Reversal of ITC on non-payment to vendors within 180 days

Background

Under the GST law, the Input tax credit [ITC] can be availed by registered person on goods/services used in course of business subject to satisfaction of conditions and restrictions set out therein. Accordingly such a person can avail the ITC on the inwards supplies of goods/services, to extent used in course of business of making taxable supplies/zero-rated supplies[exports or supplies to SEZ unit or developer].

A recipient of goods/services who receives goods and services on supplier's credit is also entitled to avail the ITC. However, if he fails to pay vendor towards the value of supply plus tax within a period of 180 days from invoice date, he is liable to discharge the benefit of the ITC along with interest.

This is set out in second proviso to Section 16(2) of the CGST Act r/w Rule 37 of GST rules.

There had been discussions in GST council in past, also in 28th Council meeting and press note thereto where it was proposed to scrap the said requirement of payment of interest for non-payment within 180 days. Extract as under: 10. In case the recipient fails to pay the due amount to the supplier within 180 days from the date of issue of invoice, the input tax credit availed by the recipient will be reversed, but liability to pay interest is being done away with. But till date the liability to pay interest has not got rolled back/done away.

In this article, the author has examined the non-payment to vendor within 180 days of invoice date and the implications thereof to assessee.

ITC reversal on non-payment towards vendor invoices within 180 days-proviso/ rule and changes therein

In the second proviso to Section 16(2) it sets out that ITC to be reversed with interest where the recipient of goods/services fails to pay the consideration with tax to the supplier within a period of 180 days from the date of issue of the invoice by the supplier. This provision is to address a situation where the recipient of taxable goods or services or both, avails the ITC without paying for the same. Consequently the taxpayer avails of a reduction in his output tax liability against ITC on supply on which he has not discharged liability payable to vendor. In such a circumstance, the amount equal to the ITC availed by the recipient is added to his output liability along with interest payable thereon.

The third proviso to Section 16(2) of the CGST Act further specifies that in the event the recipient pays the amount due towards the value of the supply of goods or services or both, along with the tax payable thereon, the recipient would be entitled to avail of the ITC. The second and third provisos to Section 16(2) of the CGST Act make it amply clear that a party is not disentitled to avail the ITC in respect of goods/services prior to his discharging the liability to pay the supplier for such goods/services and tax thereon. However, if the taxpayer does not discharge his liability to the supplier within a period of 180 days, he is required to account forthe benefit of the ITC availed by the taxpayer along with interest as a part of the output liability. In terms of the third proviso to Section 16(2) of the CGST Act, the taxpayer would be entitled to avail of the ITC once again on payment being made to the supplier.

Rule 37 of the CGST Rules provides for the mechanism for reversal of the ITC availed in case of non-payment of consideration. It set out as follows till Oct 2022.A registered person, who has availed of input tax credit on any inward supply of goods or services, but fails to pay to the supplier the value of such supply along with the tax, 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 ITC availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the 180 days from the date of the issue of the invoice. The amount of ITC shall be added to output tax liability in the month in which details furnished.

The registered person shall be liable to pay interest at the rate notified under subsection (1) of section 50 for the period starting from the date of availing credit on such supplies in GST returns, till the date when the amount added to the output tax liability, is paid.

Thereafter vide notification 19/2022-CT dated 28th Sept 2022, wef 1st October 2022,it was substituted to state that a registered person, who has availed ITC on goods/services, but fails to pay to the supplier thereof, the amount towards the value of supply plus tax payable thereon, within 180 days from invoice date, shall pay an amount equal to ITC availed along with interest under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of 180 days from the date of the issue of the invoice.

Prior to amendment, it clearly provided that taxpayer is liable to reverse the proportionate ITC attributable to the portion of the value, which has not been paid within 180 days. However, amended Rule 37 (1) appeared to beunclear about whether the taxpayer is liable to reverse the entire or proportionate ITC, in cases where only part of the invoice value is not paid within 180 days.

Thereafter with retrospective effect from 1st day of October, 2022, vide notification 26/2022-CT dated 26th December 2022it was made clear that payment to be done proportionate to the amount not paid to the supplier.

A conjoint reading of Rule 37 of the CGST Rules and the proviso to Section 16(2) of the CGST Act indicates the intention of the lawmakers that a taxpayer is entitled to avail of ITC in the first instance even though he has not paid the supplier for the goods/services. He has to however, reverse the same with interest by including the amount of ITC availed as a part of his output liability, if he does not make the payment to the supplier within the stipulated period of 180 days.

