Saga of availability of Electronic Credit Ledger for Pre-deposit payment for appeal Filing

1. Introduction:

Under GST law akin to Pre-GST regime, there is a requirement to pre-deposit specified percentage of tax in dispute before filing appeal with Appellate Authorities. However, the moot question which has been a bone of contention between the department & taxpayers is whether this pre-deposit is mandatorily to be paid from Electronic Cash Ledger or it can be paid from Electronic Credit Ledger (ECL). While department has sought to argue that this pre-deposit is not an “output tax” and thus could not be paid out of ECL, however taxpayers have made pre-deposit payments utilising balance available in ECL since it is a portion of tax itself.

Recently there have been cases where Appellate authorities have dismissed appeals citing default in making pre-deposit out of ECL rather than Electronic Cash Ledger. Taxpayers have approached jurisdictional High Courts and there has been a ruling from Bombay High Court which has allowed the utilisation of ECL for making pre-deposit payment taking cognizance of circular issued by Central Board of Indirect Taxes and Customs (“CBIC” or “Board”). In this article, we shall be discussing the present status post Bombay HC ruling and CBIC circular.

2. Relevant legal provisions under GST Law:

• Section 41 (2) originally provided that the credit shall be utilised only for payment of self- assessed output tax however post amendment made effective from 1st October 2022, there is no such restriction specified on utilisation of credit.
• Section 49 (4) states that the amount available in ECL may be used for making any payment towards output tax in such manner and subject to such conditions and within such time as may be prescribed.
• Section 2 (82) defines “output tax” as the tax chargeable on taxable supply of goods or services or both.
• Rule 86(2) refers to Section 49 and states that the ECL shall be debited to the extent of discharge of any liability in accordance with the provisions of section 49.
• Section 107 (6) (b) provides that no appeal shall be filed unless the appellant has paid a sum equal to ten per cent of the remaining amount of tax in dispute in relation to which the appeal has been filed.

3. Circulars/ clarifications issued by Board:

• Board through Circular No. 172/04/2022-GST dated the 6th July 2022 has clarified that any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the provisions of GST Laws, can be made by utilization of the amount available in the electronic credit ledger of a registered person.

4. Jurisprudence under GST regime:

• Orissa High Court has ruled that it is not possible to accept the plea of the Petitioner that “Output Tax”, as defined under Section 2(82) of the OGST Act could be equated to the pre-deposit required to be made in terms of Section 107 (6) of the OGST Act. Electronic Credit Ledger cannot be debited for making payment of pre-deposit at the time of filing of the appeal in terms of Section 107 (6) of the OGST Act. It is not therefore possible to accept the plea Section 107 (6) of the OGST Act is merely a “machinery provision”. (M/s. Jyoti Construction v. Deputy Commissioner of CT & GST – Orissa High Court)
• Allahabad High Court has ruled that pre-deposit has been made by the Firm before the Appellate Authority, and the Appellate Authority shall not insist the Firm to make deposit through electronic cash ledger. (M/s. Tulsi Ram and Company v. Commissioner – Allahabad High Court)
• Bombay High Court has ruled that the revenue’s contention that ITC can be utilised for payment of output tax only is misconceived because Section 107(6)(b) of the Act provides a pre-condition of payment of 10% of Tax for filing of an appeal. That tax can be IGST, CGST, SGST or UTGST. Therefore, any payment towards output tax, whether self-assessed in the return or payable because of any proceeding instituted under the GST Act can be made by utilisation of the amount available in ECL. HC also relied on the circular issued by CBIC in this regard. (Oasis Realty v. Union of India -Bombay High Court )

5. Discussion & Way forward:

Furnishing pre-deposit through cash is not desirable where the taxpayer has accumulated ITC available at its disposal. ITC is equivalent to tax paid and the rationale to not permit its usage for payment of pre-deposit for maintaining an appeal is quite unreasonable and devoid of logic. It could not be understood that when the entire payment of tax could have been made from ECL then why a part of it (10%) cannot be made from it. Legislation has clearly stated that ECL cannot be used for payment of interest, fee and penalty etc. and payment of taxes due under reverse charge.

Under pre-GST regime as well, the very question of CENVAT credit being utilised for payment of pre-deposit was contested in various cases until the CESTAT issued a circular in August 2014 clarifying that CENVAT credit can be used for payment of pre-deposit of service tax and central excise. Board has also issued a clarificatory circular on 6th July 2022 after five years of GST implementation interalia clarifying that ECL can be used for making any payment towards output tax, whether self-assessed in the return or payable as a consequence of any proceeding instituted under the provisions of GST Laws. Though the circular has not specifically talked about the pre-deposit payment however Bombay HC has interpreted that such pre-deposit payments shall also fall within it and thus can be made from ECL. This decision of Bombay HC has come as a welcome relief for all taxpayers in reducing the fund blockage in availing the appeal remedy.