ITC Reversal For Non-Payment Within 180 Days-Relevance In Present ERA

GST was said to be the biggest game changer for the Indian Economy. After implementation of this law, we have seen many ups and down in the Economy which inter-alia include changes in GST as well. The present economic position of the Country is on doldrums. The same is quite apparent and the Hon’ble FM has been trying to push the economy since last 5-6 months. But the present global crisis on account of outbreak of COVID-19 has further derailed the Indian economy. In such a situation it has become really difficult for the common citizens to comply the law in letters and spirit.

Input Tax Credit (ITC) is the heart and soul of the GST Law. The entire gamut of the GST law revolves around ITC. Right from the procurement of supply till the final payment thereof to the vendor the Govt. has put so many conditions and restrictions for availment of ITC. Some of the conditions are practically, contractually and legally not possible to fulfil. One such condition is that in order to avail the full ITC, the receiver of supply should make payment to the vendor within 180 days from the invoice date. In other words, if this condition is not meet out the service recipient in such a situation needs to reverse the ITC availed and pay the same along with interest. Though the facility of re-credit of such facility on making payment finally is provided but that seems to be an additional burden and a futile exercise. In this article the authors have made an attempt to examine the need and relevance of such stipulation in the context of present era.

A. Legal provisions:

In order to be precise and clear let us first understand the relevant legal provisions of section and rules. The extracts of Second and Third Proviso to Section 16(2) of the CGST Act, 2007 is reproduced as:

“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.”

Further, Rule 37 of CGST Rules, 2017 reads as under:

“Reversal of input tax credit in the case of non-payment of consideration

37. (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 starting from the date of availing credit on such supplies till the 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 re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter that had been reversed earlier.”

A conjoint reading of the above section and rule leads us to the following conclusions:

i) In case, payment against purchase of goods or services or both has not been made by the recipient to the supplier of such goods or services or both within a period of 180 days from the date of issuance of invoice, Input Tax Credit (ITC) availed by the recipient on such purchase has to be reversed by adding the same to his output tax liability along with applicable interest. However, supplies on which reverse charge is applicable are not liable for such reversal.

[Second Proviso to Section 16(2)]

ii) On complete payment of value of supply along with tax payable thereon, the ITC can be re-availed by the recipient.

[Third Proviso to Section 16(2)]

iii) The recipient is required to furnish the following details in GSTR 2 for the month immediately following the period of one hundred and eighty days from the date of issue of invoice:

a) details of such supply

b) the amount of value not paid, and

c) the amount of input tax credit availed of proportionate to such amount not paid to the supplier. Thus, in case of partial payment of consideration, proportionate ITC is to be reversed

[(Rule 37(1)]

iv) In transactions, where either the parties are related or for any other reason, price is not the sole consideration, in such cases the value of the free supply is added to the transaction value to arrive at the correct value for the purposes for calculation of GST on the value as per applicable CGST Rules. However, there is no tangible transaction for the calculated value as it is without consideration. Thus, First Proviso to Rule 37(1) states 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.

[(First Proviso to Rule 37(1)]

v) Any addition to the value of supplies 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.

[(Second Proviso to Rule 37(1)]

vi) Interest as per Section 50(1) i.e. not exceeding 18% is to be paid on the addition to output tax from the date of availing of the credit till the date of addition to output tax.

[(Rule 37(3)]

vii) No time limit is applicable for reclaiming the ITC earlier reversed.

[(Rule 37(4)]

B. Legislative Intent behind enacting the above Provisions:

In order to know and understand the object and purpose of a law it is imperative to first read the legislative intent behind enacting the same. Though the Chapter, Section and relevant Rules of the CGST Act, 2017 do not speaks about any such object. However, the 101^sth Constitutional amendments vide article 279A constituted GST Council whereby the task of framing model GST law and other allied matters was empowered to the Council. The GST Council obtains consensus through its meeting only. So, the authors examined the minutes of the GST Council meetings to know the objects of introducing the said condition of making payment to the vendors within 180 days.

The Minutes of the 5^thGST Council Meeting held on 2-3 December 2016 at New Delhi stated as under:

“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.”

