Payment within 180 days: Whether Blessing or Curse?

Recently, we are coming into the knowledge that audit u/s 66 of the Central Goods and Services Tax Act, 2017 (hereinafter referred to as "CGST Act”) is being carried out and in almost all the audits, one of the paras. which are being raised is that the taxpayer has not reversed the Input Tax Credit (hereinafter referred to as "ITC”) availed by them on the receipt of the supplies wherein the taxpayer has either not paid the amount to the supplier till date and the period of 180 days has already been elapsed or the taxpayer has paid the same after the period of 180 days. So, in the first situation, the learned officers will ask the taxpayer to reverse the ITC availed on such supplier along with interest from the date of availment of such ITC. In the second situation, the learned officers will ask the taxpayer to pay the interest from the date of availment of ITC till the date of payment. So, in this article, let us understand the following:

1. what is the provision regarding this issue?

2. For what purpose the same was introduced?

3. Whether the said provision is fulfilling the purpose for which the same was introduced

4. Whether government is unjustly enriched by payment of the interest?

5. Whether the provision is in line with the provisions of the Indian Contract Act, 1872 and whether the same is sustainable considering other points?

1. What is the provision?

1. Provisions regarding the reversal of ITC in the event of failure to pay the value of supply along with tax amount within the period of 180 days from the date of invoices are provided in 2nd and 3rd Proviso to Sec. 16(2) of the CGST Act and Rule 37 of the CGST Rules.

"Section 16. Eligibility and conditions for taking input tax credit.-

1. …
2. …

Provided that ……

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

Rule 37. Reversal of input tax credit in the case of non-payment of consideration.-

(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

(2) The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.

(3) The registered person shall be liable to pay interest at the rate notified under sub-section (1) of section 50 for the period startingfrom the date of availing credit on such supplies tillthe date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.

(4) The time limit specified in sub-section (4) of section 16 shall not apply to a claim for reavailing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter,that had been reversed earlier.

Rule 37. Reversal of input tax credit in the case of non-payment of consideration.- (as amended vide Notification No. 19/2022-CT dated 28.09.2022)

(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay an amount equal to the input tax credit availed in respect of such supply along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16:

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

(2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).

3. ****

4. The time limit specified in sub-section (4) of ​section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.”

2. So, as per the 2nd proviso to Sec. 16(2) of the CGST Act, if the recipient fails to pay, to the supplier, an amount towards the value of supply along with tax payable thereon within a period of 180 days, the recipient shall reverse the ITC availed on such supplies along with interest thereon.
3. Period of 180 days shall be counted from the date of the issuance of invoice irrespective of the fact that when the ITC on such supply has been availed. For Example, if the invoice has been raised on 01-01-2019 but the recipient has availed the ITC in the month of February, 2019 and not in the month of January, 2019. In the said case, the period of 180 days shall be calculated from 01-01-2019 and not from the date when the ITC has been availed by the recipient.
4. Interest u/s 50 shall be paid along with the reversal of ITC on such supplies.
5. Such credit can be re-claimed by the recipient when the amount towards such supply has been paid to the supplier by the recipient. Now, the question that arise is that Sec. 16(4) of the CGST Act is providing the time limit to claim an ITC. So, if the recipient has reversed the ITC along with ITC as per 2nd proviso to Sec. 16(2) of the CGST Act and reclaimed the same as per 3rd proviso to Sec. 16(2) of the CGST Act after the time limit as provided u/s 16(4) of the CGST Act, whether the same is valid or not? Yes, in such a case, the recipient will be eligible to claim the ITC because Rule 37(4) of the CGST Rules provides that Sec. 16(4) will not be applied in the case where the recipient is re-availing any ITC which has been reversed earlier.

2. Purpose for which the said provisions were introduced under the CGST Act

1. Before discussing the purpose for which the said provisions were introduced let us, understand that whether there was any similar provision under the earlier regime? Yes, there was the similar provision under the Rule 4(7) of the Cenvat Credit Rules, 2004. Rule 4(7) of the Cenvat Credit Rules, 2004 is reproduced hereinunder for your convenience:

"Rule 4. Conditions for allowing CENVAT credit.-

(7) The CENVAT credit in respect of input service shall be allowed, on or after the day which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or, as the case may be, challan referred to in rule 9.”

2. As per Rule 4(7) of the Cenvat Credit Rules, 2004, the taxpayer is allowed to avail the ITC with respect to the input services only when the payment of the value of the input service has been paid. But no such provision was there for the goods under the earlier regime unlike the CGST Act.

