SC upholds use of input tax credit for mandatory GST appeal deposit
May 19, 2025
In the context of GST, a tax credit refers to input tax credit, or ITC, which means the credit of GST paid on purchases that a business can use to offset the GST liabilities on sales
The Supreme Court on Monday ruled that taxpayers could use their electronic credit ledger (ECrL), a digital record of tax credits earned from purchases, to make advance deposits needed in the case of disputes on goods and services tax (GST).
In the context of GST, tax credit refers to input tax credit, or ITC, which means the credit of GST paid on purchases that a business can use to offset the GST liabilities on sales. This overrides demands by tax authorities that only the electronic cash ledger (ECL) be used. The ECL tracks cash payments like taxes, penalties, or fees. According to experts, the ruling ends discomfort for businesses, which can preserve cash by using ECrL balances instead.
The dispute began when Yasho Industries, a Mumbai-based specialty chemicals manufacturer, was asked to pay ₹3.36 crore “only in cash” (via ECL) as a pre-deposit in an appeal despite having enough credits in its ECrL. The Gujarat High Court in October upheld the company’s position, citing a 2022 government circular.
“The SC decision will provide relief to millions of taxpayers by allowing the use of the ECL,” said Abhishek Rastogi, founder of Rastogi Chambers, who argued for the taxpayer before the SC.
The Supreme Court thereafter dismissed the Revenue’s appeal.
While the Revenue’s circular said taxpayers could use ECrL for output tax liabilities, it did not define whether pre-deposits for appeals fell in this category.
The term “output tax” typically refers to tax on outward supplies, not procedural deposits. This ambiguity allowed tax authorities to insist on ECL payments for disputes, arguing that pre-deposits were not tax liabilities but procedural mandates.
While Circular No. 172/2022 clarified that taxpayers could use the ECrL for output tax liabilities, it did not explicitly define whether pre-deposits for appeals fell under this category. The term “output tax” typically refers to taxes on outward supplies, not procedural deposits. This ambiguity allowed tax authorities to insist on payments for disputes, arguing that pre-deposits were not “tax liabilities” but procedural mandates. The Gujarat High Court and Supreme Court, however, ruled that under the circular pre-deposits qualified as compliance with tax obligations, closing this interpretational gap.
The apex court Bench, comprising Justice B V Nagarathna and Justice Satish Chandra Sharma, rejected the Revenue’s special leave petition (SLP), upholding the Gujarat High Court’s decision in Yasho Industries Ltd vs Union of India.
“The Supreme Court’s decision will provide relief to millions of taxpayers by allowing the use of the electronic credit ledger,” said Abhishek Rastogi, founder of Rastogi Chambers, who argued for the taxpayer before the Supreme Court.
“The GST Council always intended ensuring a seamless and taxpayer-friendly mechanism for filing appeals, but a myopic interpretation by certain executive authorities had created unnecessary hurdles. This ruling rightly restores the balance.”
According to Saurabh Agarwal, tax Partner, EY, this ruling, by allowing taxpayers to use their existing credit to make these pre-deposits, will free up their cash.
“If they eventually win their case (in GST disputes), they won’t have to claim refunds because the adjustment would already be within their credit ledger. It’s a win-win in terms of immediate cash flow and avoiding hassles,” he said.
[The Business Standard]
