Implications of Availing and Utilizing ITC Under the Wrong Tax Head: Challenges and Remedies

Summary: 

Misclaiming Input Tax Credit (ITC) under GST by allocating it to the wrong tax head, such as IGST instead of CGST and SGST (or vice versa), can lead to significant compliance challenges and litigation. The GST law allows taxpayers to correct such errors through self-rectification in returns (e.g., GSTR-3B) within specified timelines. However, if not addressed, the tax authorities may issue notices under Section 73 of the CGST Act, demanding tax recovery along with interest at 18% per annum and penalties. Taxpayers can mitigate risks through voluntary disclosures, though interest is still applicable. The recent clarification via Circular No. 192/04/2023-GST offers some relief, stating that interest will not apply if the total ITC balance across all heads remains sufficient. Courts have taken varied stances on allowing rectifications after deadlines. For instance, the Kerala High Court permitted ITC reclassification in Chukkath Krishnan Praveen vs. State of Kerala, emphasizing the bona fide nature of the error, while the Karnataka High Court in M/s Orient Traders vs. Deputy Commissioner of Commercial Taxes allowed rectifications for the initial GST years, considering system limitations. Taxpayers can also benefit from the amnesty provided under Section 128A of the CGST Act for specific tax periods, which waives interest and penalties if certain conditions are met. These developments underscore the importance of accurate ITC claims and proactive measures to rectify errors to avoid prolonged disputes.

Introduction

GST law carrying moto of “One Nation, One Tax and One Market” reason being subsumed taxes into one i.e. GST, which is Charged depending on place of supply under following Heads

1. IGST- Interstate Supply
2. CGST- Intrastate supply
3. SGST/ UTGST- Intrastate supply
4. CESS - Addition to these taxes payable

After 7 years of Implementation of GST law, there is still a divergent view between Tax Payer and Revenue. On the point of Availment and Utilisation of ITC in Wrong Head of Tax, Let’s Discuss the various aspects and possible litigation and their solution at length as under:

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.

In the above scenario, following possible solution is available with the tax payer:

1. Situation of Incorrect Claim

Claiming and utilising the IGST ITC in place of CGST and SGST is an error and this requires correction. One should have ideally revered the incorrect ITC in sub sequent returns i.e. GSTR 3B and taken the correct credits considering the Circular No 26/26/2017-GST, Dated 29-12-2017.

2. Legal Framework

Under Section 73 of the CGST Act.2017 Tax authorities can issue a Show Cause Notice (SCN) for the wrongful availment of ITC within 3 years from the due date of filling the Annual returns for the relevant year if no fraud or willful misstatement is involved.

If the authorities detect the wrong credit during an audit or scrutiny in such cases they demands recovery along with interest 18% p.a. under Section 50 and Penalty

3. Rectification Timeline

Financial Yearwise Deadline is as under to rectify GSTR 3B is as follows:

Amendment of Section 16(4) up to the Financial Year 2020-21

The time limit to avail Input Tax Credit (“ITC”) in respect of any invoice or debit note under Section 16(4) of the CGST Act, through any return in FORM GSTR 3B filed upto November 30, 2021 for the Financial Years 2017-18, 2018-19, 2019-20 and 2020-21, may be deemed to be November 30, 2021. - Inserted THE FINANCE (No. 2) ACT, 2024 Act No.15 of 2024 -Finance Act] Dated: 16th August, 2024 w.e.f. 01/07/2017 Notified by Notification No 17/2024- Centra Tax from 1^st day of Nov, 2024 shall come into force.

The deadline for rectifying the GSTR-3B of the above mentioned Financial Year would have been mentioned in the table or the annual return, whichever is earlier. Since this time has already been passed, the opportunity of self-correction has closed.

4. Next Step - Voluntary Disclosures

You can voluntarily disclose the error by reversing the incorrect ITC in the current or future GSTR-3B filings, but interest still attracts on excess availment and utilisation of ITC.

Interest Calculation: Compute the interest due on the excess ITC availed and pay it to minimize the risk of penalties.

5. Risk of Scrutiny:

If the discrepancy is flagged during GST audits or scrutiny, you may face a demand notice. Taking corrective action as soon as possible is advisable.

If the scrutiny notice came in such case Circular discussed below shall be taken under consideration when the issue of Interest liability comes up.

Circular No. 192/04/2023-GST] Dated:17th July, 2023

Clarification on charging of interest under section 50(3) of the CGST Act, 2017, in cases of wrong availment of IGST credit and reversal thereof.

Issue

In the cases of wrong availment of IGST credit by a Registered person and reversal thereof, for the calculation of interest under rule 88B of CGST Rules, whether the balance of Input tax credit available in Electronic credit ledger under the head of IGST only needs to be considered or total Input tax credit available in Electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has to be considered?

Clarification

In the cases where IGST credit has been wrongly availed and subsequently reversed on a certain date, there will not be any interest liability under sub-section (3) of section 50 of CGST Act if, during the time period starting from such availment and up to such reversal, the balance of Input tax credit (ITC) in the Electronic credit ledger, under the heads of IGST, CGST and SGST taken together, has never fallen below the amount of such wrongly availed ITC, even if available balance of IGST credit in Electronic credit ledger individually falls below the amount of such wrongly availed IGST credit.

