The question of whether Input Tax Credit (ITC) earned in a subsequent period can be utilized to discharge a liability of a prior period is a subject of significant interest among tax professionals and businesses. Let’s examine this aspect under the GST regime and compare it with past practices under the erstwhile CENVAT Credit Rules, 2004 (CCR 2004).
Historical Perspective Under CCR 2004
Under CCR 2004, the First Proviso to Rule 3(4) explicitly restricted the utilization of CENVAT credit for payment of excise duty or service tax to the extent of credit available on the last day of the relevant month or quarter. The text of this provision stated:
“…the CENVAT credit shall be utilized only to the extent such credit is available on the last day of the month or quarter, as the case may be, for payment of duty or tax relating to that month or the quarter, as the case may be.”
This restriction ensured that businesses could not use ITC accumulated in future periods to offset past liabilities. Further, Circular No. 962/05/2012 dated March 28, 2012, clarified that this restriction applied only to self-assessed or return-related liabilities and not to those determined by a central excise officer. The judiciary also upheld this interpretation in multiple rulings.[1][2]
ITC Utilization Under GST Law
The GST law, however, does not impose a similar restriction. Section 49 of the CGST Act, which deals with the payment of tax, along with Chapter IX of CGST Rules, merely specifies the order of discharge of tax liabilities:
- Self-assessed tax of prior periods,
- Self-assessed tax of the current period,
- Other tax dues (e.g., adjudicated tax liabilities).
Nowhere does the law require that ITC utilized for tax payment must be earned in the same period or earlier. The clear and unambiguous language suggests that ITC accrued in a subsequent period can be utilized to pay a prior period’s tax liability.
Thus, liabilities declared in Form DRC-03 (whether voluntary or otherwise) can be paid using the ITC balance available on the filing date. Similarly, belatedly declared liabilities in subsequent GSTR-1 or GSTR-3B filings can also be discharged using ITC earned after the relevant tax period.
Supporting Circulars and Judicial Precedents
The approach of allowing ITC utilization without time-based restrictions finds support in Circular No. 42/16/2018-GST dated April 13, 2018, where the government permitted the use of ITC for recovery of central excise or service tax liabilities. This further reinforces that GST law does not intend to prohibit such utilization.
Interest Implications Under Section 50 of CGST Act
A major concern is whether belated tax payment through ITC would attract interest under Section 50 of the CGST Act. The proviso to Section 50(1) does not provide relief for belatedly declared liabilities. However, both the GST Council and courts have indicated that interest is compensatory in nature. If liability is discharged using ITC rather than cash, the argument against imposing interest strengthens.
The Concept of ITC Shopping
A broader question emerges—can businesses delay tax payment while waiting for ITC to accumulate, thereby avoiding cash outflows? This practice, often referred to as ITC Shopping, may attract scrutiny from the tax authorities. While the law currently permits such utilization, whether the executive will allow this strategy to continue remains uncertain.
Conclusion
In the absence of explicit restrictions in GST law, ITC earned in a later period can be used to discharge earlier liabilities. While this practice aligns with the current legal framework, taxpayers must remain cautious about potential scrutiny and interest implications. Future clarifications or amendments may address this issue explicitly.
[1] M/s Sairadha Developers v. C.E, S.T-Commissioner of Central Excise & Central Tax, Mangalore [2021-VIL-399-CESTAT-BLR-ST]
[2] Bombay Well Print Inks Pvt Ltd v. Commr. Of C.Ex. & S.T., Nagpur [2016 (45) S.T.R. 418 (Tri. – Mumbai)]
