Article contains a Background of provisions related to ITC reversal on non-payment of consideration, Extract of relevant provisions and analysis for 180 days reversal, Whether reversal prescribed under section 16(4) 2nd proviso r/w rule 37 to be done in GSTR-3B, Manner of calculating ITC reversal, Non applicability of 180 days ITC reversal provisions, Discussion in GST council meeting and validity of the provision of ITC reversal in case of non-payment of invoice value and tax within 180 days, Similar provision existed under erstwhile law- in Cenvat Credit Rules, COVID relaxation w.r.t credit reversal post 180 days under GST, Whether the interest is required to be paid from 181st day in above example falling in relaxation period till 30th August 2020?, Summary and measures to be taken abd Remarks of the Author.

1. Background

The input tax credit is indefeasible right of taxpayers and it is the property of taxpayer, the Government by inserting proviso to S. 16(2) and rule 37 i.e., for reversal of ITC in case of non-payment of consideration within 180 days made an apparent absurdity is the GST law which is over riding the mutual agreements between supplier and recipient which may not be in line with the intention of the GST law which was to enable ITC to taxpayers.

Further the representations made by industry to remove this provision have been unheard giving way to genuine hardships for the taxpayers discussed in 5th, 28th and 29th council meetings approved in 28th meeting and withdrawal of approval in 29th meeting left no hope for taxpayers.

The paper writer in this article aims to bring out the clarity on the aspects of the said restrictions on ITC, validity of relevant provisions, decision by the Parliament & GST Council meeting in this regard, manner of calculation of ITC reversals, COVID relaxation with illustration, summary and measures to be taken by taxpayer to be comply the said provisions.

2. Extract of relevant provisions and analysis for 180 days reversal

In terms of 2nd and 3rdproviso to section 16(2) of CGST Act, 2017 provides as

2ndproviso 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 a 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.

3rd provisoProvided 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.

Prescribed in rule 37of CGST Rules 2017

  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
  2. The registered person shall be liable to pay interest at the rate notified section 50(1) i.e. 18% from the date of availing credit till the date when the amount added to the output tax liability, as mentioned in rule 37(2) is paid.

Note: The time limit specified in section 16(4) would not be applicable for re-availing of any credit after payment along with tax have been made to supplier which had been reversed earlier due to section 16(2) second proviso r/w rule 37 above

Meaning of fails to pay*

There is possibility of thoughts that fails to pay here refers failure to pay to the vendor as agreed between supplier and recipient,

  • “Fails” is an ambiguous word that may or may not import the notion of fault [i].
  • In some areas of law, ‘failure’ is construed as involving a high degree of culpability (e.g., the failure to discharge the obligation of parenthood [ii]
  • “The word failure” means non-fulfillment of an obligation imposed” [iii]
  • The “fails to pay” here could be interpreted failure to be counted from date of failure from the contract/agreement between supplier and recipient and not as per 180 days from invoice date i.e., even if consideration is not paid to supplier post 180 days consequently there is no failure to supplier on parts of recipient

Contentions could be taken that

  • A failure can occur only in the presence of an obligation to do or perform an act.
  • The above provision would only be triggered when contractually there is an obligation on the recipient to pay the amount and the recipient subsequently fails to pay the amount within 180days.
  • In the absence of any contractual obligation of recipient to supplier to make payment within 180 days from invoice date, it can be said that the proviso does not apply, and there is no requirement of reversal in such cases.

However, the provisions under GST law clearly provides for reversal of ITC along with interest at the rate of 18% from fails to pay from date of invoice, the department would be revenue biased and may not agree with the interpretation of word ‘fails to pay’ the relief in this regard could be given by amendments in law which had been earlier proposed in GST Council meeting or such relief may have to come from the Courts of Higher jurisdictive in next few years of time thus leaving the assessee in dilemma wherein the assessee may not have choice but to follow such reversal with interest even when ITC was never utilized for payment of output taxes.

On conjoint reading of the above provisions Section 16(2) second proviso and rule 37 in case of payment of consideration along with taxes is not paid within 180 days from date of invoice to the supplier then ITC needs to reversed on 181st day along with 18% interest in GSTR-2 [GSTR-3B as GSTR-2 is inactive and only GSTR-3B is placed as return]

Though by substituting the existing rules 59 and 60 with effective from 1st January’2021, the provisions related to filing of details of inward supplies in GSTR 2 has been done away with. However, there is no such change made to rule 37 to replace GSTR-2 with GSTR-3B.