However, when the balance of ITC, under the heads of IGST, CGST and SGST of Electronic credit ledger taken together, falls below such wrongly availed amount of IGST credit, then it will amount to the utilization of such wrongly availed IGST credit and the extent of utilization will be the extent to which the total balance in Electronic credit ledger under heads of IGST, CGST and SGST taken together falls below such amount of wrongly availed IGST credit, and will attract interest as per sub-section (3) of section 50 of CGST Act, read with section 20 of Integrated Goods and Services Tax Act, 2017 and sub-rule (3) of rule 88B of CGST Rules.

Remedy U/S 128A Amnesty Scheme for FY 2017-18, 2018-19, 2019-20 

The Finance (No. 2) Act, 2024 inserted Section 128A of CGST Act, 2017.

Section 128A Waiver of interest or penalty or both relating to demands raised under section 73, for certain Tax periods.

Section 128A provides to waive interest under section 50 and penalties under Act, in respect of demand notices or orders issued under Section 73 of the CGST Act pertaining to tax period 1.7.2017 to 31.03.2020, in the cases where the taxpayer pays the full amount of tax demanded in the notice or orders on or before the date notified under section 128A(1) of the Act and satisfied other prescribed conditions. The waiver does not cover demand of erroneous refunds.

Notification No.21/2024-Central Tax Dated: 08th October, 2024

Registered persons to whom a notice or statement or order, referred to in clause (a) or clause (b) or clause (c) of section 128A of the said Act, has been issued, upto 31.03.2025 payment for the tax payable as per the notice or statement or the order referred to in clause (a) or clause (b) or clause (c) of section 128A of the said Act, as the case may be, can be made for waiver of interest, or penalty, or both, under Section 128A. w.e.f. 1st day of November, 2024.

Eligibility Condition

1. Relevant demand should pertain to tax period FY 17-18, 18-19 or 19-20 or part thereof.
2. Only demands raised under section 73 are eligible to waive interest or penalty.
3. Mandatory payment of full amount of tax payable before notified date.
4. Mandatory unconditional withdrawal of pending appeal

Types of Demand Eligible to Waiver of Interest and Penalty.

1. Demand as per notice u/s 73(1) of the Act where no order under sub-section (9) of  Section 73 has been issued.
2. Demand as per order in original u/s 73(9) of the Act
3. Demand as per first appeal order u/s 107(11) of the Act
4. Demand as per review order u/s 108(1) of the Act
5. Demand as per order of Appellate Tribunal is not eligible to waiver of interest or penalty

Legal Precedents

1. Chukkath Krishnan Praveen Vs State of Kerala (Kerala High Court) WP(C) No.41219 of 2023 dated 08.12.2023

Facts:

The Petitioner committed the error in filing GSTR-3B returns based on which the Assessment Order dated August 21, 2023 (“the Impugned Order”) was passed. The Petitioner made a representation before the Respondent Authorities vide Representation dated October 21, 2023 (“the Representation”) for rectifying the mistake/error in the returns filed.

Thereafter, the Petitioner filed a writ petition for directing the Revenue Department to permit the Petitioner to rectify the mistake in Form GSTR-3B by accounting the ITC as IGST instead of CGST and SGST ITC. The Petitioner also prayed for refund of IGST ITC and thereafter, adjusting the IGST credit towards SGST and CGST liability. The Petitioner also prayed that the Representation filed by the Petitioner be treated as a Rectification Application.

Issue:

Whether rectification in return be allowed when ITC in GSTR-3B is accounted as IGST credit instead of CGST and SGST credit erroneously?

Ruling:

The Hon’ble Kerala High Court has disposed the writ petition and directed that the Representation filed by the Petitioner be treated as Rectification application and pass the necessary order in accordance with law after granting a proper hearing to the Petitioner within a period of two months.

The court directed that, the rectification in return should be allowed when Input Tax Credit (“ITC”) in GSTR-3B is accounted as the Integrated Goods and Services Tax (“IGST”) credit instead of the Central Goods and Services Tax (“CGST”) and the State Goods and Services Tax(“SGST”) credit erroneously.

2. M/S Orient Traders v. the Deputy Commissioner of Commercial Taxes (Audit)-3, Joint Commissioner  of commercial taxes Bengaluru  P. No. 2911 of 2022 dt. 16/12/2022 Karnataka High Court

Issues Involved

The respondents are directed to permit the petitioner to make necessary corrections to the GSTR-3B for the months of July-2017 to March-2018.

Facts

The Petitioner sought directions to allow the Petitioner to rectify the GST returns filed for the months of July, 2017 and March, 2018. The petitioner noticed that it had claimed ITC relating to imports in July 2017 and March 2018 due to oversight and inadvertence in Column No. 4A(5) instead of claiming it under Column No.4A(1). This error in entering the figures in the wrong column resulted in a mismatch between the GSTR-3B and GSTR-2A forms. The counsel for the petitioner submitted that details of the IGST relating to imports are readily available on the ICE-GATE portal. The court observed that ITC, which is admittedly available to the petitioner has been entered under the wrong column; the material on record also discloses that the said errors are entirely bona fide and inadvertent and that a lenient view is required to be taken, particularly since the tax periods involved relate to the very first year of the GST regime.

