Can One GST Unit Transfer Compensation Cess ITC to Another?

1. The Background Story

Here's a situation that many large organisations can relate to. A company has two GST registrations - one in Haryana and another in Delhi. Both are distinct persons under the GST law (Section 25(4) of the CGST Act). During an audit in FY 2025-26, the tax department found that the Haryana Unit had wrongly availed of Compensation Cess credit as far back as 2021-22. Naturally, the department is now preparing to raise a demand for recovery. Meanwhile, the Delhi Unit of the same company has an excess balance of Compensation Cess ITC sitting idle in its books.

To avoid a cash outflow, someone in the finance team comes up with an idea - "Why don't we just issue an inter-unit invoice from Delhi to Haryana now, charge Compensation Cess on it, and let Haryana use that ITC to pay the old demand?" On the surface, it sounds practical and efficient, but is it really legally valid? Let's explore step-by-step.

2. The Legal Basics You Should Know

Let's review a few key provisions to better understand this idea. Under Section 25(4), each GST registration in a different State is considered a distinct person. This means that any supply between the Delhi and Haryana Units is viewed as a taxable inter-State supply. Additionally, Section 16(4) states that a recipient can claim ITC on an invoice until November 30th of the following financial year or the date it furnishes the annual return, whichever comes first. So, if Delhi issues a new invoice in 2025-26, the Haryana Unit can still claim ITC in the same year - because the claim is based on the invoice date, not the period of demand.

According to Section 49(4), you can use the balance in the electronic credit ledger to settle any tax obligations. liability, irrespective of the year to which it relates. And under Section 9 of the Compensation to States Cess Act, 2017, all provisions of the CGST Act - including those about ITC - apply mutatis mutandis to the levy and collection of Compensation Cess. Together, these provisions seem to make such a transaction possible. But there's a significant change that changes the landscape entirely.

3. A Big Change: The NextGen GST Reforms

With the upcoming NextGen GST Reforms, the Compensation Cess will no longer apply from 22nd September 2025. This means that from that date onward, no taxpayer should charge, collect, or pay Compensation Cess. If you're issuing an invoice that includes Compensation Cess, make sure it's issued before 22nd September 2025, as any invoices issued after that won't be legally valid. Therefore, timing is critical. If the Delhi Unit plans to issue any invoice involving Compensation Cess, it must do so on or before 21st September 2025. After that, the entire levy - and along with it, the right to pass on or avail such credit - vanishes.

4. So, Can Delhi Really Do This?

Let's analyse three practical scenarios.

Case 1 - Genuine Supply Before 22.09.2025

If the Delhi Unit genuinely provides a taxable supply - such as goods legally subject to Compensation Cess, such as motor cars, coal, aerated waters, or tobacco products - it has the option to issue a valid invoice before 22nd September 2025. This means that the Haryana Unit can confidently claim ITC in FY 2025-26 and even use it to settle its old 2021-22 demand through Form DRC-03.

Case 2 - Artificial or Fake Invoice to Transfer Credit

Here lies the real danger. Suppose Delhi issues an invoice showing the sale of motor vehicles to Haryana; typically, this transfers unused ITC without actually moving goods. Each motor vehicle has a distinct registration number, making it easy to track. When the Department investigates, they'll ask, "If Delhi sold a motor vehicle to Haryana, why does it still have a Delhi registration? Why hasn't it been re-registered under Haryana RTO?" This makes it very difficult for the Haryana Unit to prove they received those motor vehicles. If there's no vehicle registered in Haryana, it quickly reveals any false claims. Such invoices, lacking real substance, wouldn't be valid for ITC and could also lead to penalties under Sections 122 and 132 of the CGST Act for fake invoicing and wrongful credit claims.

Case 3 - Invoice Issued After 22.09.2025

Once the Compensation Cess levy ends, there will be no legal authority to issue an invoice that includes Cess. Any such document will be considered invalid right from the start, meaning it has no legal standing. So, even if there's genuine intent behind it, the system and law won't recognise such a transaction after the cut-off date.

5. Practical Takeaways for Businesses

The implications are clear and straightforward. If Delhi issues a genuine Cess-liable invoice before 22.09.2025, Haryana can legitimately avail itself of the ITC. However, if the invoice is artificial or relates to non-existent supplies - for instance, a fake motor vehicle sale - the ITC will not be allowed, and the transaction will face close inspection. Also, if any invoice is issued after 22.09.2025, when the Cess is officially abolished, it will have no legal validity.

6. The Smarter and Safer Route

If the inter-unit supply isn't really liable for Compensation Cess, a straightforward solution is best: have the Haryana Unit pay the 2021-22 demand in cash using DRC-03. Later, the Delhi Unit can recover or adjust that amount internally through proper accounting, without the need for a fake invoice. While it might seem easier to shift ITC artificially, this could lead to compliance issues, including interest, reversal, and penalties. A clear and transparent approach is always the best in the long run.

7. The Bottom Line

In summary, yes, Haryana is eligible to utilise ITC on a Compensation Cess invoice issued by Delhi to settle its old demand - but only if that invoice represents a real, Cess-liable supplyand is issued before 22nd September 2025. After that date, the levy ceases to exist, and with it, the right to charge or transfer such credit. Any post-abolition invoicing or fake supply arrangements (like the sale of cars that never moved) will be easily caught by the authorities and deemed invalid.

8. A Quick Word of Advice

GST might seem modern and lively, but its core is old-fashioned - "Substance over Form." When your transaction is authentic, even tricky credit adjustments can withstand review. However, if it's fake or just paper, even a straightforward invoice could fall apart during an audit. So, make sure your invoices are genuine, your supplies are authentic, and your timelines stay within legal limits - especially before 22.09.2025.

Final Thought

The story of Compensation Cess is nearing its conclusion. Before September 22, 2025, it's a good idea for businesses to thoroughly review their Cess balances, ensure all genuine transactions are reconciled, and settle any remaining discrepancies. Once the levy ends, the chance to regularise those credits will be gone. Remember, it's always best to finish your GST journey on a positive, compliant note rather than face a show-cause notice.