Article on Leveraging the Electronic Credit Ledger for Pre-Deposits in GST Appeals

Leveraging the Electronic Credit Ledger for Pre-Deposits in GST Appeals

When a person receives an order or demand, or feels aggrieved by a decision, they have the right to appeal. However, before taking this step, it's important to note that a pre-deposit is required for filing an appeal before the appellate authorities under Section 107 of the GST law. Under the GST framework, there are two primary modes of payment: the ‘Electronic Cash Ledger’ and the ‘Electronic Credit Ledger’. Despite this clarity, confusion often arises regarding how to make the pre-deposit. A critical question remains: Can this payment be made using the balance in the Electronic Credit Ledger?

In today’s article, we will delve into this topic in detail, exploring the nuances and clarifying the options available for making the pre-deposit.

The Requirement for Pre-Deposit

To file a First Appeal before the Appellate Authority under Section 107 of the CGST Act, the appellant must make a pre-deposit of a specified percentage. The relevant provision states:

“No appeal shall be filed under sub-section (1), unless the appellant has paid —

(a) in full, such part of the amount of tax, interest, fine, fee and penalty arising from the impugned order, as is admitted by him; and

(b) a sum equal to ten per cent of the remaining amount of tax in dispute arising from the said order, subject to a maximum of twenty-five crore rupees, in relation to which the appeal has been filed:

In simple terms, Section 107(6) stipulates that an appeal will only be considered when the appellant has paid a sum equal to ten percent of the remaining tax in dispute.

The Position Under Erstwhile Tax Regime

This issue dates back to the original MODVAT credit system. Just as we have the Electronic Cash Ledger and Credit Ledger today, there was a Personal Ledger Account (PLA) and RG-23 Part-II for credit then. The question arose whether the pre-deposit for an appeal could be made from the credit register.

In the case of Haryana State Electricity Board V Collector of C. Ex., New Delhi [1994(07)LCX0064], the CEGAT allowed the applicant's prayer for payment of pre-deposit by debit in RG 23 Part II. The Tribunal held that the amount may be paid either by debit or by PLA or by cash.

Similarly, in Jhalani Tools (I) Ltd. V Commissioner of Central Excise, New Delhi [1997(05)LCX0021], the Tribunal held that the appellants will be at liberty to pay the pre-deposit by adjustment in PLA/RG 23 Part II.

In Manak Moti Forgings Pvt Ltd Vs Commissioner of Central Excise, Aurangabad [2010(10)LCX0140], the Tribunal observed, that "we are of the view that pre-deposit of the duty amount by way of debit in MODVAT account can be accepted as sufficient compliance with Section 35F and, therefore, the assessee need not be called upon to make any payment towards penalty through TR-6 challan.”

Further clarification came from the CESTAT registry in Circular F. No. 15/CESTAT/General/2013-14, dated August 28, 2014, which stated that if the mandatory deposit is made from the CENVAT account, the appeal would be registered.

The Gujarat High Court in the case of Cadila Health Care Pvt Ltd vs Union of India [2018(06)LCX0120] held that "Pre-deposit made by the petitioners by availing cenvat credit shall be accepted for the purpose of section 35F of the Central Excise Act."

The Position Under GST Law

Under GST, Section 49(4) of the CGST Act, the key provision governing the utilization of the balance in the electronic credit ledger, allows such balances to be used for any payment towards ‘output tax.’ While this provision permits the taxpayer to use the electronic credit ledger for output tax payments, the term ‘any payment towards output tax’ is not explicitly defined in the law, leaving room for interpretation. Nevertheless, it is challenging to conclusively argue that the pre-deposit amount would fall within this scope. The relevant provision reads as under:

“(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 restriction and within such time as may be prescribed.”

Additionally, the CBIC in its Circular 172/04/2022-GST, clarified that the amount available in the electronic credit ledger can be used for making payment as a result of: a) Self-assessment, or b) payable as a consequence of any proceeding instituted under the provisions of GST laws.

