Reversal of wrongly availed ITC, Goods and Services Tax - GST

[Krishna Murthy]

A Registered Person (RP) has availed ITC based on the invoices issued by his Suppliers. However, after investigation by the Department, it was found that the said ITC was wrongly claimed without supply of goods. The RP has agreed to pay the availed and utilized ITC in cash and paid the same by debiting the Electronic Cash Ledger.

The query now is, how to deal with ITC availed but not utilized. Whether the same can be reversed by debiting Electronic Credit Ledger or should the same be paid in cash by debiting Electronic Cash Ledger. Any CBIC Circular in this matter. Thanks.

Posts / Replies

[Charu Tyagi]

Such Wrongful availment of ITC has to reverse by Electronic Cash Ledger along with Interest u/s 50 of CGST Act also such wrongful availment is also punishable as per section 132 of CGST Act.

[KASTURI SETHI]

Sh. Krishna Murthy Ji,

The registered person cannot take ITC without physical receipt of goods. Section 16 of CGST Act is very much clear. ITC taken on the basis of paper transaction only is a fraud. No need for any circular. The party should deposit tax in cash along with interest and imposable penalty and opt for closure of the case without issue of SCN.

The issue of "ITC availed but not utilised" arises only if there is some technical or procedural lapse. Where goods have not been received physically, the best option is to pay all the Govt. dues in cash. By cash deposit, the party will be able to distinguish between ITC availed lawfully and ITC availed unlawfully.

There are case laws including the judgement of Supreme Court but the same are in favour of the department.

[Shilpi Jain]

I dont see any restriction in using ITC balance itself to reverse the wrongly availed ITC.

[KASTURI SETHI]

If any registered person avails ITC without physical receipt of goods i.e. on paper transactions, segregation between lawfully availed and unlawfully availed is not possible. Segregation/identification is possible only by way of cash deposit for reversal of ITC. All experts know very well. The offender also knows.

[Ganeshan Kalyani]

ITC is taken without any supply. That means the ITC taken is not lawfull. Hence, it is payable thru cash with Interest.

[Padmanathan Kollengode]

Agree with Shilpi ma'am. There is no restriction in using Electronic cash ledger whatsoever. Kindly refer to Circular 172/04/2022-GST in this regard.

1. In terms of sub – section (4) of section 49 of CGST Act, the amount available in the electronic credit ledger may be used for making any payment towards output tax under the CGST Act or the Integrated Goods and Services Tax Act, 2017 (hereinafter referred to as “IGST Act”), subject to the provisions relating to the order of utilisation of input tax credit as laid down in section 49B of the CGST Act read with rule 88A of the CGST Rules.

2. Sub-rule (2) of rule 86 of the CGST Rules provides for debiting of the electronic credit ledger to the extent of discharge of any liability in accordance with the provisions of section 49 or section 49A or section 49B of the CGST Act.

3. Further, output tax in relation to a taxable person (i.e. a person who is registered or liable to be registered under section 22 or section 24 of the CGST Act) is defined in clause (82) of section 2 of the CGST Act as the tax chargeable on taxable supply of goods or services or both but excludes tax payable on reverse charge mechanism.

4. Accordingly, it is 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.

5. It is further reiterated that as output tax does not include tax payable under reverse charge mechanism, implying thereby that the electronic credit ledger cannot be used for making payment of any tax which is payable under reverse charge mechanism.

As per sub-section (4) of section 49, the electronic credit ledger can be used for making payment of output tax only under the CGST Act or the IGST Act. It cannot be used for making payment of any interest, penalty, fees or any other amount payable under the said acts. Similarly, electronic credit ledger cannot be used for payment of erroneous refund sanctioned to the taxpayer, where such refund was sanctioned in cash.

Accordingly, electronic credit ledger cannot be used only for following:

1. Interest, penalty, fee or any other amount payable under the Act

2. RCM payable

3. payment of erroneous refund sanctioned in cash

[KASTURI SETHI]

During last month I came across such a ditto case. I was wonderstruck to know the modus operandi.

[Amit Agrawal]

Even though I was reading above posts in last few days, I am not getting convinced with my colleagues asking payment strictly through cash because of their reasoning/s behind such advice as well as with my other colleagues who are suggesting payment through ITC due to changed legal provisions w.e.f. 01.10.2022.

In other words, I am not convinced with any of these views.

Kindly allow me to explain my conundrum and I request all of you to share your thoughts thereon (Please treat this as pure academic discussion and nothing more):

A. The view which suggests payment strictly through cash (against ITC wrongly availed though not utilised) seems influenced by the fact that there is never any underlying supply and ITC so availed was unlawful / illegal. In other words, this view implies that if there was any other reason for ITC reversal (For example: a blocked credit u/s 17 (5) wrongly availed, which gets detected by Dept. during investigation) can be reversed through ITC. But, I do NOT find any “direct / explicit” legal provision backing such differentiation. In other words, "reasons behind wrongly availed ITC" (i.e. on account of non-fulfilment of conditions u/s 16 or due to blockage u/s 17 (5)) may NOT be determining factor to decide if payment there-against needs to be paid in cash or through utilising ITC balance available.

