CESTAT holds GST ITC cannot be utilized towards pre-deposit for appeals under earlier regime

This Tax Alert summarizes a recent ruling of the Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Allahabad on utilization of Input Tax Credit (ITC) under Central Goods and Services Tax Act, 2017 (CGST Act) for payment of mandatory pre-deposit under Central Excise Act, 1944 (CEA).

Assessee had preferred an appeal under CEA before the first appellate authority. Accordingly, it made a pre-deposit of 7.5% of the disputed amount by way of reversal of ITC under CGST Act in its GSTR-3B return.

Commissioner (Appeals) rejected the appeal on the ground that mandatory pre-deposit as per Section 35 of the CEA was not made.  Assessee preferred an appeal before CESTAT by paying additional 2.5% of the impugned amount as pre-deposit through DRC-03.

CESTAT relied on the judgement of Orissa High Court (HC) , wherein it was held that as per Section 41 of CGST Act, credit lying in electronic credit ledger (ECRL) can be utilized only for payment of self-assessed output tax. Further, the High Court had held that “output tax”, as defined under Section 2(82) could not be equated to the pre-deposit required to be made in terms of Section 107(6). 

It observed that decision of the HC is binding on the Tribunal and hence, held that mandatory deposit under Section 35F of CEA cannot be made by way of debit in the ECRL maintained under CGST Act. 

Comments

• The ruling is likely to result in additional cash outflow in the hands of taxpayers, even if they have sufficient balance in credit ledger.
  
• Practically we understand that taxpayers are making pre-deposit using ITC balance and the same is not disputed by the department in many cases. However, it is expected that Revenue may challenge the same considering this CESTAT decision. 
• It is worthwhile to note that CBIC vide Circular 172/04/2022 had clarified that GST ITC can be utilized for self-assessed liability or the amount payable as a consequence of any proceeding instituted under GST. Interestingly, this circular does not seem to have been considered by CESTAT.   
• A similar clarification from CBIC for allowing utilization of GST ITC for appeals under erstwhile regime, if issued, will reduce unwarranted litigations.