Section 16(4) Time Limit and RCM supplies received from Unregistered Persons

Background

There have been instances of tax payers who may have omitted/missed out to discharge GST on the specified services received from unregistered vendors, as recipient of service under reverse charge mechanism[RCM]. Such specified services could be legal services from advocate, import of services such as software licensing services by foreign vendors and so on. Such unpaid RCM liabilities may be reported to assessee during GST review by competent professionals[such as CA's] or at time of audit by dept u/s 65.

Once learnt about the tax liabilities, such tax payers would then have proceeded to voluntarily discharge tax liability, availed ITC of the tax paid under cover of self-invoices. Dept was seen to be issuing notices denying input tax credit[ITC] of such RCM paid by alleging that it pertains to the inward supplies made by vendors in earlier years. Say during 2019-20, RCM was missed to be paid on consulting services from vendor of US[where vendor invoice was dated in June 2019], wherein IGST was paid in Nov 2023under import of services and ITC availed, the dept would deny credit citing such ITC had to be availed within time limit set out in section 16(4) that is due date to furnish 3B return of Sept 2020 [20th Oct 2020].

At this juncture we recall the provision of section 16(4) whichprior to amendment wasdenying the entitlement to take credit on invoices/debit notes after the due date of return under section 39 for the month of September following the respective financial year or filing of annual returns for the respective financial year, whichever is earlier.

We have examined Section 16(4) and changes therein below.[extract under]

The section 16(4) reads as under:

(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the [*thirtieth day of November] [earlier it read as *"due date of furnishing the GSTR 3B for September"] following the end of financial year to which such invoiceor[**invoice relating to such][**omitted wef 1.1.2021] debit note pertains or furnishing of the relevant annual return, whichever is earlier.

The time limit to avail the ITC has been extended to earlier of 30th November following the end of the FY or furnishing of the relevant annual return, w.e.f., 01.10.2022 vide Notification No 18/2022- CT dated 28.09.2022.

The confusion which had arisen for assesses was

• Whether ITC of tax paid underRCM on the procurements done for the past years, could be availed in subsequent years when GST paid, or
• Whether such credit is hit by time limit for credit availment set out in section 16(4)?

In this backdrop, the latest circular no.211/2024has given a relief by clarifying that section 16(4) time limit is not applicable to the credit of RCM paidby recipient on past years supplies done by unregistered vendors. This circular with intent to mitigate dispute/litigationhas been issued consequent to the recommendations in 53rd GST Council meeting in this regard.

The author has examined the latest circular and implications thereof in this article.

Analysis of recent circular 211/5/2024-GST

It clarifies as under:

• Where the supplier is unregistered and recipient is registered, and the recipient is liable to pay tax on the said supply on RCM basis, the recipient is required to issue self- invoice as per section 31(3)(f) and pay the tax in cash on the same under RCM.
• Further, ITC can be availed by a registered person in respect of any supply of goods or services or both received by him, as per the provisions of section 16(2)(a) of CGST Act, under a tax invoice or debit note or such other tax paying documents as may be prescribed.
• Rule 36(1)(b) of CGST Rules prescribes that ITC of RCM paid on procurements done from unregistered persons, shall be availed on the basis of an self-invoice issued under section 31(3)(f), subject to the payment of tax.
• It can be seen that section 16(4) of CGST Act links the time limit for ITC availment with the financial year to which the invoice or debit note pertains.
• ITC can be availed by the recipient only on the basis of invoice or debit note or other duty paying document, and as in case of RCM supplies received by the recipient from unregistered supplier, invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availment of ITC under section 16(4) of CGST Act in such cases shall be the financial year of issuance of suchinvoice only.
• In case, the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax.
• Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action under the provisions of Section 122 of CGST Act.

Author Comments

• The invoice is a key document for availing the credit [one of the conditions for availment of credit].
• Further, Rule 36 refers to documents for claim of ITC and mentions the tax paid self invoice issued u/s 31(3)(f)
• Thereby the documents for availing input tax credit would be RCM invoice raised by the recipient in case of supplier is not registered.
• As per section 16(4) itself, the due date for availing credit is linked to the financial year to which the invoice pertains and not the supply pertains. Thereby it can be concluded that invoice date is relevantfor determining the due date for availment of credit.
• For sec. 31(1) and other cases wherein the government has the power to prescribe 'time & manner', section 31(3)(f) does not specify any time limit for raising a self-invoice and also does not give power to the Government to 'prescribe'. Hence, there is no time limit for raising a self-invoice.
• For availing of ITC of RCM paid on procurements from unregistered persons, it is required to raise a self-invoice and pay the tax. Consequently when the self-invoice raised for instancein November 2022 (for RCM transactions of FY 2017-18, 2018-19, and 2019-20 on which GST was paid in Nov 2022) the restriction of 16(4) would not apply, and credit could be availed within 30th November 2023.
• Since payment of tax and raising of self-invoice is taking place after 30th November of the succeeding financial year, the eligibility arises in terms of Sec. 16(2)(a) r/w. rule 36 based on date of invoice raised.
• Also, section 16(4) mentions about the entitlement of ITC in respect of any invoice for "supply" of goods or services and not "receipt" of goods or services. Since self-invoice has to be raised on receipt of goods or services, section 16(4) would not be applicable.
• Based on the above, it can be said that ITC on RCM paid on unregistered dealer procurements say for the FY 2017-18 paid during 2022-23 can be availed based on self invoice, without attracting Section 16(4) of the CGST Act.
• Interest paid @18% by assessee for delayed payment of RCM liability of past years becomes a cost.
• The penalty u/s 122 could extend to Rs. 10000 or availed ITC whichever is higher
• Such penalty may not be sustainable, when taxes plus interest are being paid voluntarily by assessee.

Actions based on circular and Conclusion

• Circulars have binding effect on dept. Similarly held in Dhiren Chemicals case[2002 (143) ELT 19 (SC)].
• Relying on this circular, the assesses could get relief from demands of reversal/payment of ITC availed of RCM paid in subsequent years[post Nov of succeeding year] on inwards supplies from unregistered suppliers[taken place in preceding financial years].
• Taking a cue from intent of circular, the availment of ITC on RCM procurements done from registered vendors, who had issued tax invoices in past years[such as sponsorship service invoice of 2019-20 by registered vendor on which tax was paid by recipient company under RCM in Nov 2023], could also be availed.

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