A1. Furthermore, if subject amount can NOT be called as ‘ITC’ (as there was no underlying supply & same is case of fake invoicing which is main thrust of your arguments / reasoning), there is no question of its recovery using provisions of Section 73 & 74. And if there is no such recovery possible (as credit wrongly availed or utilised), then, only recourse available to Dept. is using Section 122 (i.e. penalty) & Section 132 (i.e. punishment).

A1.1 Again, here, there can NOT be any reversal of ITC (i.e. payment of taxes against ITC wrongly availed) per se OR demand demand interest u/s 50 or penalty u/s 73 or 74.

I request my fellow professional colleagues to throw more light on this please.

B. The view which suggests payment can be made through ITC (against ITC wrongly availed though not utilised) ignores the following legal position:

i). Issues which are highlighted by in Para A1 & A1.1 above equally applies for this view. Besides, please also note the followings:

ii) Section 49 (4) reads as follows: The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions ⁶[and restrictions] and within such time as may be prescribed.

iii) Output tax in relation to a taxable person (i.e. a person who is registered or liable to be registered under section 22 or section 24 of the CGST Act) is defined in clause (82) of section 2 of the CGST Act as the tax chargeable on taxable supply of goods or services or both but excludes tax payable on reverse charge mechanism.

iv) Combined reading of above means that the 'Output tax' does NOT mean "ITC wrongly availed".

v) Sub-section (4) & (5) of Section 42 is worth noting, in the context of the discussion:

"(5) The amount in respect of which any discrepancy is communicated under sub-section (3) and which is not rectified by the supplier in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the recipient, in such manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.

(6) The amount claimed as input tax credit that is found to be in excess on account of duplication of claims shall be added to the output tax liability of the recipient in his return for the month in which the duplication is communicated."

It is worth noting that that above-said Section 42 is omitted vide Finance Act, 2022 w.e.f. 01-10-2022.

vi) Serial No. 6 & 7 under Para 2 of Circular 172/04/2022-GST specifically talks about 'Output liability' and, same has NEVER dealt with 'ITC Reversal' per se.

vii) Amended Section 39 (9) w.e.f. 01.10.2022 read as follows:

¹¹[Where] any registered person after furnishing a return under sub-section (1) or sub-section (2) or sub-section (3) or sub-section (4) or sub-section (5) discovers any omission or incorrect particulars therein, other than as a result of scrutiny, audit, inspection or enforcement activity by the tax authorities, he shall rectify such omission or incorrect particulars ⁵[in such form and manner as may be perscribed], subject to payment of interest under this Act:

Provided that no such rectification of any omission or incorrect particulars shall be allowed after ¹²[the thirtieth day of November] following ⁶[the end of the financial year to which such details pertain], or the actual date of furnishing of relevant annual return, whichever is earlier."

viii) Thus, if Dept. detects wrongly availed ITC, then, said Section 39 (9) does NOT even permit correction thereof in subsequent monthly returns (i.e. even if time limit prescribed therein is still available). And issue under discussion here - requiring reversal / payment against wrongly availed ITC - is arising out of investigation carried by Dept.

ix) Prior to 01.10.2022, Section 38 (5) was reading as follows:

(5) Any registered person, who has furnished the details under sub-section (2) for any tax period and which have remained unmatched under section 42 or section 43, shall, upon discovery of any error or omission therein, rectify such error or omission in the tax period during which such error or omission is noticed in such manner as may be prescribed, and shall pay the tax and interest, if any, in case there is a short payment of tax on account of such error or omission, in the return to be furnished for such tax period:

Provided that no rectification of error or omission in respect of the details furnished under sub-section (2) shall be allowed after furnishing of the return under section 39 for the month of September following the end of the financial year to which such details pertain, or furnishing of the relevant annual return, whichever is earlier."

x) Summarising above, I am finding it difficult to accept the view that reversal is possible through / by utilising the balance available in ITC in the scenario under discussion here post 01.10.2022.

I request my fellow professional colleagues to throw more light on this please.

P.S. As said at the start, it is again requested to please treat all this as pure academic discussion/s and nothing more.

[Padmanathan Kollengode]

 Learned friend Amit Ji,

Kindly factor in section 73(8) as well, which reads as under:

(8) Where any person chargeable with tax under sub-section (1) or sub-section (3) pays the said tax along with interest payable under section 50 within thirty days of issue of show cause notice, no penalty shall be payable and all proceedings in respect of the said notice shall be deemed to be

Rule 142

(3) Where the person chargeable with tax makes payment of tax and interest under sub-section (8) of section 73 or, as the case may be, tax, interest and penalty under sub-section (8) of section 74 within thirty days of the service of a notice under sub-rule (1), or where the person concerned makes payment of the amount referred to in sub-section (1) of Section 129 within seven days of the notice issued under sub-section (3) of Section 129 but before the issuance of order under the said sub-section (3), he shall intimate the proper officer of such payment in FORM GST DRC-03 and the proper officer shall issue an order in FORM GST DRC-05 concluding the proceedings in respect of the said notice.

section 73(8) read with Rule 142(3) only says "payment of tax" - It neither says payment of output tax nor reversal of input tax credit. ie, Though SCN maybe issued for short/non payment of output tax, wrong availment or utilisation of ITC, it takes the colour of "payment of tax".

however, interesting to note that Section 49(4) reads as :-

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions and within such time as may be prescribed.

