and within such time as may be prescribed.

As the amount available in the electronic credit ledger can be used for making the payment of output tax, thus it is important to appreciate the definition of the output tax as well. The CGST Act defines² the term ‘output tax’ in relation to a taxable person as the tax chargeable under the CGST Act on the taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis.

3. Jurisprudence so far under GST

The Orissa High Court in the case of Jyoti Construction³ held that the output tax payable cannot be equated to the amount of pre-deposit required to be made by the assessee and observed that there is a difference between an amount which is refundable and an amount which is liable to be paid as output tax. It held that the appeal filed by the assessee by paying the pre-deposit amount through the electronic credit ledger at the Appellate Authority level is defective and would be liable to be rejected.

Recently, the Bombay High Court in the case of Oasis Realty⁴ held that pre-deposit can be made using the balance in the electronic credit ledger. In forming its views, the High Court observed the following:

Section 107(6) uses the expression ‘unless the appellant has paid a sum equal to 10% of remaining amount of tax in dispute’. The Court focused on the terms ‘paid’ and ‘tax’. It highlighted that the word used in the provision is ‘paid’ and not ‘deposited’. The ‘tax’ is not required to be deposited but it is paid. This section talks about the payment of tax

The above requirement to ‘pay tax’ reading with Section 49(4), allows the payment of ‘pre-deposit’ by utilizing the balance available in the electronic credit ledger

In concluding its views, the Bombay High Court has also dealt with the judgment of the Orissa High Court (supra) and held that the recent CBIC’s clarification⁵ on utilization of the balance in the electronic credit ledger clarified that any amount towards the output tax payable as a consequence of any proceeding under the GST law can be paid by utilizing the balance available in the electronic credit ledger. Thus, the judgment of the Orissa High Court may not be relevant to discuss.

Further, the Allahabad High Court⁶ directed the appellate authority to accept the appeal submitted after the deposit of the pre-deposit amount through the electronic cash ledger.

4. Our Comments

Section 107(6) provides that an appeal before the Appellate Authority would be considered only when ‘the appellant has paid a sum equal to ten per cent of the remaining amount of tax in dispute’.

On a careful reading of this provision, one may note that the law requires the appellant to pay a ‘sum’ equal to 10% of the remaining amount of tax in dispute. However, the Bombay High Court focused on the term ‘tax’ in the said provision. The provision simply requires the appellant to pay a sum which is required to be computed on the tax in dispute. In other words, the appellant is not required to pay ‘tax’ under Section 107(6)(b) but a ‘sum’ that should be equal to 10% of the tax in dispute.

The above interpretation can further be substantiated by observing the way clause (a) of Section 107(6) is drafted. Therein, it is provided that ‘the appellant has paid in full such part of the amount of tax ……. as is admitted by him’. Here, since the appellant should pay the tax amount admitted by him, the law simply says that the appellant is required to pay such part of the tax amount admitted by him.

Therefore, the amount of pre-deposit can clearly be said to be in the nature of a
‘deposit’ and not in the nature of ‘tax’.

Section 49(4) being the governing provision for utilizing the balance available in the electronic credit ledger provides that such a balance may be used for making any payment towards the ‘output tax’. The provision simply allows the taxpayer to utilize the balance in the electronic credit ledger for any payment towards the output tax.

The expression ‘any payment towards the output tax’ has not been explained under the law and it can be said to have a very wide scope, however, it is difficult to conclude that the pre-deposit amount would fall within its scope.

In analysing Section 49(6), the CBIC has clarified⁷ that Section 49 provides for any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the provisions of GST laws.

Notably, the above clarification merely provides that the scope of section 49(6) covers the self-assessed tax payable as per Form GSTR-3B and the liabilities payable as per proceedings under GST law such as departmental assessment, demand order, etc. It does not talk about the pre-deposit amount. However, taking the views of the above clarification, the Bombay High Court has held that the CBIC has clarified the impugned issue, which seems to be incorrect in our humble opinion.

