Introduction
The implementation of the Goods and Services Tax (GST) in India was a landmark reform aimed at unifying the indirect tax regime and removing the cascading effect of taxes. One of the fundamental pillars of the GST structure is the seamless flow of Input Tax Credit (ITC) across the supply chain and across tax jurisdictions — within states (SGST), across states (IGST), and at the central level (CGST). However, in recent times, a growing concern has surfaced among taxpayers regarding state-level commercial tax officers coercing registered persons to deposit cash into the Electronic Cash Ledger (ECL) instead of allowing utilization of available SGST ITC for discharging IGST liabilities.
This article aims to delve deep into the statutory framework, ITC utilization hierarchy, practical challenges, and latest developments surrounding this issue. It also outlines the taxpayer’s rights and possible remedies when confronted with such coercive practices.
Legal Framework: Understanding the ITC Utilization Mechanism
The Input Tax Credit (ITC) mechanism under the GST regime is governed by Section 49 and Section 49A & 49B of the CGST Act, 2017, read with Rule 88A of the CGST Rules, 2017**.
1. Section 49(5) of CGST Act, 2017
This section provides the order of utilization of input tax credit as follows:
- IGST Credit: To be utilized first against IGST liability, then CGST, then SGST/UTGST.
- CGST Credit: Can be utilized only against CGST liability and then IGST.
- SGST/UTGST Credit: Can be utilized against SGST/UTGST liability and then IGST, but only after IGST credit has been exhausted.
2. Section 49A (Inserted via CGST (Amendment) Act, 2018 w.e.f. 01.02.2019)
Mandates that IGST credit must be fully utilized first, before availing ITC of CGST or SGST.
3. Rule 88A of CGST Rules, 2017 (Inserted vide Notification No. 16/2019 – Central Tax, dated 29.03.2019)
Allows flexibility in utilizing IGST credit for payment of CGST and SGST in any order, subject to IGST ITC being exhausted before using CGST or SGST credit.
Key Clarification: SGST Credit CAN be used for IGST Liability
Once IGST credit is exhausted, taxpayers are lawfully entitled to utilize their available SGST credit to discharge IGST liability, as clearly permitted under Section 49(5)(d) of the CGST Act. There is no provision under GST law mandating that taxpayers must pay IGST liability in cash if SGST credit is available.
Practical Challenge: Departmental Pressure to Pay in Cash
Despite the above statutory framework, several state tax departments are reported to be coercing dealers to deposit cash into the electronic cash ledger rather than utilizing available SGST credit. The justification often cited informally is that IGST revenue goes to the Centre, and utilization of SGST credit results in revenue outflow from the state’s share. Hence, to meet collection targets, officers are reportedly discouraging ITC utilization.
Such administrative overreach directly violates statutory rights of the taxpayer and undermines the principle of seamless credit.
Illustrative Scenario
Case: A taxpayer has:
- IGST Liability: ₹5,00,000
- Available ITC:
- IGST: ₹1,00,000
- CGST: ₹0
- SGST: ₹4,00,000
As per the law:
- IGST ITC of ₹1,00,000 will be used first.
- Remaining IGST liability: ₹4,00,000
- SGST ITC of ₹4,00,000 can be legally utilized for this remaining IGST liability.
Yet, field officers insist on cash payment of ₹4,00,000 and disallow SGST credit utilization. This is legally untenable.
Revenue Sharing Between Centre and States – The Root Cause
- IGST collected is apportioned between Centre and States based on the destination principle.
- However, when SGST ITC is used to pay IGST, it reduces the gross IGST pool.
- Thus, states perceive this as a “loss of revenue” in the hands of the Centre and a dent in their collection metrics.
However, such administrative justification cannot override the statutory right of taxpayers to utilize SGST credit for IGST payment after exhausting IGST credit.
Judicial and Institutional Perspective
Although there is no direct Supreme Court judgment yet on this coercive practice, similar issues of coercive recovery have been criticized in the following precedents:
- LC Infra Projects Pvt. Ltd. vs. UOI (Karnataka HC, 2021) – Held that coercive recovery of tax without adjudication or following due process is illegal.
- Bhumi Associate vs. UOI (Gujarat HC, 2020) – Issued guidelines against extracting money from taxpayers without following procedure established by law.
Takeaway: Any attempt to force taxpayers to pay cash when they have available credit is akin to coercive recovery, and violates Articles 14 and 265 of the Constitution of India.
Recent Developments and Industry Feedback
- Representations have been made to the GST Council by trade bodies highlighting this issue.
- CBIC has not issued any circular directly endorsing such state-level cash deposit targets.
- However, there is a need for clarity through a formal circular reasserting the legality of SGST ITC usage for IGST and denouncing coercion.
Rights and Remedies for Taxpayers
If a taxpayer is being pressurized to deposit cash despite eligible SGST credit:
1. File a Complaint
- File a written grievance to the jurisdictional Joint Commissioner / Commissioner.
2. Record Communication
- Maintain records of all emails, letters, or oral instructions regarding coercion. Insist on written orders.
3. Use CPGRAMS Portal
- File a grievance under the Centralized Public Grievance Redress and Monitoring System (CPGRAMS).
4. Legal Action
- Consider filing a writ petition under Article 226 before the High Court for violation of statutory rights and coercive recovery.
Advisory to Chartered Accountants and Industry Practitioners
Chartered Accountants must guide clients to:
- Assert their right to utilize available SGST ITC after IGST ITC exhaustion.
- Push back against verbal instructions from field officers demanding cash deposits without legal basis.
- Document everything to protect against future audits or litigation.
- Escalate the matter to GST Council Secretariat or relevant ombudsman if unresolved.
Conclusion
The GST framework empowers taxpayers with the right to utilize their input tax credit in a structured manner as defined by the CGST Act and related Rules. Any coercive action or denial of such a right not only breaches statutory provisions but also violates fundamental principles of taxation and good governance.
While fiscal targets are administrative objectives, they cannot override taxpayer rights under law. It’s high time that the GST Council and CBIC issue explicit clarifications denouncing such practices and preserving the sanctity of credit utilization under GST.
Until then, taxpayers and professionals must remain vigilant and proactive in safeguarding their rights.
Stox N Tax 
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