Interest to be calculated from date of availment of ITC in electronic credit ledger- This is a clear case of unjust enrichment to the tax payer as ITC lying is electronic credit ledger yet assessee is bound to pay interest on the amount which was never utilized due to which the principles of natural justice are breached.

3. Whether reversal prescribed under section 16(4) 2nd proviso r/w rule 37 to be done in GSTR-3B?

The procedure discussed above needs ITC to be indicated in GSTR-2 which till date has not been put in place.

  1. Non implementation of GSTR-2 – Technical glitches in the GSTN portal as well as difficulty faced by the taxpayers it was decided to keep filing of GSTR-2 and GSTR-3 in abeyance.
  2. GSTR-3B is not valid return – On the same aforementioned grounds Gujarat H.C had ruled out that Form GSTR-3B is not a valid return under section 39 of CGST Act, 2017. The same has been contested by the department and an appeal has been filed in Supreme Court in the Union Of India & Ors Vs Aap And Co in (2019-TIOL-543-SC-GST) the status of the case is still pending before Hon’ble Supreme Court of India.

To sideline the above ruling Govt have replaced GSTR 3 with GSTR 3B by substituting rule 61 w.e.f. 01st January 2020 thus ending the long awaiting debate w.r.t whether GSTR-3B is return not as per GST law.

The proviso to section 16(2) and rule 37 is in violation of Article 265 of the Constitution revenue “Taxes not to be imposed save by authority of law No tax shall be levied or collected except by authority of law” revenue should be collected as tax and unjust interest should not be a source of revenue. The procedure discussed above needs one to be indicated in GSTR-2 which till date has not been put in place.

As on date the Form GSTR-2 is not available/inactive on the GST portal and consequently a view could be that the reversal as prescribed under rule 37 would not be applicable until such Form is active.

It could be disputed by revenue that merely non availability of GSTR-2 when GSTR-3B was already placed in position for reversal of ITC with similar features could not be reason for non-reversal of ITC consequently the reversal of ITC would be required to be done in GSTR-3B taking into the account the conservative view.

4. Manner of calculating ITC reversal

Erring on caution, in case full payment towards invoice value and tax thereon is not made to supplier within 180 days from the invoice date, then the recipient is required to reverse ITC along with interest on proportionate ITC to the extent of unpaid amount of invoice

Part payment unpaid beyond 180 days x Total ITC availed on invoice

                                                  Total invoice value

Let’s say,

Sl. No. Particulars Amount
a. Taxable value 100,000.00
b. IGST 18% [a*18%] 18,000.00
c. Total Invoice value [a+b+c] 118,000.00
d. ITC availed [b] 18,000.00
e. Payment made within 180 days 90,000.00
f. unpaid beyond 180 days 28,000.00
g. Reversal of ITC[d*f/c] 4,271.19

To summarize, on conjoint reading where the recipient within 180 days from date of invoice

  • Pays value of supply and tax – Recipient is not required to reverse ITC
  • Do not pay the value of supply and tax-Recipient is required to reverse ITC and interest at the rate of 18% from date of availment till date of reversal
  • Pays value of supply but not tax – Recipient is required to reverse ITC to extend of amount unpaid from total invoice value and interest at the rate of 18% from date of availment till date of reversal
  • Pays tax but not value of supply – A view is possible that since tax is paid to supplier then rule 37 is not applicable in the set case of facts such stand taken could be defendable as when tax is already paid to supplier then question of denying the ITC by law is not the intention

However, this is disputable as the rule specifically provides for proportionate credit, in such cases ITC to be reversed to the extent of amount unpaid from total invoice value.

  • Pays proportionately value of supply and tax – Recipient is required to reverse ITC along with interest at the rate of 18%from date of availment till date of reversals on the unpaid portion proportionately from total invoice value.

5. Non applicability of 180 days ITC reversal provisions

180 days reversal of ITC would not be applicable in case of Schedule I specified supplies and amount paid by supplier on behalf of recipient S. 15(2)(b) and it would be deemed that payment is already made.

A. Schedule I of CGST Act

Schedule I provides the details of activities which are considered to be liable even though there has been no consideration. Few relevant instances are:

  • Supply made between branches or establishments of the same person with same PAN but different GSTINs (distinct persons),
  • Supply between related persons in the course of business.