Para 6 of circular 172/04/2022-GST dated 6 July 2022 is reproduced below:

Utilisation of the amounts available in the electronic credit ledger and the electronic cash ledger for payment of tax and other liabilities

6. Whether the amount available in the electronic credit ledger can be used for making payment of any tax under the GST Laws?

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.

Practical Illustration

Let’s illustrate this with an example: Suppose the Adjudicating Authority issues an order imposing a tax of Rs.1,00,000, along with interest and penalties. The aggrieved party may file an appeal with the Appellate Authority. To proceed with this appeal, a pre-deposit of 10% of the disputed tax amount, which amounts to Rs.10,000 in this scenario, is required. This amount is refundable contingent upon the outcome of the judgement.

Essentially, tax demand of Rs.1,00,000 refers to the amount as indicated in the Circular “payable as a consequence of any proceeding instituted under the provisions of GST laws”.

If the judgement does not favor the assessee, the Adjudicating Authority will proceed to recover the total tax, interest, and penalties. However, since the assessee has already made a pre-deposit of Rs. 10,000, this amount will be adjusted against the total tax liability of Rs.1,00,000. Consequently, the Appellate Authority will only need to recover the remaining balance of Rs.90,000, along with the applicable interest and penalties.

In a nut shell, a pre-deposit represents a portion of the tax owed that is paid in advance to the Authority and can be adjusted against the total tax demand based on the final judgement. This establishes a clear link between the pre-deposit of the disputed tax amount and the total tax liability that arises from proceedings under the GST laws, highlighting that the pre-deposit is indeed a fraction of the total amount payable as a consequence of such proceedings.

Judicial Precedents

Judicial reliance can be placed on the Bombay High Court’s ruling in the case of Oasis Realty decided on 16/09/2022 [2022(09)LCX0084] wherein it was held that pre-deposit can be made using the balance in the electronic credit ledger.

In Kiran Motors vs Addl. Commissioner of CT & GST (Appeal) decided on 10-08-2023 [2023(08)LCX0084], the Hon’ble Orissa HC, held as “Noted that, CBIC vide circular dated July 06, 2022 clarified that payment of pre-deposit can be made by using the ECL. Opined that, the Petitioner has already made the pre-deposit using the ECL, that will now be accepted by the Revenue Department.”

Additionally, in Tulsi Ram And Company vs Commissioner, decided on 23/09/2022 [2022(09)LCX0006], the Allahabad High Court directed the appellate authority to accept the appeal submitted wherein the pre-deposit has been through the electronic credit ledger.

The GSTN portal facilitates the payment of pre-deposit amounts through the electronic credit ledger when filing appeals in FORM GST APL-01.

Conclusion

While Section 49(4) permits the use of the electronic credit ledger for output tax payments, its applicability to pre-deposits has been a subject of interpretation. However, clarifications from the CBIC and multiple judicial rulings affirm that pre-deposits can be made using the electronic credit ledger. The availability of this option on the GSTN portal further enhances clarity and convenience for taxpayers when fulfilling pre-deposit requirements during appeals.

It is reasonable to argue that the balance in the Electronic Credit Ledger should be available for mandatory deposits under GST laws. If taxpayers have credit on hand, why must they resort to cash? Furthermore, given that tax obligations can be settled through the credit ledger, this flexibility should similarly apply to pre-deposits. Since pre-deposits are temporary payments that can be refunded if the taxpayer prevails in their case. Ultimately, the funds in the credit ledger represent money already paid to the government.

However, it would greatly benefit appellants if the government clarifies that payments from the credit ledger are equivalent to those from the cash ledger. Without this clarification, taxpayers may struggle to secure cash for the significant tribunal deposits while their available credit goes unused.

Disclaimer: The information given in this article is solely for purpose of understanding the law. It is completely based on the interpretation of the author and cannot be constituted as a legal advise, the author of this article and Lawcrux team is not responsible for any legal issues if arises on the basis of the interpretation given above.