This provision maybe drafted with section 42 in mind as it provides for excess input tax credit availed to be added to Output tax liability.

however, as you rightly pointed out in your earlier post, section 42 has been omitted but probably the consequential amendments may not be brought about in other provisions yet.

As you are aware, these delays in amendments are not something new in GST Law.

Maybe the GST Council and Legislature will iron out the creases in the coming days.

But it would be a too technical view to deny debit of Electronic credit ledger for reversal of wrongly availed ITC remaining unutilized.

[KASTURI SETHI]

Sh.Padmanathan Kollengode Ji,

Just for academic purposes/interest

What will be the scenario if there is a question mark on the genuineness of debit/credit entries in the bank accounts of supplier and purchaser ? Explore this possibility also for arriving at fool proof reply to any query on this count.

.

[Amit Agrawal]

Thank you, Shri Padmanathan Kollengode Ji for sharing your perspective on issues raised in my earlier posts. Appreciate your efforts!

[Padmanathan Kollengode]

Kasturi Ji,

I am not sure how genuineness of entries in Bank Account has a bearing here. Let me explain-

Our current discussion is with regard to wrongly availed ITC balance (whether genuine or not) in the electronic credit ledger which is remaining unutilized.

To the best of my knowledge the genuineness of entry in bank account will have open up on proceedings under 74 and penalty u/s 122, 132 etc.

But the issue under consideration in this query is much more fundamental than that I believe

[Padmanathan Kollengode]

Ld friend Amit ji

Also think on this line -

(4) The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and restrictions and within such time as may be prescribed.

The words used is "May be used"

It is neither :-

A. may only be used; nor

B. Shall be used

Therefore, while the right to use any amount available in electronic credit ledger for reversal of input tax is "inherent", the right to use any amount available in electronic credit ledger for payment of output tax is explicitly provided in the Act.

[Rohit Mathew]

Please clarify my doubt.

In case of a builder who is taxed at 5% without itc, should the ITC be first availed and then reversed under others or file 3B without availing ITC with no need of reversing the ITC ? I hope my query is clear enough.

[KASTURI SETHI]

If ineligible ITC is auto populated in GSTR 3B, first reverse it then file GSTR 3B return.

[Rohit Mathew]

Thank you sir.

Then what about ITC already availed but not utilised for builders for whom ITC is not allowed ? Can they be reversed only by paying cash ?

[Rohit Mathew]

And is it a problem maintaining ITC is credit ledger without utilising it ?

[KASTURI SETHI]

Answer to query at seral no.16 is 'YES'. In the case of one of my clients I deposited in cash and got rid of the problem for ever. The amount was meagre.

[KASTURI SETHI]

W.r.t. query at serial no.17, when the amount is paid in cash, there is no problem at all. Then do not bother about the difference, especially, when there is no loss of revenue to Govt.

[Padmanathan Kollengode]

Pls find the extract of Column 5 of Notification 3/2019-CT(R) dated 29-3-2019 below:

Provided that the central tax at the rate specified in column (4) shall be paid in cash, that is, by debiting the electronic cash ledger only;

Provided also that credit of input tax charged on goods and services used in supplying the service has not been taken except to the extent as prescribed in Annexure I in the case of REP other than RREP and in Annexure II in the case of RREP;

Provided also that the registered person shall pay, by debit in the electronic credit ledger or electronic cash ledger, an amount equivalent to the input tax credit attributable to construction in a project, time of supply of which is on or after 1^stApril, 2019, which shall be calculated in the manner as prescribed in the Annexure I in the case of REP other than RREP and in Annexure II in the case of RREP;

....

Explanation. -

.....

3. Input Tax Credit not availed shall be reported every month by reporting the same as ineligible credit in GSTR-3B [Row No. 4 (D)(2)].

Regarding query -

1. In case of a builder who is taxed at 5% without itc, should the ITC be first availed and then reversed under others or file 3B without availing ITC with no need of reversing the ITC ? I hope my query is clear enough.

Earlier, ITC was not required to be taken in GSTR-3B at all and only required to be declared in Table 4D2.

Now If one is following new clarification, one can declare in 4A5 and reverse in 4B1 as well. (PS- I am going into the validity of the said clarification)

2. Then what about ITC already availed but not utilised for builders for whom ITC is not allowed ? Can they be reversed only by paying cash ?

ITC already availed has to be reversed as per Annexure I or II of the Notification depending on whether it is REP or RREP. The notification is also clear that ITC reversal shall be made by debited credit ledger or cash ledger.

Therefore in case of ITC availed and not utilized (ie remaining in credit ledger), it can be reversed by debiting the credit ledger. ITC already utilized has to be now reversed using cash ledger.