B. Payment made by supplier on behalf of recipient

The value of supplies added on account of any amount that the supplier is liable to pay but which has been incurred by the recipient in terms of section 15(2)(b) i.e., supplier’s obligation met by the recipient and supplier includes the same in the value of supply, would be deemed to have been paid.

6. Discussion in GST council meeting and validity of the provision of ITC reversal in case of non-payment of invoice value and tax within 180 days

A. Discussion in 5th GST Council Meeting dt. 2th-3rd December 2016

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.

B. Discussion in 28th GST Council meeting dt. 21stJuly 2018

Discussion agenda [Volume 1] It was proposed to remove the liability to pay interest in case where the recipient has been made liable to pay an amount equal to the ITC availed in case he fails to pay to the supplier of goods or services or both the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier and it is believed that liability to pay interest is too onerous and should be removed.

Proposed for amendments [Press note] 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.

C. Discussion in 29th GST Council meeting table agenda

It was observed by Council that the original formulation of second proviso to section 16(2) 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.

The approval of the 29th GST Council is sought not to carry out the proposed amendment in the second proviso to section 16(2).

At this juncture the paper writer would remind that the Hon’ble Finance Minister of India Smt. Nirmala Sitharaman in the budget speech provided that, “Our government would like to reassure taxpayers that we remain committed to taking measures so that our citizens are free from harassment of any kind.”

Consequently, non-relaxation of the norms which are adversely affecting ITC which is the taxpayer’s property* is also of the nature of bar to ease of doing business and kind of harassment. *Article 300A of Constitution of India, “No person shall be deprived of his property save by the authority of law”. Input tax credit would be treated as a property of the taxpayer.

The above proposed beneficial proposals as on date are not notified under GST laws, despite genuine hardships being faced by the industry.

References:

7. Similar provision existed under erstwhile law- in Cenvat Credit Rules

The provision was similar in erstwhile law however it was restricted to services only unlike under GST it is applicable to both goods and services

Third proviso to Rule 4(7) of the CENVAT Credit Rules, 2004 provides that in case the payment of the value of input service and the service tax paid (or payable) as indicated in the invoice is not made within 3 months from the date of the invoice then the manufacturer or the service provider shall pay an amount equal to the CENVAT credit so availed.

In this regard the Tribunal in the case of Hindustan Zinc Limited [(2014) 34 S.T.R. 440 (Tri-Del)] has held that Rule 4(7) would be applicable only in a situation where the service provider has issued the invoice but he has not paid the service tax. But where there is no dispute that service tax has been paid by the service provider on the full invoice value, even though he has not received full payment from the service recipient and part of the payment due to him has been withheld by the service recipient due to some reason, this rule would not be applicable.

Going by the analogy of the said judgment, the scope of second proviso to Section 16(2) of the CGST Act gets reduced. Under the erstwhile law, reversal of credit on account of non-payment is provided in the Rules, whereas the same provision has been included in the CGST Act, 2017.

Therefore, the said judgment may not support the recipients and when there is non-payment of value plus tax within 180 days from invoice date, it could lead to demand for the reversal of the credit with 18% under GST regime as well.

8. COVID relaxation w.r.t credit reversal post 180 days under GST

In terms of notification no 35/2020 CT DT. 03.04.2020 with retrospective effect from 20th March 2020 amended by notification 55/2020 CT read as

(i) where, any time limit for completion or compliance of any action, by any authority or by any person, has been specified in, or prescribed or notified under the said Act, which falls during the period from the 20th day of March, 2020 to the 30th day of August, 2020,and where completion or compliance of such action has not been made within such time, then, the time limit for completion or compliance of such action, shall be extended upto the 31st day of August, 2020, including for the purposes of

  1. completion of any proceeding ………..
  2. filing of any appeal, reply ………..

The Rule 37 i.e. 180 days reversal is a compliance notified under CGST Act and respective States Act consequently the above relaxation would also apply to the said rule, where the 180th day from date of invoice on which ITC have been availed by RECIPIENT falls between 20th March 2020 to 30th August 2020 and would be extended to 31st August 2020.

