ITC Shopping
- Sandesh S Kutnikar
- Sep 12, 2021
- 3 min read
Pandora Box | Can the liability of a prior period be paid by utilizing ITC of subsequent period?
Let us start with a simple question: “Is it mandatory to ensure that ITC utilized for paying output liability must be earned at-least in the period when the liability arose or prior to that?”
Before we answer under GST law, we draw your attention to First Proviso to Rule 3(4) of CCR 2004 which placed the above restriction. Extract reproduced for ease of understanding: “Provided that while paying duty of excise or service tax, as the case may be, 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”.
It can be clearly seen that the legislative intent was to restrict the payment of liability by utilizing CENVAT credit which was earned subsequent to the period in which the liability arose. Further, Circular No. 962/05/2012 dated March 28, 2012, clarified that such restriction is applicable only to self-determined/return related liability and not to cases where taxes are determined by central excise officer. This Circular has stood the test of time and also got the approval stamp of the Judiciary[1][2].
This restriction is missing under the GST Law. Section 49 of the CGST Act read with CGST Rules (Chapter IX), which deals with payment of tax, provides only for the order in which the tax has to be discharged: first self-assessed tax of prior period, second self-assessed tax of current period and lastly other tax dues (E.g., tax liability on adjudication & assessments). It is silent on the aspect of matching the period of ITC with the period of liability.
It is trite law to read it the way it is written when the language is unambiguous and clear. Accordingly, the Law does not place any restriction on utilization of ITC earned in the subsequent period to pay the liability of prior period. Thereby, liability declared in Form DRC-03 (voluntary or otherwise & return related or otherwise) can be paid by utilizing ITC (without any strings attached) balance as on the date on which the said Form is filed. On the same line, belated declaring of liability in subsequent month GSTR 1/3B can also be paid utilizing ITC of subsequent period using the same logic##.
This logic has been embedded in Circular No. 42/16/2018-GST dt. 13.04.2018 (see para 4.1(b)) wherein the utilization of ITC has been allowed for recovery of central excise or service tax liability. Clearly, the intention is not to restrict the utilization of future ITC for payment of past liability.
## However, the bigger question is whether such belated payment of tax (though paid through ITC) will attract interest u/S. 50? Belated declaration of liability does not find shelter under Proviso to S. 50(1) of the CGST Act. But the intentions of the GST Council and Courts screams loud and clear that as far as liability has been discharged by utilization of ITC, interest is not payable considering the compensatory nature of interest.
Will ITC shopping (i.e., practice of waiting for ITC to accumulate and later declaring liability of the past to ensure that there is no cash outflow) pass the vices of the executive is yet to be seen.
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