Inadmissible credit utilized is output tax unpaid or credit liable to reversal or both?
Credit maybe inadmissible for any reason – 16(2)(c), 17(2) or 17(5). Such credit is no credit at all, yet portal admits all credit into ECrL once claimed via 3B.
Output tax maybe discharged out of balance in ECrL. And subject to 49A, ECrL debit is output tax validly discharged, without enquiry into identity of said credit.
If output tax is treated as undischarged (on grounds that input tax credit is non est), then demand must be for output tax admitted and due, which has impliedly fallen in arrears.
If input tax credit is shown to be inadmissible (for cause-of-action listed earlier or any other), then repayment of said credit will settle this demand.
If credit availed is repaid (due to inadmissibility), it will restore status quo ante, that is, restore a state of things as if said credit was never availed at all.
If credit (availed, utilized and now repaid) was never availed at all, then output discharged (by utilization of credit that was never availed) was also never discharged at all. Output tax not paid, is undisputed arrears.
Strange but true that repayment settles inadmissible credit claimed, not output tax in arrears. And previous debit to ECrL affirms discharge of output tax, not reversal of credit.
Unlike inadmissible credit utilized, admissible credit utilized wrongly will be visited with very interesting consequences.
Credit wrongly availed is when (i) vesting conditions or (ii) tariff restrictions are not complied. Credit wrongly utilized is when credit is lawfully vested but is utilized contrary to law, say, when tax was to be discharged in cash only. For eg. RCM paid via vested credit balance in ECrL.
Credit correctly availed cannot be demanded as wrongly utilized. Credit wrongly utilized, affirms it was availed correctly.
Credit correctly availed but utilized wrongly must be claimed as refund within limitation, to be recredited to ECrL under 86(4A). But if this error is not discovered until lapse of limitation in 54, skilful selection of cause-of-action in SCN can land a double whammy.
GST is no stranger to such ‘double trouble’. Say, where proceeds are not realized on export of services (on payment of tax) then:
a) exports being inter-State supplies, will be liable to IGST
b) zero-rating allowed only if all conditions are met.
Exports admitted will attract IGST. And refund sanctioned will be recovered for default of conditions. But 86(4B) will save this impact except for interest (when refund was retained).
Aggravated impact in case admissible credit is utilized wrongly depends on deft selection of cause-of-action and interplay of limitation to issue notice v. claim of refund.
Delayed start of limitation in 77 (cir.162) does not apply when admissible credit is utilized wrongly. To even misuse credit, requires much thought and careful consideration.
Inadmissible credit utilized is not same as admissible credit utilized wrongly!
