Cross-Utilisation of ITC under GST: Can Technical Credit Sequencing Trigger Interest Liability?

The issue of cross-utilisation of Input Tax Credit (ITC) has become a bone of contention in the emerging GST adjudication proceedings. The issue is more pronounced when CGST credit is utilised to discharge IGST liability. Consequently, in some proceedings, such utilisation was treated as irregular, and hence, it resulted in the imposition of the liability of interest and penalty in the proceedings. This eventually culminated in a vital interpretational issue within the GST framework: when there exists a valid tax credit, can its utilisation under a distinct tax head invoke and justify the liability of interest or penalty?

The same can be answered by keeping in view the entire statutory scheme governing the Electronic CreditLedger (ECL) and the proper sequencing rules as prescribed under the CGST Act and Rules.

Statutory Scheme for Utilisation of Credit

The utilisation of ITC is governed primarily by Sections 49(4) and 49(5) of the CGST Act, read with Rule 88A of the CGST Rules. These provisions encapsulate the order in which the credit may be discharged under the different tax heads-IGST, CGST and SGST, to discharge output tax liabilities.

Section 49(5) of the CGST Act establishes the statutory sequence as follows:

• IGST credit must first be utilised towards the payment of IGST liability, and thereafter towards the payment of CGST, SGST or UTGST.
• CGST credit must be utilised for the payment of CGST liability and thereafter for IGST, but not for SGST.
• SGST credit must be utilised for the payment of SGST liability and thereafter for IGST, but not for CGST.
• UTGST credit must be utilised for the payment of UTGST liability and thereafter for payment of IGST, provided that the ITC on account of UTGST must be utilised for the payment of IGST, only where the balance of the ITC on account of CGST is not available for the payment of IGST.

Rule 88 A of the CGST Rules adds a dimension of additional flexibility by permitting the utilisation of IGST credit towards CGST or SGST liabilities in any order, subject to the principles of sequencing as envisaged under Section 49 (5). These provisions essentially substantiate that these tax credits are not treated as isolated compartments under the GST system. On the contrary, the ECL functions in an integrated manner for discharging tax liability, subject solely to the condition that the sequencing requirements should be adhered to as per law.

The dilemma of Cross-Utilisation of Credits

The controversy erupts when the authorities view this cross-utilisation of credit (for instance, discharging IGST liability by CGST credit) as violative and demand interest or subsequent payments. However, it can be demanded only if some conditions are fulfilled. The Authority must establish at least one of the following:

1. Wrongful availment of credit, meaning thereby, the credit itself was legally inadmissible;
2. Violation of statutory sequencing rules as laid down under Section 49(5); or
3. When there is an actual deprivation of revenue to the Government.

In the absence of these elements, cross-utilisation of otherwise valid credit cannot automatically be treated as unlawful. It is important to differentiate the thin line of difference existing between wrongful availment of credit and irregular utilisation of the valid credit. The very legal character of the credit and its entitlement to claim are questioned for wrongful availment. Cross-utilisation concerns itself with the manner in which legitimately available credit is used to discharge tax liability. This distinction is significant as distinct consequences ensue under the GST law for both cases.

Embracing the Unified Character of the Electronic Credit Ledger

A reference to the CBIC Circular No. 192/04/2023-GST dated 17.07.2023 elaborates that the GST framework conceptualises the ECL as a pool of tax credits available for the tax payment, rather than considering it as a rigid, segregated amount. The Board had explained the particular manner for the determination of interest in cases involving alleged wrongful utilisation of credit. It clarified that the total available balance in the ECL under all heads-IGST, CGST and SGST must be considered cumulatively while determining utilisation and interest liability.

The circular mirrors the ECL with a single wallet with various compartments, where the litmus test is to determine whether the aggregate balance dropped below the amount of credit allegedly wrongly utilised. If the total balance of the ECL never dropped below that level, then it would be incorrect to state that the credit was utilised improperly. This acts as an aid for the interpretation by narrowing the scope for treating the head-wise adjustments as wrongful utilisation.

Judicial Approach to Technical Credit Adjustments

At this juncture, it is important to place reliance on judicial pronouncements and understand their stance on this contentious issue.

The Hon’ble Kerala High Court in Rejimon Padickapparambil Alex v. Union of India 2024 TAXSCAN (HC) 2347 dealt with a situation where IGST credit had been inadvertently reflected under CGST and SGST heads. The department treated this as wrongful availment of credit and initiated recovery proceedings.

The Hon’ble High Court endorsed the wallet analogy as provided under the Circular, thus explaining that the liability of the interest payment arises only in the case where the accumulated balance of the ECL drops below the amount of disputed credit during the relevant period. Further, the Court emphasised the holistic assessment of the credit utilisation rather than paving the way for the mechanical compartmentalisation. This view upheld the integrated pool of funds rather than segregated compartments.

Practical Implication for Businesses

The view taken by the Hon’ble Kerala High Court is appreciated because if the technical deviations are covered under the umbrella of substantive violations, then the same would result in businesses facing cash flow pressures, increased compliance burdens and potential litigation risks. The companies maintain sufficient credit balances within the ECL, and requiring reversal or payment through cash ledgers merely due to sequencing issues can result in blocking working capital. Furthermore, treating the cross-utilisation of credit as a penal issue rather than a procedural issue would be against the principles of GST, of facilitating seamless credit flow and would adversely affect the ease of doing business.

This controversy of cross-utilisation reflects a broader interpretational challenge within the GST regime. Taking into consideration the statutory rules for the credit utilisation, the legislative design also treats the ECL as an integrated pool for discharging tax liability. Further, after referring to various administrative clarifications and judicial pronouncements, it can be inferred that the adjustment of head-wise tax of valid credit should not automatically trigger interest or penalty where there is no revenue loss. The test is not whether credit was utilised under a different head, but it is whether such utilisation triggered wrongful availment, violation of statutory sequencing, or caused actual deprivation of revenue to the exchequer.

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