Further, the decision taken by the 6^thGST Council Meeting held on 11 December, 2016 held at New Delhi read as under:

“v. Section 16(2) (Eligibility and conditions for taking input tax credit):

To incorpoate the decision in the Minutes that in Section 16(2), the time period for making payment shall be increased from three months to six months from the date of issuance of invoice and that this provision shall apply to both goods and services.”

Thus, a reading of the above recommendations/ discussions leads us to the following conclusion:

i. The proviso was intended to be an anti-evasion measure and to encounter the menace of fake or book entry transactions.

ii. The proviso was initially intended to be introduced only for services but finally made applicable to Goods as well as Services.

C. Testing above Legislative intent vis-a-vis framework of law:

Though the proviso to section 16(2) is not yet tested on the touchstone of its legislative intent at any forum, but a cursory look at the above proviso vis-a-vis its legislative intent and other provisions of GST law leads us to the following conclusion:

i. Anti-Evasion Measure:

The proviso intends to address the issue of sham transactions or book entry transactions which are primarily intended to evade taxes and in cases where no actual purchase or sale takes place.

Let us first know whether at all the CGST Act have any other anti-evasion measures n-built therein to curb such transactions:

Section/Rule of CGST Act, 2017	Description of provision
Section 25& Rule -9	Verification of application of registration, Aadhar Authentication and Physical verification of Premises
Section 67 & Rule	Powers of Inspection Search & Seizure
Section 69& Rule 139	Power to arrest in case a person has committed offences u/s 132
Section 70& Rule 132	Power to summon persons to give evidence and produce documents
Section 71	Access to business premises & Inspection of records etc.
Section 68&Rule 138	Inspection of Goods in movement /Information to be furnished prior to commencement of movement of goods and generation of e-way bill

A further study reveals that separate penal provisions has also been prescribed for each of the violation or offences. A summary of the relevant penal provisions are also reproduced as follows:

Section	Nature of offence	Penalty
S-122(1)(i)	Supplies any goods or services or both without issue of any invoice or issues an incorrect or false invoice with regard to any such supply	Shall be liable to pay a penalty of ten thousand rupees or an amount equivalent to the tax evaded or input tax credit availed of or passed on or distributed irregularly whichever is higher
S-122(1)(ii)	Issues any invoice or bill without supply of goods or services or both in violation of the provisions of this Act or the rules made thereunder;
S-122(1)(vii)	Takes or utilizes input tax credit without actual receipt of goods or services or both either fully or partially, in contravention of the provisions of this Act or the rules made thereunder;
S-122(1)(ix)	Takes or distributes input tax credit in contravention of section 20, or the rules made thereunder;
S-122(1)(xii)	Furnishes any false information with regard to registration particulars, either at the time of applying for registration, or subsequently
S-122(1)(xiv)	Transports any taxable goods without the cover of documents as may be specified in this behalf

Further sub-section (1A), (2) & (3) also prescribed penalty in some more cases. Thus, it is crystal clear that there are sufficient safeguarding provisions under the law; right from the start of supply till its final disposal. The Govt. has checks at each point of transaction. Interestingly, even if it is presumed to be an anti-evasion measure then why the Govt. wants to wait for 180 days to catch hold the defaulter? Further it is not on record as how many defaulters Govt. has brought to book till the date by applying the said provisos. The perpetrator of sham transactions will always ensure that payments should be made within 180 days because he has to do only book entry transactions.

So, when so many anti-evasion provisions are already put in place and inbuilt in the law itself how one can assume that payment to vendor beyond a period of 180 days is an anti-evasion measure to block the sham transactions? Further, said provision is also discriminatory and inequitable inasmuch as it makes no difference between genuine transactions and sham transactions and considers both of them on equal footing. Thus, it is also violative of Article 14 and Article 19(1)(g) of the Constitution of India. Further, this restriction should also meet the test under article 301 of the Constitution of India. It is a settled position that whenever any limb of enactment fails to achieve or fulfil its purpose and intent then the same is liable to be struck down by Courts.

ii. Its Applicability to both Goods and Services:

The very applicability of the said proviso to goods as well as services is also questionable on the basis of the minutes of the meeting of the GST Council. Originally, the said proviso was framed for services only so as to control the bogus or sham entries only in the books of account without actual supply. But finally, without giving any cogent reason the Council made it applicable to goods as well. It will not be out of place to mention here that in case of goods, the same being movable, and movement thereof can be easily traced by E-way bill so it is beyond one’s understanding how at present the said proviso is effective as an anti-evasion measure in case of goods?