The judgment of the Apex Court in Bharti Airtel’s case cannot be made applicable to the facts of the case. The petitioner is entitled for the limited relief of being permitted to make the necessary changes to its GSTR 3-B returns for the months of July 2017 and March2018, particularly, since doing so would not cause any prejudice to the respondents-Revenue nor would it upset the chain of credit under the GST scheme. 

Ruling   

The Hon’ble High Court directed the respondents to permit the petitioner to make necessary corrections to the GSTR-3B for the months of July-2017 to March-2018.Due to technical glitches/defects, if it is not possible for the respondents to permit such corrections online or on the portal, respondents are directed to permit to carry out such corrections via manually/physically.

3. Commissioner of C. EX & CUS., Vadodara Vs Narmada Chematur Pharmaceuticals Ltd 2005 (179) ELT  276 (SC)

Facts

The Appellant are engaged in manufacture of LDPE Plastic Bags rolls classifiable under heading 39.26. The said goods attracted nil rate of duty in terms of Notification No 53/88-CE dated 01.03.88 However, the Appellant instead of claiming the exemption, choose to clear their final product on payment of duty, after availing MODVAT Credit of duty paid on inputs.

Held

It was held by Hon’ble Court that when amount of CENVAT / MODVAT Credit wrongly availed is exactly equivalent to the amount of excise duty paid by not vailing exemption, the consequence of revenue neutral.

4. Divya S.R. Vs Union of India (Kerala High Court) W.P.(C) No. 38 of 2024 Dated 03/01/2024

Facts                     

In a recent case before the Kerala High Court, Divya S.R., an Assessee under the Central Goods and Services Tax Act and State Goods and Services Tax Act, 2017, sought relief through a writ petition. The petitioner requested a mandamus directing the 6th respondent to set off Input Tax Credit (ITC) of Integrated Goods and Services Tax (IGST) worth Rs.1,14,957/-, which was inadvertently claimed under Central Goods and Services Tax (CGST) and State Goods and Services Tax (SGST) for the period July 2017 to March 2018.

The petitioner received IGST tax credit through interstate inward supply of goods during the financial year 2017-18. While filing the monthly return in GSTR 3B for July 2017, the petitioner mistakenly claimed the entire input tax credit of Rs.1,14,957/- under CGST and SGST instead of IGST. The mistake resulted in the issuance of an Assessment Order.

Ruling

The Kerala High Court’s directive ensures the consideration of the rectification application, allowing the petitioner an opportunity to correct the mistaken ITC claim. The court’s emphasis on a fair hearing reflects the importance of procedural justice in tax matters. Until the application is adjudicated, the court shields the petitioner from coercive measures for tax recovery based on the original assessment order.

5. M/S Cosyn Limited vs Assistant Commissioner of State Tax; W.P.A. 25725 of 2023 Dated 30 April, 2024

The Calcutta High Court in the case of M/s. Cosyn Limited v. Assistant Commissioner of State Tax held that there is no need to reverse the IGST Credit when it is used for payment of CGST and SGST. The petitioner had availed IGST Credit in February 2018 and utilized it for payment of SGST in subsequent months. An Assessment Order was passed against this, contending that the IGST should have been transferred to the Respective State.

Conclusion

Hon’ble Court took views in (1) Chukkath Krishnan Praveen   W.P. no. 41219 of 2023  dt. 08/12/2023   Kerala   H C (2) M/S Orient Traders  W.P. no. 2911 of 2022 dt. 16/12/2022 Karnataka H.C. (3) Divya S.R. Vs Union of India (Kerala High Court) W.P.(C) No. 38 of 2024 Dated 03/01/2024 (4) M/S Cosyn Limited vs Assistant Commissioner of State Tax; W.P.A. 25725 of 2023 Dated 30 April, 2024 in this cases the Court has considered the mistake as bonafide mistake and all this judgement has been for the tax period before FY 2020-21. It has been noticed that from July 2017 to till today, for the wrongful ITC availment and utilisation the Demand has been Generated Under Section 73 of CGST and SGST Act,2017 by Issuing FORM GST DRC-01A, FORM GST DRC-01 SCN and Demand Order in Form GST DRC-07 with Tax, Interest and Penalty. Though, it’s a Revenue Neutral Situation the Revenue is generating Demand Order from July 2017 onwards and it is still continue. I personally believe that  Availment of ITC under the wrong head would still lead to a revenue-neutral situation for the Government and the taxpayers would not be penalized or forced into litigation, especially when the law was in its nascent stage and the GST portal experienced multiple technical glitches. In absence of Issuance of Instructions or can say Circular this demand generated in FORM GST DRC-07 which gives only one option to File an Appeal before First Authority to the Taxpayer. That’s how it leads to Litigation and Number of Appeal has been Filled already on this issue all over the India.