What if credit (ITC) is availed/claimed under wrong head?

Summary: Since the introduction of GST in India in July 2017, many taxpayers have faced challenges, including errors in claiming Input Tax Credit (ITC). One common issue is the incorrect availment of ITC under the wrong head, such as claiming CGST and SGST instead of IGST or vice versa. The relevant provisions of the CGST Act specify that ITC must be claimed based on whether the supply is intra-state or inter-state. When incorrect claims are identified, tax authorities often seek to reverse the ITC with interest penalties. However, the principle of revenue neutrality suggests that if no actual revenue loss to the government occurs, reversing the ITC might be unnecessary. Several court rulings support the rectification of ITC claims, such as those from the Kerala and Madras High Courts, which allowed taxpayers to amend their returns to reflect the correct head of ITC. The author concludes that while officers may demand reversal, it is crucial to assess the specifics of each case, considering judicial precedents and the principle of revenue neutrality, to determine if a reversal is warranted.

Introduction:

GST was introduced in India for the first time in July 2017. The concept of dual levy was also introduced for the 1^st time where the Centre and the State would charge tax simultaneously in the form of CGST and SGST respectively in case of intra-state supplies. Similarly, the concept of charging IGST was also introduced for inter-state supplies. However, because the GST law was new, in the initial years of GST, a lot of mistakes were made by the assessee’s while filing returns, issuing invoice, claiming ITC, etc. without any intention to defraud the government. Recently, after 7 long years of implementation of GST, the government came up with an amnesty scheme for some of such mistakes which were committed in the initial 3 years. However, one such mistake, which is not part of the 53^rd GST Council recommendation is availment of ITC in the wrong head i.e., availment of CGST and SGST instead of IGST and vice versa. The author has tried to examine this issue and the possible though process while dealing with such issue, in this article.

Meaning of Inter-state and Intra-state

Though this is a very basic topic, it is important to understand by way of a simple table before we proceed further:

Provision:

Section 16 and Section 17 of the CGST Act read with relevant CGST Rules provides for eligibility, conditions and restrictions for the purpose of availment of ITC. The same provisions would equally be applicable under the IGST Act by virtue of section 20 of the CGST Act.

Provisions of CGST Act and respective State/Union Territory GST A/c to be referred and complied with where credit involved is in relation an intra-state supply. Similarly, provisions of IGST Act to be complied with where credit involved is in relation an inter-state supply.

Consequently, as per the provisions of law, credit of CGST and SGST/UTGST to be availed on intra-state supplies and credit of IGST to be availed on inter-state supplies.

Issue:

Because of various reasons, in the initial years of implementation of GST, credit in relation to intra-state supply was availed as inter-state supply and vice-versa i.e., credit of IGST was availed as CGST and SGST and vice-versa. Because of this, the officers have been denying the ITC and seeking reversal of ITC along with applicable interest. Further, because the time limit for availment of ITC has already lapsed in terms of Section 16(4) of the CGST Act, the taxpayer would not have been able to avail the correct ITC. This resulted in the following two costs to the taxpayer

• Denial of benefit of ITC
• Interest implication as the ITC would have been utilized for payment of GST.

Analysis:

On plain reading of the provisions of the GST law, input tax credit means the credit of CGST, SGST, IGST or UTGST charged on any supply of goods or services or both made to him and includes IGST paid on imports and GST paid under RCM. Therefore, if CGST and SGST has been charged by the supplier, then such CGST and SGST charged by the supplier would be the input tax credit and the same need to be availed in the GST return.

What if IGST is availed instead of CGST and SGST?

If IGST is availed where CGST and SGST has been charged by the supplier, then technically, IGST has not been charged by the supplier and hence there is no input tax credit of IGST available to the recipient. However, if we see at the overall ITC i.e., cumulatively, no excess credit would have been availed and there is no revenue loss to the government. The concept of revenue neutrality can be of rescue in such scenario.

What is revenue neutrality?

The concept of revenue neutrality is there in taxation matters especially in indirect taxes in which the Revenue does not lose or gain in any proceedings caused against an assessee. The situation that amounts to revenue neutrality is not provided anywhere in the Act or in the rules made there under nor there is any clarification in this regard.

The doctrine of revenue neutrality found acceptance in the following judgements under the erstwhile regimes:

• The Hon’ble Supreme Court in the case of Commissioner of Customs & Excise Textile Corporation, reported in 2008 (231) E.L.T. 195 (S.C.) held that Revenue did not file any appeal and accepted the decision and in our view rightly so. Admittedly, assessee has paid duty at the final stage. If assessee has to pay the excise duty at each and every stage of manufacturing, it would be entitled to Modvat credit and the whole exercise would be revenue neutral.
• The Hon’ble Supreme Court in the case of Star Industries Commissioner of Customs, reported in 2015 (324) E.L.T. 656 (S.C.). It was submitted by the Learned Counsel for the assessee that the entire exercise is Revenue neutral because of the reason that the assessee would, in any case, get Cenvat credit of the duty paid. If that is so, this argument in the instant case rather goes against the assessee. Since the assessee is in appeal and if the exercise is Revenue neutral, then there was no need even to file the appeal. Be that as it may, if that is so, it is always open to the assessee to claim such a credit.

There have been numerous cases under the erstwhile regime where it was the concept of revenue neutrality was upheld however there have also been cases where this concept was not accepted by the courts and hence revenue neutrality may be one of the grounds while disputing the issue of ITC claimed under different head.

Coming to the issue under examination, the following cases may be relevant:

• In the case of Divya S.R. [2024 (81) G.S.T.L. 454 (Ker.)] and Chukkath Krishnan Praveen [2024 (80) G.S.T.L. 241 (Ker.)], Kerala High Court had directed the authorities to consider the rectification application where the assessee wrongly claimed IGST credit under CGST and SGST and to pass necessary orders.
• In the case of Kondamma Trading [2024 (80) G.S.T.L. 248 (Mad.)], the Madras High Court held that Assessee should file a rectification application under section 161 where assessee had availed IGST instead of CGST and SGST on basis of invoices issued by their suppliers.

In the above cases, the high court has allowed rectification of return and allowed the assessee to claim the ITC in the correct head.

Conclusion

In case of issue of ITC claimed under wrong head, the department officer would surely seek reversal of ITC along with interest or penalty, however, the above principles and judgements could be examined before making a decision. Where there is no real loss to the government, then in the view of the author, there should not be any requirement to reverse such ITC.

In case of any clarifications/doubts, the author may be reached at [email protected].