Thus it is clear that the said proviso is presently not in consonance or fulfilling the objects and reasons given for insertion of the same.

D. Practical difficulties in giving effect to the said provisos:

The business terms and conditions in our Country have always been a prerogative of the buyer and seller. The Govt. cannot force any buyer or seller to choose a particular methodology for doing their business as long as they follow the other regulatory frameworks. In many situations, it is not always necessary that the buyer will make payment to the seller within 180 days. Rather, it also depends on nature of business, model of business, form of business and relationship between the parties. In practical scenario, there are many situations where higher credit period is necessary and allowed. Some illustrations are:

1) Higher credit period allowed to a new entrepreneur by friends/ relatives to support with proper agreements.

2) Retention money kept by the recipient in case of large works contract.

3) Some commodities require push sales. In such cases higher credit is part and parcel of business strategies.

4) Invoice remains partially unpaid in some cases where post-sale turnover discounts offered by sellers normally at year end.

The compliance of this provision is also impossible in cases where it is difficult to ascertain payment made beyond 180 days for each invoice. Take an example where lumpsum payment is made by the buyer to the vendor on running account and the same is not adjusted against a particular bill rather various bills spread over a particular frame of time. In such cases, it is hardly possible to determine which bill is being paid in full or which is paid in part. Whether the payment received covers invoice value or tax bill? So, in such cases it is really beyond one’s control to comply the said provision meticulously.

The present global crisis on account of COVID-19 has created a panic not only in health sector but economy of the Country is also affected. The entire world is under lockdown. Further the economic experts believe that even after lockdown is over it will take at least 6-8 months to normalise the situation. After lockdown most of the business houses will face liquidity problem and will try to cut down their fixed expenses etc. to recoup the force majeure losses. So, payment within 180 days in such a scenario seems to be really difficult. Hence, in such a situation the reversal of input on account of non-payment of consideration within 180 days as prescribed will be an additional burden on the business.

Surprisingly, the Govt. has also not given any relief on account of this proviso in the recently issued bunch of notifications on account of COVID-19. Thus, the authors strongly feels that this proviso to section 16(2) is going to be a big challenge for the business house sand very soon going to be tested legally as well on this ground. It will be impracticable as well as impossible to follow in the situation of compete lockdown.

The legal maxims Lex non cogit impossibila”- meaning law does not compel a man to do that which he cannot possibly perform and “Impossibilum Nulla Obligatio Est”  -meaning law does not expect a party to do the impossible are well known maxims in law and would squarely apply to the present case. The Supreme Court in the case of State of MP Vs. Narmada Bachao Andolan [(2011) 7 SCC 639], applied this maxim and held that thus, where the law creates a duty or a charge and the party is disabled to perform it without any fault on his part and has no control over it, the law will in general excuse him.

E. Revenue Neutral Situation:

The reversal of credit under second proviso to section 16(2) and re-claim thereof under third proviso to the same section on making actual payment to vendor is a revenue neutral situation. Further, in such cases supplier of goods duly files its returns and pays applicable taxes to the Government. Moreover, section 16(2)(c) already requires reversal of ITC if tax has not been paid by the supplier to the Ex-Chequers account. Thus, the Govt. is not going to lose any revenue due to this exercise. The only benefit accruing to the Govt. due to such exercise is the interest u/s 50(1) for the period starting from the date of availing credit on such supplies till the date when added to output tax liability on account of such reversal. But the object of the said proviso can never be earning of interest keeping in mind its legislative intent. Hence the said provisos does not have any impact on the revenue of the Govt. inasmuch as the same is first reversed and later on re-claimed.

It is a settled principle that when contravention of statutory provision has no revenue implications i.e. contravention is of form but not content then it will absolutely be a revenue neutral situation. So, the instant provisions of section 16(2) are nothing but, purely a revenue neutral case as long as credit is reversed and re-claimed.

F. Legal Analysis of the said provision:

a) The first question which comes is whether the Govt. can impose conditions for availing Input Tax Credit?

