Can the Electronic Credit Ledger Satisfy Pre-Deposit Requirements? A Legal Examination

Introduction

On May 19, 2025 the Supreme Court of India [UNION OF INDIA & ANR. Versus M/s YASHO INDUSTRIES LTD - 2025 (5) TMI 1614 - SC Order] reaffirmed Gujarat High court’s decision in M/s. Yasho Industries Limited Versus Union Of India & Anr. - 2024 (10) TMI 1608 - GUJARAT HIGH COURT which permits companies to make the mandatory 10% pre-deposit filing under Section 107(6)(b) of the Central Goods and Service Tax Act ( CGST Act) by utilizing the accumulated Input Tax Credit (ITC) for the purpose of filing an appeal under the GST Law. The Bench headed by Justice B.V. Nagarathna affirmed that the pre-deposit made through Electronic Credit Ledger (ECL) is valid and satisfies the legal requirement under section 107(6)(b) of the CGST Act, 2017.

Yasho Industries made their payment for the pre-deposit using the ITC accumulated in the ECL amounting to Rs. 3.36 crore, but the department declined to acknowledge this mode of payment, citing that the only acceptable mode of payment towards the Pre-deposit must be done through Electronic Cash Ledger with Cash. The company then contested the refusal of the department before the Gujrat HC, which held the decision in its favor.

The verdict through permitting the use of ECL to make payment for the mandatory Pre-deposit filing, substantially eliminates financial constraints and relaxes the process of appeal by eliminating interpretation. This will free up the cash reserves of the industries. If they win their case, they don’t have to proceed via the painfully long refund claiming procedure as the adjustments shall be reflected in their ECL. The decision eliminates a major compliance bottleneck, particularly for MSMEs, by reducing cash flow burdens and allowing seamless adjustments within the ECL.

Interpreting Pre-Deposit Requirements: Scope for Utilizing Input Tax Credit under GST

The CGST Act establishes a statutory requirement for a pre-deposit before an appeal can be filed before the Appellate Authority against an order passed by the Adjudicating Authority. This provision, outlined in Section 107, mandates the payment of the admitted amount along with ten percent of the “remaining amount of tax in dispute.” A key implication of this pre-deposit is that recovery proceedings for the balance amount are deemed to be stayed.

A central point of contention within this framework concerns the mode of payment for this pre-deposit. The GST mechanism for tax payment, as detailed under Section 49, allows for the utilization of the ECL for making payments towards 'output tax.' The disputed demand of tax under Sections 73 and 74 of the CGST Act, against which the pre-deposit is made, is inherently in the nature of output tax. This alignment suggests that the ITC balance available in the ECL could be used for the pre-deposit payment.

Several arguments support the utilization of ITC for this purpose:

1. Absence of Statutory Prohibition: Neither Section 107 nor Section 49 of the CGST Act imposes any specific restriction on the mode of payment for the pre-deposit. In the absence of a clear embargo, an adjustment of the credit balance against a portion of the tax liability to be appealed against is arguably admissible.

1. Nature of the Disputed Amount: The 'amount of tax in dispute' under Section 107(6) is essentially output tax, which aligns with the provisions of Section 49(4) allowing the use of the ECL for 'any payment towards output tax.' The GST portal itself has historically allowed for such adjustments, reflecting this interpretation.

1. Legal Jurisprudence under Erstwhile Laws: The legal position under the previous Central Excise laws provides a precedent. Courts had consistently allowed the utilization of CENVAT credit for pre-deposits. The principle established was that the credit balance, representing tax already suffered, could be used for specified purposes, a rationale that appears directly applicable to the GST framework.

M/s. Jyoti Construction Versus Deputy Commissioner of CT & GST, Barbil Circle, Jajpur and Another - 2021 (10) TMI 524 - ORISSA HIGH COURT: Cash Over Credit

The Orissa High Court, in Jyoti Construction v. Deputy Commissioner of CT & GST, Barbil Circle, Jaipur judgment, relied on Section 41(2) of the CGST Act to conclude that the credit balance cannot be utilized for making a pre-deposit under Section 107(6). The court’s reasoning was based on the premise that Section 41(2) restricts the utilization of credit to the payment of 'self-assessed output tax.'

