[Opinion] Availment and Utilisation of ITC Under Incorrect Tax Heads | A Path to Litigation

CA Keshav Gupta & Sahil Dewan – [2025] 170 taxmann.com 280 (Article)

1. Introduction

The Goods and Services Tax (GST) system was designed to streamline the taxation process by providing businesses with the ability to offset tax paid on inputs through the mechanism of Input Tax Credit (ITC). This mechanism, while invaluable, has also become a potential minefield.

One of the most common and concerning errors businesses face is the improper availment or utilization of ITC under the wrong tax head. This seemingly minor issue can escalate into significant financial and legal challenges, including interest charges, penalties, and extended litigation. This article explores why such errors occur, the risks they pose, and how businesses can avoid falling into this trap.

The GST regime divides taxes into three distinct heads: Central Goods and Services Tax (CGST), State Goods and Services Tax (SGST), and Integrated Goods and Services Tax (IGST). CGST and SGST are applicable to intra-state supplies, while IGST is applied to inter-state transactions and imports.

Under the law, businesses must ensure that ITC is claimed under the correct head of tax. For example, ITC on IGST must first be used to offset IGST liabilities, and any excess can then be used for CGST and SGST, but not the other way around. Similarly, CGST and SGST ITC should only be utilized for their respective liabilities. The incorrect allocation of ITC between these heads can result in significant complications, both from a tax and legal perspective.

2. Root Causes of ITC Misallocation

Despite the clear guidelines and legal framework around ITC, several factors contribute to the misallocation of credits:

1. Complex Transactions and Multi-State Operations: For businesses that operate across multiple states or have a combination of intra-state and inter-state supplies, correctly attributing ITC can become a challenging task. Mistakes can easily occur when businesses fail to differentiate between CGST, SGST, and IGST liabilities in complex transactions.
2. Accounting Software and Manual Errors: A significant number of errors arise due to misconfigurations in accounting systems or manual data entry mistakes. Businesses may inadvertently apply credits to the wrong head because of software misalignment or human oversight during GST return filing.
3. Lack of Awareness and Expertise: Smaller businesses or newly registered entities often struggle with the nuances of GST compliance. Limited understanding of how ITC should be properly availed and utilized can lead to mistakes, especially when businesses face the pressure of meeting deadlines for GST filings.
4. Frequent Amendments to GST Laws: The ever-evolving nature of GST law, with frequent amendments, updates, and clarifications, often creates confusion. Even experienced tax professionals may struggle to keep up with changes, leading to inadvertent misallocations in ITC claims.

3. ITC taken as Intra State Supply for Inter State Supply or Vice Versa

In this scenario, ITC was taken as an Intra state supply for Interstate supply or vice-versa. Where a tax payer who claims ITC in wrong head i.e. CGST and SGST instead of IGST and IGST instead of CGST and SGST.

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