The answer will be probably YES. It is a well settled law laid down by the Apex Court including the decision in the case of Kerala Hotel & Restaurant Association Vs State of Kerala, (1990) 77 STC 253 (SC) that though other legislative measures dealing with economic regulation are not outside Article 14, it is well recognized that the State enjoys the widest latitude where measures of economic regulation are concerned. The Apex Court held that it is for the State to decide what economic and social policy it should pursue. In view of the larger discretion of the legislature in matter of its preferences of economic and social policies, the Apex Court held that the legislative preference in favour of a particular class cannot be questioned on the ground of lack of legislative wisdom or that the method adopted is not the best or that there were better ways of adjusting the competing interests and claims.

b) Can a different interpretation of second proviso to section 16(2) possible?

The second proviso to section 16(2) uses language as “shall be added to his output tax liability”. So, prima facie, the use of word ‘shall’ makes it a mandatory requirement. Further, on going through the intent of this proviso, it appears that the same was introduced as an anti-evasion measure because at the initial stage, the other anti-evasion measures like E-Way Bill etc. were not introduced or in force. So, here again a question arises whether the subsequent introduction of other anti-evasion measures in the law has in anyway changed or liberalised the interpretation of the second proviso to section 16 from mandatory to directory?

A statute is an edict of the Legislature and the conventional way of interpreting or construing a statute is to seek the ‘intention’ of its maker. It is to be understood according to the intent of its maker, with the guidance furnished by the accepted principles of interpretation. “The object of interpreting a statute is to ascertain the intention of the Legislature enacting it”, (South Asia Industries (Pvt.) Ltd. S. Sarup Singh, AIR 1966 SC 346.) For determining the purpose or object of the legislation, it is permissible to look into the circumstances which prevailed at the time when the law was passed and which necessitated the passing of that law.

In case of Dinesh Chandra Pandey v. High Court of Madhya Pradesh, (2010) 11 SCC 500 the Supreme Court has held as under:-

“15. The courts have taken a view that where the expression “shall” has been used it would not necessarily mean that it is mandatory. It will always depend upon the facts of a given case, the conjunctive reading of the relevant provisions along with other provisions of the Rules, the purpose sought to be achieved and the object behind implementation of such a provision. This Court in Sarla Goel v. Kishan Chand, took the view that where the word “may” shall be read as “shall” would depend upon the intention of the legislature and it is not to be taken that once the word “may” is used, it per se would be directory. In other words, it is not merely the use of a particular expression that would render a provision directory or mandatory. It would have to be interpreted in the light of the settled principles, and while ensuring that intent of the Rule is not frustrated.”

Similarly, in case of Mohan Singh v. International Airport Authority of India (1997) 9 SCC 132the Apex Court held that the effect of word “shall” would be mandatory or directory must be seen looking to the object of the enactment. The Court held as below:

“26. Thus, this Court, keeping in view the objects of the Act, had considered whether the language in a particular section, clause or sentence is directory or mandatory. The word „shall‟, though prima facie gives impression of being of mandatory character, it requires to be considered in the light of the intention of the legislature by carefully attending to the scope of the statute, its nature and design and the consequences that would flow from the construction thereof one way or the other. In that behalf, the court is required to keep in view the impact on the profession necessity of its compliance; whether the statute, if it is avoided, provides for any contingency for non-compliance; if the word ‘shall’ is construed as having mandatory character, the mischief that would ensue by such construction; whether the public convenience would be subserved or public inconvenience or the general inconvenience that may ensue if it is held mandatory and all other relevant circumstances are required to be taken into consideration in construing whether the provision would be mandatory or directory. If an object of the enactment is defeated by holding the same directory, it should be construed as mandatory whereas if by holding it mandatory serious general inconvenience will be created to innocent persons of general public without much furthering the object of enactment, the same should be construed as directory but all the same, it would not mean that the language used would be ignored altogether. Effect must be given to all the provisions harmoniously to suppress public mischief and to promote public justice.”

So, the authors feel that a possible other view on the interpretation of the said provision may be called for by the judicial authorities as and when it will be challenged. Further, in such cases it would be left to the judgement of the assessing officer to assess in each individual case, if the transaction is bogus or sham and it is necessary to disallow the ITC on the basis of doubt created due to non-payment to suppliers. If that can be done, then the recipient of supply shall also get an opportunity and he can justify his case by producing necessary documents/ evidences to the officer to justify the transaction as genuine. This will save honest and genuine taxpayers from the clutches of this section.

c) Can Govt. impose uncertain and vague conditions for operation of law?