Let’s say suppose the

Sl. No. Particulars date
a. Date of invoice 17-01-20
b. Date of availment of ITC 15-03-20
c. 180th day from invoice 15-07-20
d. Relaxation due to COVID till 30-08-20

a. ITC is reversed on 31st August 2020 – In the above example interest required to be calculated from date of availment [15-03-2020] till 20-03-2020 as 180th day [15-07-2020] is falling in relaxation period where there was no requirement of reversal

b. ITC is reversed post 31st August 2020 let’s say on 20th September 2020 –In the above example interest to be calculated from

  • RECIPIENT could still contend it would be liable to interest at 18% by excluding period between 20-03-2020 till 30.8.2020 and;
  • Pay interest from 31st August 2020 till 20th September 2020
  • Dept may dispute above relaxation not available since the date is past 31st August 2020.

9. Whether the interest is required to be paid from 181st day in above example falling in relaxation period till 30th August 2020?

One should also consider that interest cannot be demanded unless the amount was due and payable. In this context, reference can be made to the landmark judgement of Hon’ble Apex Court in case of Pratibha Processors V/s UOI [1996 (11) SCC 101] wherein it was held that ‘Interest is compensatory character and is imposed on an assessee who has withheld payment of any tax as and when it is due and payable.

The levy of interest is geared to actual amount withheld and the extent of delay in paying the tax on the due date.’ Thus, if one considers the relaxation in extension of the said compliance as extension of tax liability itself, then interest liability may be defended in such a case.

When there was no requirement to reverse ITC from 181st day in above example falling in relaxation period till 30th August 2020 then consequently the question of interest of such period could arise.

However, dept may dispute this view where RECIPIENT is taking a stand for the same not to pay interest for period from 20th March 2020 till period which is falling in relaxation period till 30th August 2020 taking support of notification no.35/2020-CT as amended by notification no.55/2020-CT. One may intimate the department about the understanding of the same.

10. Summary and measures to be taken

  • The recipient is required to reverse the ITC availed along with 18% interest in form GSTR-2. As on date the Form GSTR-2 is not available/inactive on the GST portal and consequently the reversal as prescribed under rule 37 would not be applicable until such Form is active.
  • Intention was not to levy interest on reversal as per 28th GST Council meeting dt. 21st July 2018 discussion agenda and proposed for amendments discussed above
  • Actively make representation through Trade Associations/bodies to FM to give relief from the said provision/omit said provision from the law.
  • Even assuming that reversal with interest to be done, though 180 days computed from invoice date, interest to be computed only from month in which the ITC was availed in GSTR 3B.
  • One could opt to avail 100% eligible ITC in the month of invoice provided all conditions under section 16 are satisfied and reverse without interest in the same month in order to enable unlimited time limit for reavailment, avail ITC proportionately to the extent of payment made out of total invoice value in the month of payment. As this availment would be re-claim of ITC and there is no time limit for such re-availment of the same. Dept may dispute that this is not in line with law and done to evade payment of interest as per provisions
  • Could add a clause in agreement entered with / purchase order given to its supplier that supplier would declare the invoices issued by them in their GSTR-1 and taxes in relation to such supplies would be paid by them in their GSTR-3B and the tax amount would be paid by recipient only when the above is compiled and communicated by the supplier to recipient with documentary evidence.

11. Remarks

The drafting of the law has placed absurd restriction on ITC which is the right of the taxpayers.

It is rightly said that “You don’t pay taxes – they take taxes” and this could be linked with the ITC that such ITC is supposed to be in hands of taxpayers as credit to offset the output liability but due to such adverse tax laws assessee is facing hardships in pandemic times due to cash crunch.

It is hoped that the representations done are considered and this provision is scrapped to enable the assessee.

Special thanks to CA Roopa Nayak for her guidance and for vetting this article

For any further clarifications reach at

Mail – harish.p.devda@gmail.com or Tax guru on https://taxguru.in/author/Harish.p.devda@gmail.com/

[i](Ingram v Ingram (1983) 38 SR (NSW) 407 at page 410 per Jordan C.J.)

[ii] M v Wigan Metropolitan Borough Council [1978] 3 WLR 713

[iii] Royal Calcutta Turf Club Vs. Wealth Tax Officer reported at MANU/WB/0114/1983.

Author Bio

Qualification: Student - CA/CS/CMA
Company: Hiregange & Associates
Location: Bengaluru, Karnataka, IN
Member Since: 21 Mar 2019 | Total Posts: 13
Experienced Articled Assistant in consultation and compliance in Indirect Tax (IDT). Strong administrative professional with a CA focused in Accounting and Finance from The Institute of Chartered Accountants of India. View Full Profile

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