Hidden Danger in GSTR-3B: Portal Glitch Could Trigger ITC Notices

For Indian businesses, the Goods and Services Tax (GST) isn’t just a monthly formality—it’s part of your financial routine. And at the center of GST compliance lies something deceptively simple: the correct use of Input Tax Credit (ITC).

Now, here’s the problem. Even though the law is clear on how you must use ITC, a glitch on the GST portal has created a potentially dangerous trap for taxpayers. One that’s easy to fall into—and costly to fix.

This article explains what’s going wrong on the portal, why it matters, and how to protect yourself.

What’s Going Wrong on the GST Portal

Recently, while filing GSTR-3B (Table 6.1), some taxpayers noticed that the GST portal is allowing manual ITC entries that violate the legally mandated order of utilization. Specifically, it’s letting users apply CGST or SGST ITC against IGST liabilities—even before settling their own respective CGST or SGST dues.

Even more concerning, the portal then generates a challan based on this incorrect ITC usage, without showing any immediate error or warning. This creates a false sense of compliance.

While this glitch may not strike every taxpayer, its very existence is a stark reminder: we simply cannot blindly trust the system’s suggested utilization. This particular anomaly has been notably observed during the July 2025 GSTR-3B return filing period, making it a timely concern for many businesses. While no official GSTN communication has acknowledged this issue, multiple professionals have reported such behaviour during real-time filing.

While several sources mention error messages for incorrect cross-utilization, such as “Please offset the CGST credit first before cross utilising SGST credit against IGST tax liability”, the observed problem is that this error does not occur immediately upon manual entry or before challan generation. Instead, the system accepts the entry and proceeds to generate a challan, which is the core of the “trap.” This implies a critical flaw in the real-time validation at the data entry stage. The actual error might only manifest at a later, irreversible stage, such as during the final Electronic Verification Code (EVC) or Digital Signature Certificate (DSC) filing.

You may assume that everything is fine, only to face an error at the final submission stage or worse, successfully file the return and later receive a notice for misutilization of ITC.

What the GST Law Says About ITC Utilization

Under Section 49(5) of the CGST Act, 2017, and Rule 88A of the CGST Rules, 2017, there’s a strict, legally enforceable order for utilizing Input Tax Credit (ITC). While Rule 88A provides flexibility in utilizing IGST credit across CGST and SGST/UTGST liabilities in any order, this flexibility only applies after IGST liability has been fully cleared. Rule 88A supplements—but does not override—the hierarchy in Section 49(5).

Here’s a simplified breakdown of how ITC must be utilized:

This table serves as your statutory compass. Any deviation from this order—regardless of what the portal permits—could expose you to compliance risks, penalties, and interest.

A Quick Historical Note

Sections 49A and 49B came into effect from 1 February 2019, and Rule 88A was notified via Notification No. 16/2019-Central Tax on 29 March 2019, effective 1 April 2019. Before July 2019, taxpayers followed a rigid structure (especially during the Feb–June 2019 period). Rule 88A introduced some flexibility mainly in how IGST balance could be used after IGST dues were paid. However, this did not alter the primary condition: your own liabilities must be cleared with their corresponding ITC types before using them crosswise.

In the past, certain advisories or system limitations may have indirectly encouraged users to go with what the portal allowed during transitions. That’s part of why many taxpayers now rely on what “works” on the portal rather than what the law demands.

How the Glitch Plays Out

Example: Legal vs Glitched ITC Set-Off

Let’s say your business has the following tax position:

Tax liabilities:

IGST: ₹1,00,000

CGST: ₹25,000

SGST: ₹25,000

Available Input Tax Credit:

IGST ITC: ₹15,000

CGST ITC: ₹25,000

SGST ITC: ₹25,000

According to the law, here’s what you must do:

Use the ₹15,000 IGST ITC for IGST liability, leaving ₹85,000 to pay in cash.

Use ₹25,000 CGST ITC to pay CGST dues.

Use ₹25,000 SGST ITC to pay SGST dues.

But here’s what the portal may wrongly allow:

You apply CGST ITC to pay a portion of IGST liability before clearing CGST dues. The portal accepts it, generates a challan, and you proceed. Only at final submission (or worse, after filing), you face an error or a compliance issue.

Why This Is a Design Flaw

The danger lies in how the portal is built. It appears to have a soft validation when you enter the ITC details—meaning it doesn’t immediately block incorrect usage. It then proceeds to generate the challan without raising an issue. Only at the final submission stage (when you use EVC or DSC) might it throw an error—or it might not at all, letting you file incorrectly.

This inconsistency leads taxpayers into thinking their return is in order when it isn’t. And that’s where the risk starts.