3. Now, let us understand the purpose for which the GST Law was introduced. Relevant portion of minutes of 5th GST Council meeting held on 2nd – 3rd, December, 2016 has been reproduced as hereinunder:

"XXI. Section 16(2) (Eligibility and conditions for taking input tax credit):

The Hon'ble Minister from West Bengal raised a question in respect of the second proviso of this sub-section as to why tax would be payable in a situation where a contract between two taxable persons could provide for period for making payment beyond three months. The Commissioner (GST Policy Wing), CBEC clarified that it was an anti-evasion measure and that the credit reversed after three months could be again taken once the recipient of service had made payment to the supplier. The Hon'ble Minister from West Bengal raised a question as to why the same principle was not applied to goods to which the Commissioner (GST Policy Wing), CBEC clarified that goods being tangible, there would be a proof of its receipt which was not the case in services, where there was only a book entry. The Council after further discussion agreed to keep similar provision for goods and services and further agreed that the time period for making payments shall be increased from three months to six months from the date of issuance of invoice.”

4. In the 5th GST Council meeting, in response to the question raised by the Hon'ble Minister of West Bengal, the Commissioner (GST Policy Wing), CBEC (hereinafter referred to as "Commissioner”) has clarified that the said provision is an anti-evasion matter.

5. In the earlier regime, as per the learned Commissioner, the similar provision was not enacted for the goods because the movement of the goods can be traceable unlike the services. In the CGST Act, there are many other provisions from which tracking of movement of goods have been made much easier than the earlier regime e.g. the provisions for E-Way Bills. However, even after the same, in the CGST Act, the said provision has been applied to the goods as well.

3. Whether the purpose for which the said provision has been introduced is being fulfilled?

1. As explained in the earlier paragraph that such provisions are an anti-evasion matter. However, my humble question is whether the said purpose is being fulfilled?

2. We are failed to understand that how the condition that of payment within 180 days to the supplier will became an anti-evasion matter because such provision provides that the recipient shall pay the amount towards the supply to the supplier within the period of 180 days. However, the provision has failed to provide the mode through which the payment is required to be made. Therefore, even in the case where the recipient has debited the said amount in the books of accounts will be considered as the sufficient compliance of the said provision and ITC cannot be denied on the ground that the payment has not been made by cash or bank.

3. I would like to reproduce relevant portion of the Circular No. 122/03/2010-ST dated 30.04.2010 wherein the similar view has been taken by the Central Board of Excise and Customs as hereinunder:

"5. Matter has been examined and clarification in respect of each of the above mentioned issues is as under,-(

a) When the substantive law i.e. section 67 of the Finance Act, 1994 treats such book adjustments etc., as deemed payment, there is no reason for denying such extended meaning to the word 'payment' for availment of credit. As far as the provisions of Rule 4 (7) are concerned, it only provides that the CENVAT credit shall be allowed, on or after the date on which payment is made of the value of the input service and of service tax. The form of payment is not indicated in the same and the rule does not place restriction on payment through debit in the books of accounts. Therefore, if the service charges as well as the service tax have been paid in any prescribed manner which is entitled to be called 'gross amount charged' then credit should be allowed under said rule 4 (7)……”

4. Further, the Hon'ble West Bengal Authority for Advance Ruling in the application filed by Senco Gold Ltd. and Hon'ble Madhya Pradesh Authority for Advance Ruling in the application filed by Mr. Rajesh Kumar Gupta of M/s. Mahaveer Prasad Mohanlal have held that payment by way of book entries can be considered as a due payment and reversal of ITC is not required in such case.

5. Further, issuance of credit note will also be counted as a payment made by the recipient to the supplier. In Shiva Electricals vs. CST [(2007) 7 STR 35], Mohd. Ekram Khan vs. CTO [2004 (6) SCC 1083 (SCC)] and CST vs. Shiva Analyticals [(2009) 21 STT 328 (Karnataka High Court)], it was held that issuance of credit notes also amounts to payment to supplier.

4. Whether government is unjustly enriched by payment of the interest?

• As per the provisions of the CGST Act and Rules made thereunder, reversal under 2nd proviso to Sec. 16(2) of the CGST Act is required to be made along with interest u/s 50 of the CGST Act.
• As per the provisions of the CGST Act and rules made thereunder, the supplier will pay the tax to the government vide return in Form GSTR-3B irrespective of the fact that whether the supplier has received the payment or not. Therefore, the government will duly receive the amount of tax whether the supplier will receive the payment or not. Therefore, government will be unjustly enriched by asking the recipient to pay the interest u/s 50 of the CGST Act because it has already received the amount of tax on the said amount.
• Further, in the 28th GST Council meeting dated 21st July, 2018 few amendments were proposed. One of the amendments was to remove the liability to pay interest in the case of reversal of ITC under 2nd Proviso to Sec. 16(2) of the CGST Act. It was believed that liability to pay interest is too onerous and should be removed and the same was also confirmed by way of press note.
• However, in the 29th GST Council meeting it was observed by Council that the original formulation of 2nd proviso to Sec. 16(2) of the CGST Act is more beneficial to the MSME and deletion of the phrase "along with interest thereon” would reduce the incentive for timely payment to suppliers, especially to MSMEs. Therefore, the amendment which was proposed in 28th GST Council meeting was not implemented.

