Introduction–
The provisions of Section 16 and Rule 37 governs the implications to the recipient who has availed ITC but has failed to pay to the supplier, the payment towards the value of supply and tax thereon within prescribed time period. Many taxpayers are struggling to follow this provision and have not paid back ITC even though payments are not made to suppliers within prescribed period of 180 days. Department has started issuing Show cause notices in such cases and is asking for “reversal of ITC” and/or interest for the period such consideration remains unpaid beyond prescribed timeline. Recently rule 37 is substantially amended to provide for reversal mechanism. In this backdrop we shall compare pre and post amended provision and try to analyze its impact.
Analysis–
A) Pre-Amendment Provisions
The second and third provisos to Section 16(2) reads as follows:
“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.”
Prior to 01.10.2022, Rule 37(1) read as follows:
“(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) ……
(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.
It is pertinent to note that pre-amended rule 37(1) mandated
(a) reporting of ITC amount “proportionate” to amount not paid to supplier within prescribed period
(b) Such amount was to be reported in GSTR-2
(c) Payment of interest from the date of availing credit on such supplies till the date when the amount added to the output tax liability at the rate notified u/s 50(1)
Also sub rule 2 prescribed that this amount will be added to output tax liability of taxpayer.
B) Post-Amendment Provisions –
With effect from 01.10.2022, Rule 37 reads as follows:
(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 along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay an amount equal to the input tax credit availed in respect of such supply 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:
C) Comparison-
Now let us analyze points referred supra in light of this amendment.
(i) reporting of ITC amount “proportionate” to amount not paid to supplier within prescribed period
v/s
“shall pay an amount equal to the input tax credit availed in respect of such supply”
Surprisingly, while making this amendment; word “Proportionate” appearing in pre-amended rule has been eliminated. Prior to amendment, sub-rule (1) 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 talks about reversing the whole ITC even though failure is only for part payment in respect of supply.
To understand this provision better, let us take an example of taxable person Mr.X who purchased goods as per following details –
| Date of Invoice | Taxable Amount | GST (28%) | Total Amount |
| 01/04/2022 | 10,00,000 | 2,80,000 | 12,80,000/- |
Now let us assume that amount of Rs.12,00,000/- is paid against this invoice till 27th September 2022 and Rs.80,000/- has remained unpaid beyond prescribed period of 180 days. In such scenario, we need to add Rs.17,500/- (80,000/12,80,000*2,80,000) to outward liability in order to comply with proviso to section 16(2) and rule 37.
But amended rule is silent on this aspect and hence, it seems that even for failure to pay part of the consideration, ITC for whole supply is to be paid back. In our example, even though amount of only Rs.80,000/- has remained unpaid, it seems that whole ITC amounting to Rs.2,80,000/- needs to be paid back. Thus in the absence of such clear stipulation in the amended rule, the authorities may demand reversal of entire ITC by applying this rule, even if the insignificant part of the invoice value has not been paid within 180 days.
(ii) Such amount was to be reported in GSTR-2
v/s
Shall while furnishing the return in FORM GSTR-3B
We all know that GSTR 2 and GSTR 3 never saw light of the day and were never implemented. Hence there was no mechanism to report “reversal” under rule 37. Hence in order to align the provisions of the rules with the existing return framework and remove the redundant references to erstwhile forms, i.e., the GSTR-2, rule 37 was amended and amended rule was made effective from 01.10.2022.
- Payment of interest from the date of availing credit on such supplies till the date when the amount added to the output tax liability at the rate notified u/s 50(1)
v/s
along with interest payable thereon under section 50
Pre-amended rule referred to section 50(1) only to borrow rate from this interest charging section and mechanism to calculate interest was in-built in rule 37(1) itself. So Interest was payable @ 18% from the date of availing credit on such supplies till the date when the amount added to the output tax liability irrespective of the fact that said ITC was utilized or not.
However amended rule mentions that interest is payable as per section 50. Hence mechanism of calculating interest is removed from rule 37 and reference is made to section 50 for mechanism as well as rate.
Section 50 read with Rule 88B (3) clearly provide that interest for the wrongly availed and utilized ITC shall be calculated for the period starting from date of utilization of the wrongly availed ITC to date of reversal of such ITC. Hence now if ITC is not utilized immediately, period for calculating interest will start only from that when ITC is actually utilized. No interest will be payable in cases where ITC is availed but not utilized even after 180 days from date of Invoice and payment is delayed.
Although this is welcome change and will provide relief to taxpayers where ITC is availed but not utilized, the basic issue that remains unanswered is whether government can levy interest on an “(imaginary)” amount. Proviso to section 16(2) casts liability to pay “an amount equal to the input tax credit availed” on taxpayer “who fails to pay” to the supplier. It is pertinent to note that there is no liability cast on taxpayer to pay supplier within 180 days either under GST law or for that matter under any other law. Proviso to section 16(2) mandates to pay “an amount” which is equal to…… Hence this section tries to recover an amount which is equal to some other amount although this amount is not legally due. It is settled position that interest is compensatory in nature and can be recovered only if there is a delay in payment of any sum which is due. However, here interest is neither recovered on outward liability nor on ITC, but on “an amount” and such recovery of interest may be challenged along with the “amount” itself.
Conclusion–
Proviso to Section 16(2) mandates reversal of ITC, which is validly availed after satisfying all the conditions mentioned in section 16(2) and hence is inconsistent with actual scheme of section 16(2). Hence this proviso is prone to litigation and will be tested by judiciary in times to come. Also, many taxpayers have defended show-cause notices for reversal under rule 37 by taking shelter of absence of machinery provisions for adding back amount of reversal. Although tenability of such defense can be subject matter of debate, amendment in rule 37 has put end to this anomaly, and now clearly prescribes mechanism for payment of such ITC. However elimination of word “Proportionate “ and adding words “shall pay an amount equal to the input tax credit availed in respect of such supply” has created another anomaly in this already harsh provision. As a measure of taxpayer’s facilitation measure, GST Council should take up this issue in upcoming council meeting and should clarify legislative intent and its understanding on this amendment in order to avoid undue trouble to taxpayers.
Author Bio
Good analysis.
Govt. needs to review it as it is unreasonable to decide business terms by it.
It has every right to catch the wrong ones but has no right to consider all the wrong ones.