Whether erroneous excess grant of refund can be paid by debiting electronic credit ledger under CGST act 2017

1. Section 54(3) provides for grant of refund of any unutilised ITC in case of where  the credit has accumulated on account of rate of tax on input being higher than rate  of on output supplies. While making an application for refund eligible amount of refund is required to be determined on the basis of formula prescribed in rule 89. Sometimes excess refund was  claimed and granted due to  mistake in determination of  amount eligible refund  while application of formula prescribed under rule 89.  In such situation Proper Officer initiate proceeding under section 73/74 of the act to demand and recover amount of  erroneous excess grant of refund along with applicable interest u/s 50 and penalty. In this background following issue is discussed in this article.

“Whether  amount of excess refund (due to mistake in determining amount of eligible refund as per formula prescribed in rule 89) granted by proper officer u/s 54(3) of GST act   for which  demand  created by Proper officer  by passing order u/s 73 or 74 of the act  can be paid to the Government by debiting electronic credit ledger ? “

2. In order to understand impugned issue it necessary to analyse relevant provisions of act and rule and same are reproduced hereunder for ready reference.

3. Relevant provisions of CGST act rules.

Section 49 of CGST act.

Section 41 (2) of CGST act.

Subsection 82 of section 2.

Rule 85 of CGST rules.

Rule 86 of CGST rules.

4. Section 49 of the act provides mechanism for payment of tax, interest, penalty fee and other amount payable under the act. Section 49(2) states that self assessed ITC as per return shall  be credited to the electronic credit ledger in accordance with the provisions of section 41(1) of the act.

5. Section 41 (2) existing before substitution by Finance act 2022 states  that every registered person is entitled to take credit  of eligible  self assessed ITC  subject to prescribed conditions and restrictions. Such credits shall  be utilized only for payments of self assessed output tax.

6. Section 49(3) speaks about  utilization of electronic cash ledger. As per this subsection amount available in cash ledger may be used for making any payment toward tax, interest, penalty or any amount payable under the act. There is no restriction on use of balance in the electronic cash ledger.

7. Subsection 4 of section 49 of the act deals with utilisation of balance available in the electronic credit ledger. Accordingly, said ledger may be  used only for any payment toward output tax payable under the act, subject to prescribed  restriction and conditions.

8. Rule 85 deals with maintenance of electronic liability register. Rule 85 (3) provides that subject to provision of section 49, 49A and 49B payment of every liability by R P as per return shall be made by debiting electronic credit ledger or electronic cash ledger and electronic liability register be credited accordingly. The registered person has option to pay liability as per return by debiting  any ledger but subject to provision of section 49. However, it is pertinent to note that section 49(4) permit  to debit electronic credit ledger for payment of output tax only.

9. As per rule 85(4) any  amount  payable under the act may be paid by debiting electronic cash ledger. As such there is no restriction on utilisation of said cash ledger. On the contrary electronic credit ledger may be utilised only for payment of output tax.

10. Under rule 86 electronic credit ledger has been prescribed in formGST-PMT-02 and manner of utilisation of said ledger. As per rule 86(2) electronic credit ledger shall be debited for discharge of liability as per section 49 of the act. And section 49 (4) permit to debit said ledger for payment of out put tax only.

11. Definition of output tax has prescribed in section 2 (82) of the act. Accordingly, output tax means tax chargeable under the act on taxable supply of goods or service excluding tax payable on reverse charge basis.

12. Co joint reading of all aforesaid provisions of the act and rule, it is clear that the registered person is eligible to utilise electronic credit ledger for making payment of only self assessed output tax as per return. He is  not allowed to use said ledger for making payment of any other liability except output tax. In this background it is necessary to examine whether amount of excess grant of refund  is output tax within meaning of section 2 (82) of the act.

Whether erroneous excess grant of refund can be paid by debiting electronic credit ledger

13. The registered person has claimed and granted refund of unutilised ITC under section 54 (3) under inverted tax structure. It is further seen that excess refund was granted due to mistake in determination of  amount eligible refund , while application of formula prescribed under rule 89. It is  seen that refund was pertaining to unutilised ITC. Thus , it can be said erroneous grant of excess refund has inextricable  link  with amount of self assessed ITC and which is lying in the electronic credit ledger in the nature of balance. Thus, impugned excess grant of refund  is pertaining to inward supply and not outward supply. In other words it can be said that impugned amount of excess grant of refund is not output tax within meaning of section 2 (82) of the act.

14. The proper officer may initiate proceeding under section 73 of the act for demand and recovery of erroneous grant of refund. Since said amount has no nexus with output tax it is not permissible to pay such amount by debiting electronic credit ledger and therefore required to pay it by debiting electronic cash ledger.

15. In the case of M/s Jyoti Construction (W P NO 23508 OF 2021) petitioner has made payment of pre-deposit u/s 107(6) of the CGST act by debiting electronic credit ledger instead of electronic cash ledger and the appellate authority has rejected the appeal being defective. According to him payment of such amount was required to be made by debiting electronic cash ledger. The appellant challenged the decision by filing writ petition in High Court of Orrisa Cuttack. Hon High court has held that no error had been committed by the appellate authority in rejecting petitioners contention that electronic credit ledger could be debited for the purpose of making pre-deposit . Relevant observation  made in para 14 are as under. Copy enclosed.

16. Para 14- It is not possible to accept the plea of the petitioner that “ output tax “ as defined under section 2(82) of the act could be equated with the pre-deposit required to be made in term of section 107(6) of the act. Further, as rightly pointed out by Mr Mishra learned ASC , the provisions of section 41 (2) of the act limit the usage to which the electronic credit ledger could be utilised. It can not be debited for making payments of pre-deposit at time of filing of appeal in term of section 107(6)  of the act

17. In view of aforesaid discussion in my opinion such demand of amount of erroneous excess grant of refund , interest and penalty applicable thereon under section 73 of the act  require to pay in cash by debiting electronic cash ledger instead of electronic credit ledger.

M M Kanadje Author can be reached via email at [email protected]

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