5. Whether the provision is viable / justifiable considering the provisions of the Indian Contract Act, 1872 and other points?

Taxing statutes should be strictly construed

1. It is a well settled law that the taxing statues should be strictly construed. In J. Srinivasa Rao v. Govt. of A.P. and Anr. 2006(13) SCALE 27, Raja Jagadambika Pratap Narain Singh v. C.B.D.T., [1975] 100 ITR 698 (SC), Hon'ble Supreme Court has held that common sense approach, equity, logic, ethics and morality have no role to play. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less.

2. Before the amendment vide Notification No. 19/2022-CT dated 28.09.2022, according to Rule 37, the taxpayers were required to reverse the ITC along with interest in Form GSTR-2 which is never implemented.

3. Further, in Swedish Match AB v. Securities and Exchange Board, India, AIR 2004 SC 4219, CIT v. Ajax Products Ltd. [1965] 55 ITR 741 (SC), Hon'ble Supreme Court has held that Section 158BD of the Act provides for "undisclosed income” of any other person. Before we proceed to explain the said provision, we intend to remind ourselves of the first or the basic principles of interpretation of a fiscal legislation. It is time and again reiterated that the courts, while interpreting the provisions of a fiscal legislation should neither add nor subtract a word from the provisions of instant meaning of the sections. It may be mentioned that the foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule.

4. Hon'ble Supreme Court has, in the case of CIT v. Keshab Chandra Mandal, AIR 1950 SC 265, has held that hardship or inconvenience cannot alter the meaning of the language employed by the legislature if such meaning is clear and apparent. Hence departure from the literal rule should only be done in very rare cases, and ordinarily there should be judicial restraint to do so.

5. In B. Premanand & Ors. vs. Mohan Koikal & Ors., (2011) 4 SCC 266 Hon'ble Supreme Court has observed as follows:

"32. The literal rule of interpretation really means that there should be no interpretation. In other words, we should read the statute as it is, without distorting or twisting its language.”

6. Further, in the case of M/S Canon India Private Limited vs Commissioner of Custom (Civil Appeal No.1827 of 2018), Hon'ble Supreme Court has held as under:

"14. It is well known that when a statute directs that the things be done in a certain way, it must be done in that way alone. As in this case, when the statute directs thatthe proper officer can determine duty not levied/not paid, it does not mean any proper officer but that proper officer alone. We find it completely impermissible to allow an officer, who has not passed the original order of assessment, to re-open the assessment on the grounds that the duty was not paid/not levied, by the original officer who had decided to clear the goods and who was competent and authorised to make the assessment.”

7. However, It is also trite that while interpreting a machinery provision, the courts would interpret a provision in such a way that it would give meaning to the charging provisions and that the machinery provisions are liberally construed by the courts. In Mahim Patram Private Ltd. v. Union of India (UOI) and Ors., (2007) 3 SCC 668 Hon'ble Supreme Court has observed that:

"20. A taxing statute indisputably is to be strictly con­strued. [See J. Srinivasa Rao v. Govt. of Andhra Pradesh and Anr., 2006(13)SCALE 27 ]. It is, however, also well-settled that the machinery provisions for calculating the tax or the procedure for its calculation are to be con­strued by ordinary rule of construction. Whereas a liabil­ity has been imposed on a dealer by the charging section, it is well-settled that the court would construe the stat­ute in such a manner so as to make the machinery workable. 21. In J. Srinivasa Rao (supra), this Court noticed the de­cisions of this Court in Gursahai Saigal v.Commissioner of Income-tax, Punjab, [1963] 1 ITR 48(SC) and Ispat Indus­tries Ltd. v. Commissioner of Customs, Mumbai, 2006(202)ELT561(SC).In Gursahai Sai gal (supra), the ques­tion which fell for consideration before this Court was construction of the machinery provisions vis-à-vis the charging provisions. Schedule appended to the Motor Vehicles Act is not machinery provision. It is a part of the charging provision. By giving a plain meaning to the Schedule appended to the Act, the machinery provision does not become unworkable. It did not prevent the clear inten­tion of the legislature from being defeated. It can be given an appropriate meaning.”

