Let’s analysis the GST provisions one by one to obtain a clear cut understanding of the intention of the lawmakers.
Section 16 of CGST Act, 2017 says:
1. Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.
Explanation – In general, subject to certain conditions, input credit of all input supplies shall be available, subject to it being used or intended to be used in course of or in furtherance of business.
2. Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless, –– (Basically, Sub-section (2) of section 16, prescribes conditions for taking input tax credit.)
3. He is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed; which means a valid Tax Invoice/Debit note is mandatory for claiming input tax credit.
4. He has received the goods or services or both
Explanation — For the purposes of this clause, it shall be deemed that the registered person has received the goods where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise i.e. Good and or services should actually be received or deemed to be received in cases of transfer of documents of title.
5. Subject to the provisions of section 41, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilization of input tax credit admissible in respect of the said supply which means tax has to be actually paid to the Government.
6. He has furnished the return under section 39 i.e. prescribed returns should be duly filed by both the recipient and supplier.
Provided that where the goods against an invoice are received in lots or installments, he registered person shall be entitled to take credit upon receipt of the last lot or installment i.e. for part or installment payments, credit is available at the time of last installment.
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 which means Recipient of goods/services should pay to the supplier (Including Taxes), within 180 days from the date of issue of invoice, else the Input Credit shall be reversed.
7. Where the registered person has claimed depreciation on the tax component of the cost of capital goods and plant and machinery under the provisions of the Income-tax Act, 1961, the input tax credit on the said tax component shall not be allowed which means Input tax credit on capital goods shall not be available if depreciation has been claimed on the tax component.
8. 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 due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier which means Input credit can be claimed latest before due date of return filing for the Month of September of the subsequent year in which the invoice is being raised.
Now here is the analysis of the Interest rate to be levied on such reversal of input tax credit:
Notification No. 13/2017 – Central Tax dated 28th June, 2017 applicable w.e.f. 1st July 2017 notified rate of interest as Eighteen Per Cent (18%) for Sub-section (1) of section 50.
From here we go to Rules i.e. Rule 37 of ‘Central Goods and Services Tax (CGST) Rules 2017’: Reversal of Input Tax Credit in the case of Non-payment of Consideration
Provisions under Rule 37 of the Central Goods and Services Tax (CGST) Rules, 2017 relating to “Reversal of Input Tax Credit in the case of Non-payment of Consideration”, as per CGST (2nd Amendment) Rules 2017 notified by CBEC on 28 June 2017, applicable w.e.f. 1st July 2017, are as under:
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.
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.
Simply, it says that a taxpayer can avail ITC even without making payment for goods / services to the supplier (provided supplier has paid the GST component to the Government and other criteria to avail ITC are full-filled). However the payment must be made within 180 days from invoice date.
In case the payment is not made within 180 days, the ITC will be reversed and will become payable along with interest. The Rule requires furnishing the details of such supply and the amount of input tax credit availed of in form GSTR-2 and the same shall be added to the output tax liability for the purpose of credit reversal.
The rule also provides such reversed amount is available for re-credit once the payment for the supplies is made.
Concluding the above indicates that, if the registered person avails credit on accrual basis and does not pay the invoice value to his supplier of goods or services or both within 180 days from the date of issue of the invoice, he would be required add the ineligible credit so availed, as his output tax liability in Form GSTR-2 in the month immediately succeeding the six-month period along with the interest thereof.
For Example: Mr.(registered person) purchased goods from Mr. on credit worth Rs.1000/- on 15th July 2017 and assuming the tax rate on such goods to be 18% , the CGST and SGST amount comes out to be Rs. 90/- each and the total invoice value is Rs.1180/-.Now according to second proviso to sub-section (2) of section 16 , Mr. must pay the invoice value to Mr. within 180 days from the date of invoice i.e. maximum by 11th Jan 2018 or else the credit availed earlier shall be reversed along with interest till the payment is not made. Now Rule 37 of the Central Goods and Services Tax (CGST) Rules, 2017 explains that the interest at the rate of 18% is to levied on Rs.180/- from the date of availing of credit of Rs.180/- in GSTR-2 for the m/o July’2017 till such the input tax reversal is added to the output tax liability for the m/o January’2018.
It is the responsibility of the assessee to be compliant with all provisions of the law. He will have to maintain appropriate records in order to ensure that payment is done on time and there is no reversal of credit.
Details of credit reversal are to be given in GSTR 2 itself. If we go through return formats there is no provision for linking payment with invoices. Hence, it is not possible to track non- compliance of this aspect automatically.
However, the Auditor is also responsible to highlight such issues while giving his audit report in GSTR 9B. The department can find out about such transactions during assessment proceedings.
Let’s see how to account this in our financial books:
Service Expense A/C — Dr.
CGST A/C – Dr.
SGST A/C – Dr.
IGST A/C – Dr.
To Sundry Creditors
Sundry Creditors—- Dr.
CGST reconciliation A/c—- Dr.
SGST reconciliation A/C— Dr.
To CGST A/C
To SGST A/C
IGST reconciliation A/C— Dr.
To IGST A/C
CGST A/C – Dr.
SGST A/C –Dr.
To CGST reconciliation A/c
To SGST reconciliation A/C
IGST A/C – Dr.
To IGST reconciliation A/C