You Can Now Use ITC for GST Appeal Pre-Deposit, Rules- S.C.

You Can Now Use ITC for GST Appeal Pre-Deposit, Rules- S.C.

The Supreme Court’s decision marks a watershed moment for taxpayers contesting GST demands, as it affirms that the mandatory 10% pre-deposit required for appeals can be made using balances in the Electronic Credit Ledger (ECL), rather than tying up scarce cash reserves. In doing so, the Court has upheld the Gujarat High Court’s interpretation of Section 107(6)(b) of the CGST Act, 2017, which treats pre-deposits as “output tax liabilities” that legitimately fall within the scope of accumulated input tax credit (ITC). This ruling, delivered by a bench led by Justice B.V. Nagarathna and Justice Satisah Chandra Sharma, not only vindicates Yasho Industries Ltd.—which initially deposited ₹3.36 crore via the ECL and saw its payment rejected—but also sets a binding precedent that will ease cash‑flow pressures for businesses, especially SMEs, across India.

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Background of the Dispute: In October 2024, Yasho Industries—a Mumbai‑based specialty chemicals manufacturer—deposited the requisite 10% pre‑deposit of ₹3.36 crore through Form GST DRC-03 using its Electronic Credit Ledger, only to have the department insist on payment via the Electronic Cash Ledger (ECL) and refuse to recognise the ITC balance as valid for pre‑deposit purposes.

The company challenged this demand before the Gujarat High Court, which, relying on Circular No. 172/2022 issued by the CBIC, held that “output tax liabilities, including amounts due from adjudication,” qualify for payment through the ECL; the High Court quashed the department’s cash‑only directive and ordered appeals to proceed on merits.

Supreme Court’s Verdict: On May 19, 2025, the Supreme Court dismissed the Union’s Special Leave Petition against the Gujarat High Court’s order, unanimously confirming that Section 107(6)(b) of the CGST Act does not restrict pre-deposits to cash payments and that the ECL may be used for this purpose.

The bench emphasised that the statutory language and the 2022 circular together demonstrate Parliament’s intent to allow taxpayers to utilise their ITC balances to meet appeal pre‑deposit requirements, thereby closing any interpretational gaps that had permitted a “narrow” view by certain authorities.

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Key Legal Provisions

• Section 107(6)(b), CGST Act, 2017: Mandates a 10% pre-deposit of the disputed tax amount for appeals, without specifying the ledger for payment.
• Section 49(4), CGST Act: Permits use of the Electronic Credit Ledger for “output tax liabilities,” which the courts have interpreted to include pre-deposits.
• CBIC Circular No. 172/2022: Clarified that credit ledger balances can be used for output tax payments, implicitly covering amounts deposited in dispute resolution.

Implications for Businesses: This judgment removes a significant working‑capital burden by allowing companies to preserve cash and leverage ITC reserves when contesting GST assessments.

If a taxpayer ultimately prevails, no separate refund process is necessary—the pre-deposit adjustment remains within the ECL, streamlining both cash flow management and procedural compliance.

Analysts expect small and medium enterprises, in particular, to benefit most, as they often lack large cash buffers and rely heavily on ITC credits for day‑to‑day operations.

Point of View: By permitting use of the credit ledger for mandatory pre-deposits, the Court has removed an unnecessary financial bottleneck and aligned the law with commercial realities,

This is a much‑needed relief for industries constrained by cash flow, enabling them to focus on litigation merits rather than upfront cash arrangements,

Next Steps and Administrative Compliance: Tax authorities must update their e‑filing systems and internal guidelines to accept ECL‑based pre-deposits without manual intervention or departmental objections.

GST appeal forms (GST DRC-03) should explicitly display both the cash and credit ledger options for Section 107(6)(b) deposits, accompanied by automated validation to prevent rejection of ITC‑funded payments.

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