Recently, the Division Bench of the Orissa High Court held that pre-deposit at the time of filing an appeal under section 107(6) of the Central Goods and Services Tax Act, 2017 (CGST Act) cannot be made by debiting the Electronic Credit Ledger (ECRL). The payment of pre-deposit should be made by debiting the Electronic Cash Ledger (ECL) in accordance with section 49(3) of the CGST Act read with Rule 85(4) of the Central Goods and Services Tax Rules, 2017 (CGST Rules).
What this order in effect does is that it puts the burden on taxpayers to pay the pre-deposit (ie 10 per cent of disputed tax) amount in cash by transferring money from electronic cash ledger (ECL) for any tax dispute raised by them. This would mean more cash outflows leaving little for working capital needs.
In case that went to the Orissa High Court, the revenue raised demands of GST along with interest on the petitioners, who were engaged in execution of works contract. The petitioner filed an appeal and made payment towards pre-deposit (i.e. 10 per cent of disputed tax) for filing an appeal, by utilising the balance in the ECRL. The revenue dismissed the appeal and considered it to be defective, emphasising that the liability of pre- deposit can be discharged only by debiting ECL.
The petitioner's contention was that any payment towards output tax can be made through ECRL. Since pre-deposit can be construed as a percentage of output tax, it can be paid by debiting ECRL.
Revenue department contended that the CGST Act specifically provides that ECRL can be utilised towards payment of output tax. However, pre-deposit required to be made cannot be equated with output tax payable. Input tax credit can be utilised only to discharge 'self-assessed output tax as per the return'.
The High Court's accepted this contention and observed that the pre-deposit cannot be equated with 'output tax' and that the restriction under proviso to section 41(2) of the CGST Act, limits the usage of the credit ledger for making pre-deposit. The High Court declined the petitioner's contention to treat the provision under section 107(6) of the CGST Act as a 'machinery provision'.
Accordingly, the decision of the Appellate Authority that pre-deposit cannot be made by debiting ECRL was upheld.
The petitioner contended that they would make payment by debiting the ECL, but they should be permitted to reverse the debit of ECRL. The High Court observed that this was a separate cause of action for which the petitioner should independently seek appropriate remedy. The Court held that the making of pre-deposit is not contingent upon the reversal of the debit entry in ECRL.
This is an important decision that categorically holds that the pre-deposit of taxes for filing an appeal has to be made necessarily by debit to ECL. This is contrary to the understanding of the industry and the practice being followed by the taxpayers for making pre-deposit in the GST regime. Under the erstwhile indirect tax laws, payment of pre-deposit was permitted by debit to the Cenvat credit account.
This decision is of great significance since it affects the working capital of taxpayers preferring appeals, more specifically in the case of taxpayers who have huge credit accumulation.