Note

The time limit of availment of ITC for invoices/debit notes in respect of a year within 30th November of the succeeding year or filing annual return[whichever is earlier] as specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit under 2nd proviso to Section 16(2) that had been reversed earlier.

Time limit for availment of ITC for invoices/debit notes of a financial year was within due date of furnishing GSTR 3B for September of succeeding year or filing an annual return[whichever is earlier] [prior to amendment w.e.f 1st October 2022].

Author's Comments

• There has been school of thought that failure to pay within 180 days arises only when there was obligation to pay within 180 days. If by contract between vendor and recipient, there was no obligation to pay within 180 days, then reversal not required. This may have to be validated through the Higher Courts of jurisdicature, as of date no clarity in this regard in GST.
• A view was possible that as Form GSTR 2 was not available and thereafter scrapped, the requirement of reversal of ITC with interest was not required to be done July 2017 till October 2022 as per 2nd proviso to section 16(2).
• In respect of the supplies done between branch offices/different GST registrations of same person or related persons, the consideration is deemed to be paid vide first proviso to Rule 37(1).
• Even book entry is deemed to be paid. Ref Senco Gold Advance ruling.In the case of Senco Gold Ltd [2019 (24) G.S.T.L. 688 (A.A.R. - GST)], it was held that consideration paid by way of setting off book debt is proper payment. While common mode for payment of consideration may be money, obligation to pay can be discharged by other legal agreeable means also. Consideration, as defined in GST law, is so wide that no form of payment is excluded.
• The interest rate applicable would be 18%/24%? In the paper writer's view it would be 18% to extent of credit availed and utilized [from July 2017 onwards].
• The proviso of payment within 180 days is not applicable to RCM cases where the recipient requires to discharge tax liability.

Relevant decision in the context of the said proviso

In Sunny Jain vs UOI ( W.P.(C) 6444/2022, CM Nos.19502/2022 & 33763/2022) pronounced on 05.12.2022the petitioner has filed the present petition impugning the action of the respondents in blocking the Input Tax Credit (hereafter 'the ITC') of ₹1,37,17,022/- (IGST of ₹1,29,80,631/- and CGST of₹7,36,391/-), which is credited in the Electronic Credit Ledger (hereafter 'ECL') of the petitioner. The said ITC was blocked on 11.02.2020.

Respondent no.2 issued a letter dated 12.11.2021, directing the petitioner to deposit interest on account of non-payment of consideration to a supplier (D.G. Impex), within a period of 180 days as required in terms of Section 16(2) of the Central Goods and Services Tax Act, 2017(hereafter 'the CGST Act') and Rule 37 of the CGST Rules. The petitioner disputes the said demand. He claims that he is not required to pay any interest on the ITC as he had not utilized the ITC in respect of supplies received from D.G. Impex.

The ECL of the petitioner was unblocked on 01.04.2022 and was again blocked on the same date.

Analysis and conclusion

A plain reading of Rule 86A of the CGST Rules indicates that the restriction on use of ITC in the Electronic credit ledger, as contemplated under Rule 86A(1) of the CGST Rules, can be imposed only where the ITC available in the ECL has been "fraudulently availed" or is "ineligible" as specified in the said Sub-Rule.

It is also important to note that in terms of Rule 86A(3) of the CGST Rules, the restrictions imposed to block credit under Rule 86A of the CGST Rules cannot extend beyond the period of one year from the date of imposing such restriction. Thus, there may be merit in the petitioner's contention that the Order under Rule 86A(1) of the CGST Rules cannot be extended beyond the period of one year by successively issuing further orders.

In the given facts and circumstances of the case, the action of the respondents to continue blocking the ITC available in the ECL of the petitioner for a such extended period is without the authority of law. In the circumstances, the respondents are directed to forthwith unblock the ITC available to the petitioner in his ECL.

Held: No continuous blocking of credit ledger by Revenue for more than one year and grounds of vendor not being paid not valid for blocking. The respondents have completely misdirected themselves in proceeding on the basis that unless a taxpayer pays the supplier, he is ineligible to avail of the ITC lying to his credit in the Electronic Credit Ledger[ECL].

It is significant at last para of said decision it has held that:

It is clarified that nothing stated in this order would preclude the respondents from taking such steps as are necessary for recovering any ITC along with interest from the assessee, if the same is otherwise required to be added to the petitioner's output liability in terms of the second proviso to Section 16 of the CGST Act [non-payment within 180 days]

Conclusion

It would do good to remember that the said proviso seems to be contrary to the ease of doing business, however may have continued to be enforced by lawmakers due to revenue augmentation targets.

In this article, the author has examined the proviso for reversal along with its implications under GST.

The author can also be reached at roopa@hiregange.com