The answer will be NO. Rule 37(1) of the CGST Rules, 2017 requires a recipient of supply who has not paid within a period of 180 days of date of issue of invoice to 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. However, since FORM GSTR-2 has not been made operational till now and there is no other notification, circular, order, clarification to waive such a requirement, will it not make the section redundant or otiose since the procedure to give effect the section is not in place?  Thus, it is a situation of uncertainty and vagueness which is not permissible in taxing statues. Reliance can be placed on Apex Court judgement in case of Govind Saran Ganga Saran Vs. CST (1985 Supp SCC 205) & CIT Vs. B.C. Srinivasa (1981 2 SCC 460)

d) Whether a contractual obligation between the parties in good faith overrides the express provisions of GST law?

Second proviso to Section 16(2) states ‘where a recipient fails to pay to the supplier of goods or services or both’. In this context, the word ‘fails to pay’ has much wider implications. As stated in our discussions above, there may be certain genuine situations where the payment may be delayed beyond 180 days. Also, in some cases there may be a contractual agreement between the buyer and seller wherein payment term may be beyond 180 days. So, in such cases if payment is made by the buyer to the seller within the agreed terms, can it be considered as failure to pay under the GST Law? Thus, a question arises as to whether contractual obligations between the parties in good faith override the express provisions of GST law? This is really a tricky question to answer and based on the past experience the answer comes in negative. But since GST is a new law so let’s wait and watch how judicial authorities interpret the same in due course of time.

e) Can Interest be charged on reversal of ITC as prescribed u/s 16(2)?

Rule 37(3) prescribes levy of interest u/s 50(1) also. But interest in the instant case applicability of section 50(1) is also questionable legally. The sub-section (2) of section 50 specifies that interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid. But, unfortunately the said manner of calculation has not yet been prescribed by the Govt. So, when the machinery provision is not there how can the provision of section 50(1) be given effect to? Reliance can be placed in case of Gauhati Municipal Corporation Contractor’s Association Vs. Gauhati Municipal Corporation 91196) GLR 172 and India Carbon Ltd. Vs. State of Assam, (1997) 6 SCC 479.

f) Whether extended period of limitation and penalty be invoked in such cases?

Another question comes whether extended period of limitation prescribed u/s 74 can be applied and penalty can be levied in cases where there is non-compliance of the second proviso to section 16(2) with regards to reversal of ITC for non-payment within 180 days? The answer will be NO. As discussed above, there would be a revenue neutral situation in such cases. So, when there is a revenue neutral situation there should not be a question of any fraud, suppression of facts, wilful misstatement etc. and the same was held in a plethora of cases decided under the Central Excise and Service Tax law. Reliance can be placed in cases of M/s British Airways Vs. Commissioner ( Adjn.), Central Excise, Delhi 2014 (6) TMI 626-CESTAT New Delhi (LB)and Formica India Division Vs. Collector of Central Excise 1995 (3) TMI 98-SC.

G. Conclusion:

There is no denying the fact that section 16(2) is a part of a piece of legislation approved by the Parliament. Thus, it is the duty of every law abiding citizen to comply with the provision of law in its true spirit. At the same time, it is also a settled legal position that a law should not compel a man to do that which he cannot possibly perform. In such a situation, it is the duty of the Govt. to remove the difficulty and pave the way for its compliance. The present situation where the entire world is suffering due to the pandemic is the right time to give permanent relaxation from this disputed provision of law. The irony behind this provision is that the benefit of reversal is also not given to the supplier of goods who is the person who is actually losing due to non-payment inspite of the fact that the applicable output tax on such transaction has been paid by him. So, this provision is acting like a double-edged sword. So, it is certain that in the coming period this provision is going to be challenged before the judicial forum(s) of the Country. The legislative intent behind the enacting this proviso is to plug revenue leakages, so the proviso should work towards attainment of this primary objective of the legislature and should not lead to any absurd and unintended results.

Disclaimer: The above expressed views are purely the personal views of the authors. The possibility of other views on the subject matter cannot be ruled out. So the readers are requested to check and refer relevant provisions of statute, latest judicial pronouncements, circulars, clarifications etc before acting on the basis of the above write up. The authors are not responsible in anyway.