The Real Cost of Non-Compliance: Why Misusing ITC Is Never Worth the Risk

Incorrect ITC utilization—even if due to a portal glitch—can lead to serious consequences.

Demand Notices: Under Section 73 (non-fraud cases), penalties can reach 10% of tax due but escalate to 100% under Section 74 if errors are seen as deliberate. If repeated or left uncorrected, even a system-induced mistake may be treated as wilful misstatement.

Interest Liability: Interest at 18% per annum applies from the due date until the correct payment is made. There’s legal debate on whether this should be calculated per tax head (CGST, SGST, IGST) or across the total ITC pool—departments often apply the stricter, ledger-wise method.

Penalties and Prosecution: Penalties under Section 122 can equal the tax involved, and Section 132 allows for prosecution in severe or repeated cases. Even consultants or advisors can face penalties if they assist in incorrect claims, as seen in recent high-value fake ITC cases.

Filing Delays and Late Fees: Errors caused by the portal can block return submission at the EVC/DSC stage, resulting in late fees and compliance delays—despite the taxpayer having paid the amount prompted by the system.

Bottom Line: A system error doesn’t protect you from legal consequences. Correct ITC utilization according to the law—not what the portal allows—is the only safe path.

Your Shield Against Errors: Law First, Portal Second

The GST portal may accept incorrect ITC setoffs and generate challans—but this does not make them legally valid. If your GSTR-3B reflects a non-compliant ITC utilization, you remain liable, regardless of system behaviour.

Here’s how to stay protected:

• Know the Law: Understand Section 49(5) of the CGST Act and Rule 88A. This legal framework—not the portal—is your guide.
• Follow the Utilization Order Strictly: Use IGST credit first. Then apply CGST and SGST only to their respective liabilities. Never cross them.
• Calculate Manually: Don’t rely on portal auto-fills. Independently compute your liabilities and apply credits as per law before entering values in Table 6.1.
• Document Discrepancies: If the portal accepts an incorrect entry or generates a misleading challan, take clear screenshots of your liabilities, ITC balances, and the set-off allowed. This may help if questioned later.
• Correct Mistakes with PMT-09:If you paid into the wrong tax head, use Form PMT-09 to reallocate funds within your electronic cash ledger—provided the funds haven’t been used to offset liabilities yet.

 Note: PMT-09 cannot reverse funds that have already been used to offset liabilities—it only works for unutilized balances in the cash ledger.

• Consult Experts: When in doubt, talk to a qualified GST professional to avoid risks.
• Report the Glitch: Lodge a grievance on the GST portal describing the error clearly and attaching evidence. This helps GSTN identify and fix system flaws.

What If You’ve Already Filed Incorrectly?

If you’ve already submitted a return using the incorrect ITC set-off due to this glitch, don’t panic—but act quickly.

• Consult your tax advisor to evaluate your options. If you voluntarily pay the tax and interest before receiving a notice, you may avoid penalties under Section 73(5).
• Check whether voluntary correction in a future period is feasible.
• Document everything: screenshots, challan references, and portal errors (if any).
• If you receive a notice under Section 73 or 74, respond promptly and with legal support.

Staying proactive is the best way to minimize potential penalties or interest.

A single lapse can snowball into legal and financial trouble, especially if it affects multiple periods or goes undetected.

Key Takeaway: Follow the Law, Not the System

The most important message is simple: never rely solely on what the portal lets you do. Always cross-check your ITC set-off against the statutory rules.

If you’re unsure, consult your tax advisor or refer to the original provisions of Section 49(5) and Rule 88A. Being informed is your best defence.

Before you file GSTR-3B, double-check the following:

• Make sure your IGST liability is fully paid using IGST credit first.
• Use CGST credit only for CGST dues. If any CGST credit is left, you can use it for IGST—but never for SGST.
• Use SGST or UTGST credit only for SGST/UTGST dues. If there’s any balance, you can apply it to IGST—but not to CGST.
• Don’t rely on what the portal allows. Cross-check your ITC application manually or with your tax consultant.

Conclusion

While GST technology has come a long way, it still isn’t perfect. And when a technical flaw creates a legal risk, it’s the taxpayer—not the system—who pays the price.

If you’ve experienced this issue, make sure to document it thoroughly and consult your GST advisor before proceeding. Awareness and proactive compliance are your best safeguards.

So, stay cautious. Never file a return that breaks the rules, even if the system lets it slide. Because when it comes to GST, “the portal let me do it” is not a valid defence.

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Disclaimer: The views expressed in this article are my personal interpretation of the applicable GST laws as of the date of publication. This content is intended solely for informational and educational purposes and should not be considered professional or legal advice. While I have made every effort to ensure accuracy, GST laws and portal behaviour may evolve, and interpretations can vary. Readers are encouraged to consult a qualified tax professional before making any decisions based on this article.