In sum, we believe that the output tax cannot be equated with a deposit amount and thus as per the existing provisions, the amount available in the electronic credit ledger cannot be used for making the pre-deposit amount.

It is also to be noted that while concluding its views neither the Bombay High Court nor the Orissa High Court has considered the provision of Section 41 that existed prior to October 01, 2022.

Special Consideration in respect of appeals filed before October 01, 2022

Prior to October 01, 2022, Section 41(2) dealt with the utilization of the provisional Input Tax Credit (‘ITC’) lying in the electronic credit ledger. It provides that any credit availed on a provisional basis can only be utilized for making the payment of self- assessed output tax as per the return. The relevant provisions are reproduced below:

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self-assessed output tax as per the return referred to in the said sub-section.

One may note that since the inception of the GST law, the provisions relating to the matching of details furnished in returns have not been implemented, however, such provisions have always existed under the law till September 30, 2022. In accordance with Section 41(1), any ITC availed in Form GSTR-3B is first booked on a provisional basis in the electronic credit ledger and only after the completion of the matching process⁸, such ITC would be considered final.

Therefore, considering that the provisions relating to the matching process still existed under the law till September 30, 2022, the ITC which is booked in the electronic credit ledger through Form GSTR-3B without following the matching procedure, can be said to be availed on a provisional basis and should only be utilized for the payment of self-assessed output tax as per return.

Notably, in respect of appeals filed on or after October 01, 2022, the analysis of the above provision is not relevant as this provision has been omitted by the Finance Act, 2022.

Position compared with the erstwhile regime of Central Excise

Under the Central Excise Act, 1944, Section 35F was requiring the appellant to deposit 7.5% of the duty/penalty with the Commissioner (Appeals) or the Tribunal.

The issue that whether such a pre-deposit amount can be deposited through RG-23 Part-II (CENVAT register) also existed under the pre-GST regime as the revenue was not allowing the utilization of CENVAT credit in some cases. However, the Tribunals in general had allowed the utilization through either cash ledger or credit ledger.

Further, in year 2014, the Delhi CESTAT had specifically issued a circular9 allowing the mandatory deposit of duty can be made through the CENVAT account.

It is important to note here that the provisions under the erstwhile regime are not pari
-materia with the provisions of the GST law as there it was requiring to deposit a percentage of duty/penalty in dispute whereas in GST it requires to deposit a sum which would be computed based on percentage of a duty.

Given this, the jurisprudence and clarifications of the erstwhile regime may not be relevant under the GST regime.

5. Conclusion

The pre-deposit amount is in the nature of a deposit, which cannot be equated to the output tax. Interestingly, the GSTN portal allows the payment of the pre-deposit amount through the electronic credit ledger, which does not seem to be in line with the provisions of the law.

It is important that the legislative amendments should be brought under Section 49 to allow payment of pre-deposit using the electronic credit ledger.

Disclaimer – The above comments are not applicable to appeals filed in the GST regime in respect of issues under the erstwhile regime. Views discussed in this write-up are for guidance purposes and cannot be construed as a legal advisory. Feel free to reach us at connect@taxmann.com for any query.

1. Central Goods and Services Tax Act, 2017

2. Section 2(82) of the CGST Act

3. Jyoti Construction v. Deputy Commissioner of CT & GST, Jajpur [2021] 131 taxmann.com 104 (Orissa) dated 07-10-2021

4. Oasis Realty v. Union of India [2022] 143 taxmann.com 5 (Bombay) dated 16-09-2022

5. Circular No. 172/04/2022-GST, dated 6-7-2022

6. Tulsi Ram and Company Vs Commissioner [2022] 143 taxmann.com 6 (Allahabad) dated 23-09-2022

7. Circular No. 172/04/2022-GST, dated 6-7-2022

8. As per the provisions of Sections 42 and 43 and the relevant rules therein

9. Customs, Excise and Service Tax Appellate Tribunal’s Circular, dated 28-08-2014 (F. No. 15/CESTAT/General/2013-14)