Claiming ITC Under Wrong Head- Remedies Available

Since the introduction of GST in India in July 2017, many taxpayers have faced challenges, including errors in claiming Input Tax Credit (ITC).

Section 16 and Section 17 of the CGST Act read with relevant CGST Rules provides for eligibility, conditions and restrictions for the purpose of availment of ITC. The same provisions would equally be applicable under the IGST Act by virtue of section 20 of the CGST Act.

Provisions of CGST Act and respective State/Union Territory GST A/c to be referred and complied with where credit involved is in relation an intra-state supply. Similarly, provisions of IGST Act to be complied with where credit involved is in relation an inter-state supply.

ITC availment under wrong head—One common issue is the incorrect availment of ITC under the wrong head, such as claiming CGST and SGST instead of IGST or vice versa.

Because of various reasons, in the initial years of implementation of GST, credit in relation to intra-state supply was availed as inter-state supply and vice-versa i.e., credit of IGST was availed as CGST and SGST and vice-versa.

When ITC claim under wrong head identified by department—When incorrect claims are identified, tax authorities often seek to reverse the ITC with interest penalties. However, the principle of revenue neutrality suggests that if no actual revenue loss to the government occurs, reversing the ITC might be unnecessary.

Because of this, the officers have been denying the ITC and seeking reversal of ITC along with applicable interest. Further, because the time limit for availment of ITC has already lapsed in terms of Section 16(4) of the CGST Act, the taxpayer would not have been able to avail the correct ITC. This resulted in the following two costs to the taxpayer

• Denial of benefit of ITC

• Interest implication as the ITC would have been utilized for payment of GST.

Remedy— If IGST is availed where CGST and SGST has been charged by the supplier, then technically, IGST has not been charged by the supplier and hence there is no input tax credit of IGST available to the recipient.

However, if we see at the overall ITC i.e., cumulatively, no excess credit would have been availed and there is no revenue loss to the government. The concept of revenue neutrality can be of rescue in such scenario.

As, there is no provision for setting off ITC claimed under Wrong head with excess ITC available under other heads, several court rulings support the rectification of ITC claims where taxpayer can apply for Rectification under Section 161 of CGST Act instead of going for an appeal to higher authority.

Relevant Judicial pronouncement—

Madras High Court in case of Kondamma Trading V/s The Assistant Commissioner of CGST and Central Excise [2023] 65 TAXLOK.COM 046 (Madras), grants liberty to the petitioner to file a Rectification application under Section 161 of the GST Act. Once the Rectification application is filed by the petitioner, a Rectification order will be passed by the respondent and if the petitioner had availed the credit under Wrong head and the same is genuine, it would be reversed by changing one head to another head.

Similarly, Kerala High Court in case of Chukkath krishnan Praveen V/s State of Kerala [2023] 67 TAXLOK.COM 022 (Kerala), has permitted the petitioner to rectify the mistake in Form GSTR-3B by accounting input tax credit as IGST instead of SGST and CGST credit.

Hon'ble Kerala HC in the case of Divya S.R. [2024] 68 TAXLOK.COM 054 (Kerala) has also allowed certain relief directing the department to set off IGST wrongly claimed under the head of CGST and SGST. There are many other case laws available in the library.

In view of the above judgments, taxpayer can submit that this error occurred due to inadvertence and was not done with any malafide intent. As per Section 16 of the CGST Act, 2017, the right to avail ITC is contingent on eligibility, which we have duly fulfilled. The error pertains only to the reporting of the tax heads, and the total ITC remains accurate.

No demand for reversal of ITC or interest should be raised, as there is no revenue loss to the government.

Conclusion— In case of issue of ITC claimed under wrong head, the department officer would surely seek reversal of ITC along with interest or penalty, however, the above principles and judgements could be examined before making a decision. Where there is no real loss to the government, there should not be any requirement to reverse such ITC.