8. In Whitney vs. Commissioners of Inland Revenue 1926 A C 37, CIT vs. Mahaliram Ramjidas (1940) 8 ITR 442, Indian United Mills Ltd. vs. Commissioner of Excess Profits Tax [Bombay [1955] 27 ITR 20 (SC)], and Gursahai Sai gal vs. CIT [Punjab [1963] 1 ITR 48(SC)]; Commissioner of Wealth Tax, Meerut vs. Sharvan Kumar Swarup & Sons [(1994) 6 SCC 623]; CIT vs. National Taj Traders [(1980) 1 SCC 370]; Associated Cement Company Ltd. vs. Commercial Tax Officer, Kota and Ors. [(48) STC 466] it was held that it is the duty of the court while interpreting the machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the Courts ought not be hesitant in espousing a common-sense interpretation to the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same.

Government cannot re-write the contract between 2 parties unless such contract is not entered in arm's length i.e., the same is fictitious

1. Invoice issued by the supplier can be considered as a valid contract between the supplier and recipient under the provisions of the Indian Contract Act.

2. By imposing a condition under the GST Law on the recipient to clear the dues of the supplier within the period of 180 days, the government are re-writing the contract entered into by supplier and recipient.

3. It is a well settled law that the government cannot rewrite the contract entered into by the parties unless it is proved that such contracts are not entered in arm's length and both the parties are acting collusively.

4. There are many judgments which are pronounced by the Hon'ble Courts of the land wherein it has been held that contract entered by different parties cannot be re-written by the government unless it is proved that the contract is not entered in arm's length and parties are acting collusively i.e., the contract is fictitious. Some of the cases are as follows:

a. Hon'ble Delhi High Court has, in the case of D. S. Bist & Sons vs. Commissioner of Income Tax [1984] 17 Taxman 283 (Delhi), held as follows:

"9. We are of the opinion that the valuation of the shares and the valuation of a debt to a party proceeds on several divergent considerations. Unless there is solid material on the record before the income-tax authorities, it is not permissible to re-write the terms of the commercial agreement entered into when the agreement is held as valid and genuine and not collusive and the two parties are held to be dealing at arm's length while entering into he agreement dated 20-8-1963……………”

b. Relying on the above referred judgment, Hon'ble Apex Court has, in the case of Mangalore Ganesh Beedi Works vs. Commissioner of Income-tax, Mysore (Civil Appeal No. 10547-10548 of 2011), held as under:

"33. …… In D.S. Bist & Sons v. CIT [1984] 149 ITR 276/17 Taxman 283 (Delhi) it was held that the Act does not clothe the taxing authorities with any power or jurisdiction to re-write the terms of the agreement arrived at between the parties with each other at arm's length and with no allegation of any collusion between them. 'The commercial expediency of the contract is to be adjudged by the contracting parties as to its terms.”

c. Relying on the abovementioned judgment of Hon'ble Supreme Court, Hon'ble Gujarat High Court has, in the case of Commissioner of Income Tax-II Vs. Parle International Ltd. (Tax Appeal Nos. 1905 of 2008), held as under:

"11. We have heard learned counsel for both the sides and perused the documents on record. It is an undisputed fact that all transactions were supported by duly executed legal Agreements, having been acted by both the parties. Under the circumstances, the Revenue had no right or legal justification to doubt its genuineness, particularly when, there was no material on record to support the stand of Revenue.”

Supplier has a right to waive the promise made to him / her

1. As per Sec. 63 of the India Contract Act, 1872 every promisee may dispense with the performance or promise made to him / her or may extends the time perform such contract i.e., in the present case, the supplier may waive its right to receive the payment or may also allow the recipient to pay the value of the supply within some extended time period.

2. Sec. 63 of the Indian Contract Act, 1872 is reproduced as hereinunder:

"63. Promise may dispense with or remit performance of promisee

Every promisee may dispense with or remit, wholly or in part, the performance of the promisee made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit.”

3. Therefore, by mandating the recipient to pay the value of supply within 180 days, the government is violating Sec. 63 of the Indian Contract Act, 1872.

From all the above paragraphs we can say that the 2nd and 3rd Proviso to Sec. 16(2) of the CGST Act is not even fulfilling the purpose for which the same was introduced. Further, instead of helping the MSME to recover the dues, it has become the curse for the businesses. Therefore, the validity of the same has already been challenged before various Hon'ble Courts of the land including the Hon'ble Gujarat High Court and Hon'ble Bombay High Court.