Does non-payment of consideration really attract reversal of ITC under section 16?

“Delve into the intricacies of Section 16’s second proviso in GST, which mandates ITC reversal on non-payment of consideration beyond 180 days. Explore key concerns, such as partial payments, credit periods, and the impact on output tax liability. Stay informed about recent amendments effective from October 2022 and gain insights into potential challenges and interpretations.”

Second proviso to Section 16 entails reversal of ITC on non-payment of consideration for more than 180 days. But do GST authorities really have the authority to instruct business as to what credit period they can give and what they can’t?

The relevant amended provisions as on 15-May-2023 are reproduced below for quick reference:

16.—-

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 paid by him along with interest payable under section 50, in such manner as may be prescribed:

37—

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 , whether wholly or partly, along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, 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

History of section 16 and rule 37 of CGST Rules, 2017 :

From the inception of GST, there has been a lot of confusion/queries/concerns flagged by the trade. Some of them are as below:

I. If I have paid part payment before 180 days, then am I required to reverse ITC for part amount or full amount?

II. What about the business scenario wherein the credit period is more than 180 days.

III. The wording of Section 16 entail that such ITC needs to be added to output tax liability so are we required to add this in output section of GSTR-3B or reduce ITC in GSTR-3B

IV. Whether interest on such reversal would be calculated under 50(3) of CGST Act, 2017.

V. Whether ITC would be required to be reversed in case of imports where payment of tax is to the Government and not to the supplier?

However, the CBIC has not issued any circulars/notification to clarify any of the above questions. However, in the month of October 2022, the CBIC has issued few notifications effective from 01-10-2022 which provides the revised provision and reduces few doubts in terms of practical aspects of this draconian provision:

Vide Notification 19/2022 and Notification 26/2022, the CBIC clarified the following :

• The taxpayer is required to reverse ITC only on the outstanding portion as on 181^stoutstanding day
• The taxpayer can pay this ITC either by adding it to the outstanding liability or reversing the ITC availed for the month
• Interest can be paid under section 50(1) or 50(3) (wherever applicable) of CGST Act, 2017 and not necessary under 50(1) owing to omission of rule 37(3) of CGST rules, 2017.

All these changes are made effective prospectively i.e. from 01-10-2022. Hence, there is a risk that the department can direct taxpayers to take following action for the period before 30-09-2022 :

• Direct the taxpayer to pay such amount by way of addition in outward tax liability (and not by reversing ITC) and/or
• Add to the output tax liability the amount of ITC availed on the whole amount of invoice wherein proportionate payment is made within 180 days and/or
• Compute interest on such outward tax liability under 50(1) of CGST Act, 2017.

The risk of the above instances cannot be mitigated as the CBIC has introduced these changes prospectively. However, a view can be taken that rule 37 does not hold water before 01-10-2022, as the earlier rule 37 required the taxpayer to furnish details in GSTR-2, a return which was never made effective by CBIC, hence the requirement of reversal under rule 37 is null and void.

Author’s opinion:

For ease of reference please find the author’s comments on each of the subject matter separately:

If I have paid part payment before 180 days than am I required to reverse ITC for part amount or full amount.

• Basis the above discussion, it is amply clear that with effect from 01-10-2022, the reversal is only applicable on the outstanding amount however the learned officers can argue to the fact that before the amendment, there was no mention of the word ‘whether wholly or partly’ in the section/rule made thereunder hence when the taxpayer has made a part payment then also the reversal would be applicable on the whole invoice amount.

• However, it can be argued against that the intention of the legislation has always been to ensure reversal of ITC on the outstanding amount, hence the word ‘whether wholly or partly’ should be assumed to be applicable from 01-07-2017

• In the event of the confusion, it is always expected that CBIC should come up with a circular to clear the air around the word ‘whether wholly or partly’ before 01-10-2022

What about the business scenario wherein the credit period is more than 180 days?

• From the interpretation of the section and rules made thereunder it can be established that CBIC has stressed upon creating a fiction of 180 days credit cycle for availment of ITC.

• However the CBIC should consider cases wherein the recipient was not liable to make payment within 180 days owing to the credit period. In few businesses, it is a mutual agreement to pay consideration post 180 days however the CBIC has conveniently remained silent on this issue.

• Further, the proviso starts with ‘where a recipient fails to pay to the supplier’ hence in order to reverse the ITC, there should be default by the recipient to make a payment to the supplier. So if the given arrangement entails for a longer credit period, a view may be taken that the second proviso to section 16 is not applicable.

• However, it is pertinent to note that the department may not hold the above interpretation unless a favorable court ruling is issued or the CBIC comes up with a circular.

The wording of Section 16 entails that such ITC needs to be added to output tax liability so are we required to add this in output section of GSTR-3B or reduce ITC in GSTR-3B

• The aforementioned question is settled w.e.f. 01-10-2022 however, before that the provision was drafted with the intention of furnishing the details of such supply in GSTR-2. Hence, a view may be taken that when any statute prescribes the manner in which something is to be done, it must be done in the same manner only and not otherwise. To support this context, the Hon’ble Supreme Court in the case of M/s CANON INDIA PRIVATE LIMITED VERSUS COMMISSIONER OF CUSTOMS stated that “when a statute directs that things to be done in a certain way, it must be done in that way alone“.

• Applying this to the present scenario, earlier the Act and the Rules required the taxpayer to furnish the details of such supply in Form GSTR-2 for the month immediately following the period of 180 days from the date of the invoice.

• So, can it be said that since GSTR-2 was not operational, it was not possible for the taxpayer to comply with this provision in the manner set out in the statute and thereby it was not required to be complied with?

• If this be the conclusion, the taxpayer was not required to comply with this provision until GSTR-2 was made effective.

• The GSTR-2 was not made effective till 30-09-2022, hence a view may be taken that no reversal under second proviso to section 16 is applicable till that period.

Whether interest on such reversal can be calculated under 50(3) of CGST Act, 2017.

• Via Finance Act 2023, it is made effective by the CBIC that the payment under second proviso to Section 16 in respect of vendor invoices whose payment is due for >180 days can be reversed through ITC as well.

• In this regard, interest may be levied under Section 50(3). Thus, it is important to analyze whether ITC is wrongly availed and utilized.

• Further, basis rule 37, the interest on such reversal is applicable from the date of such availment (and not from 181st day). So basis this, it can be deduced that the taxpayer was not eligible to avail ITC at the first place.

• And as the taxpayer availed such ITC, it can be regarded as ITC wrongly availed.

• So from the above discussion, it can be inferred that the current ITC reversal is on account of wrongly availed ITC. Accordingly provisions of 50(3) can be invoked and Interest may only be applicable if ITC is utilized.

Whether ITC would be required to be reversed in case of imports where payment of tax is to the Government and not to the supplier?

• The section 16 entails that when the ‘recipient fails to pay to the supplier the value of supply along with the tax payable thereon’. Hence, in order to invoke the second proviso it is pertinent to note that the tax should be payable by the recipient to the supplier.

• Further, the proviso mentions the words ‘one hundred and eighty days from the date of issue of invoice by the supplier’.

• As per section 2(66) of CGST Act, “invoice” or “tax invoice” means the tax invoice referred to in section 31

• Under imports arrangement, the supplier does not issue any invoice/tax invoice in accordance with section 31.

• Hence, owing to the fact that the supplier is not liable to issue tax invoice under section 31 and the recipient is not liable to pay the tax amount to the supplier, a view may be taken that the second proviso is not applicable on the import cases.