A critical analysis of the court's conclusion reveals several points of contention:

• Interpretation of Statutory Provisions: The court's focus on Section 41(2) appears to overlook the specific mechanism for payment outlined in Section 49.Section 41(2) defines the purpose of credit utilization, while Section 49 governs the operational mechanics, and the latter contains no such prohibition. The distinction between the purpose and the mode of payment is a vital aspect that was not thoroughly addressed.

• Definition of 'Tax in Dispute': The court did not provide a comprehensive rationale for why the terminology 'ten per cent of the remaining amount of tax in dispute' under Section 107(6) could not be treated as a form of output tax, thereby falling within the purview of Section 49(4).

• Purposive Interpretation: The ruling did not engage in a purposive interpretation of the law.

Given that the balance amount deemed to be stayed under Section 107(7) is in the nature of tax, it is logical to interpret the amount paid under Section 107(6) as also being tax. A purposive analysis would recognize that the intent of the law is to secure a partial payment without imposing an undue cash flow burden, an objective well-served by allowing ITC utilization.

The divergence between the prevailing legal arguments and the recent judicial pronouncement has created significant ambiguity. This issue necessitates a deeper academic and legal evaluation, particularly to reconcile the provisions of Sections 41, 49, and 107 of the CGST Act. The resolution of this matter, whether through a higher judicial pronouncement or legislative clarification, is essential for ensuring a consistent and clear application of GST law concerning pre-deposits and appeals.

Yasho Industries: Resolving the ITC vs. Cash Debate in Pre-Deposits:

The aforementioned debate has been largely settled by a series of significant judicial pronouncements, providing much-needed clarity on the matter. The Gujarat High Court, inYasho Industries, ruled decisively in favor of the taxpayer's position. The Court's reasoning was grounded in the principle that the pre-deposit requirement under Section 107(6) does not explicitly mandate payment in cash. It correctly identified that ITC, once validly accrued, is equivalent to tax already paid and its denial for pre-deposit would subject taxpayers to a form of double jeopardy—first by blocking working capital and then by forcing a fresh cash payment.

The court emphasized that the GST framework, being a credit-based system, should not be interpreted in a manner that creates arbitrary hurdles for taxpayers seeking to exercise their right to appeal. This judicial position was subsequently challenged by the Revenue Department, which filed a Special Leave Petition (SLP) against the Gujarat High Court’s decision. The Hon’ble Supreme Court, by dismissing the SLP, effectively affirmed the view that pre-deposit can indeed be made using ITC when the law does not explicitly prohibit it. This series of rulings establishes key legal takeaways, including the interpretation of ITC as a form of 'tax paid,' the preference for a purposive interpretation over a literal one, and the application of the doctrine of beneficial construction in favor of the taxpayer. The Supreme Court's affirmation solidifies the position that ITC has real monetary value within the GST system and can be used for discharging various liabilities, including those related to appellate conditions.

Conclusion: A Landmark Step for Taxpayer Rights:

The Supreme Court's affirmation of the Gujarat High Court's decision in Yasho Industries Ltd. is a welcome move that underscores the judiciary’s role in safeguarding taxpayer rights and promoting ease of doing business under GST. By allowing accumulated ITC to fulfil the statutory pre-deposit requirement, the Court has effectively bridged the gap between legal formality and commercial practicality and has effectively challenged the restrictive interpretations of tax authorities.

However, a degree of caution is still necessary. This ruling, while legally binding, doesn't change the actual wording of the CGST Act. Until the GST portal is updated to reflect this change, businesses may need to take extra steps, such as manual follow-ups or formal representations, to ensure their ITC-based pre-deposits are accepted. Additionally, this decision specifically addresses the first level of appeal. Its application to higher appellate stages, like the Appellate Tribunal or High Courts, may still need further judicial clarification, though the established principles will likely guide future interpretations.

It is a landmark step toward aligning the spirit of GST with its foundational goals — simplification, transparency, and economic efficiency.