Input Tax Credit (ITC) under GST is the GST credit paid and subsequently availed by taxpayers to be set-off against their GST payable. However, not all ITC is available to a taxpayer. Some ITC is ineligible for claim from the time it’s incurred by the taxpayer while other ITC become ineligible after availment by way of reversal by the taxpayer.
The various types of ITC subject to reversal after availment are:
1. Rule 42& 43 – it’s the most common type of ITC reversal made due to exempt and Non-GST supplies and ITC used for non-business purposes.
2. Section 18(6) – This ITC reversal pertains to ITC claimed on capital goods which are sold or disposed before the life of the asset is completed.
3. 2nd & 3rd Proviso to Section 16(2)(d) pertains to ITC reversal on invoices which are pending payment even after 180 days from the date of the invoice.
4. ITC claimed wrongly / incorrectly is required to be subsequently rectified by way of reversal in the period the wrong claim is noticed.
Though all reversals of ITC attain significant importance as non-compliance results in interest liability to the taxpayer, one type of reversal stands out in comparison due to possibility of different interpretations. This is the reversal arising from non-payment of dues to the suppliers within 180 days.
The following types of reversal take importance in case of 180 days reversal:
1. Discounts given by supplier to buyer
2. ITC remaining un-claimed by the buyer
Discounts given by suppliers are usually of two types:
(1) Trade discount: This type of discount is provided as part of the trade and is usually agreed to between the supplier and retailer beforehand. This also shown in the Tax Invoice raised by the supplier to the buyer.
(2) Cash discount: This type of discount is typically given for payment terms. This is never shown in Tax Invoice and may or may not feature in the agreement between supplier and buyer.
Both types of discounts have GST implications under the CGST Act, 2017 and KGST Act, 2017.
GST law provisions:
As per Section 15(3) of the CGST and KGST Act, 2017: The value of the supply shall not include any discount which is given––
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if–
(i) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and
(ii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply.
From the above provision we can infer that discounts provided results in a reduction of the taxable value of the supply and thus the Input Tax Credit (ITC) that can be claimed on the same.
The reduction in the supply value can happen either at the time of making the sale or after making the sale if it has been agreed upon between the supplier and buyer and the ITC claimed by the buyer has been appropriately reduced.
Hence, GST provision does not distinguish between trade discounts and cash discounts provided that above requirements are complied with.
As per 2nd & 3rd Proviso to Section 16(2)(d) of the CGST / KGST Acts, 2017:
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.
Hence, as per the above, any ITC claimed on an invoice for which payment has not been made for 180 days from the invoice date shall have to be paid back by way of reversal along with interest. The ITC to be reversed will be proportionate to the non-payment of the dues. And in case of subsequent payment of the dues, then the ITC so reversed can be claimed back without any time limit for reclaiming it.
For example: A purchase is made on 1st March 2019 for ₹ 10,000 plus 1,800 GST. On 1st May 2019, the buyer pays ₹ 5,000 (inclusive of GST) to the supplier for the above invoice. But balance payment is not done till 31st August 2019. The 180 days period will end on 28th August 2019. Hence, in the GSTR 3B of August month the buyer is required to reverse ITC of ₹ 1,037 (11,800 – 5,000 *18/118).
In the above example, if we consider that the supplier has given ₹ 1000 discount after supply takes place. Balance payable is only ₹ 5800. If we assume the ₹ 1000 includes GST also, recipient needs to reverse ITC of ₹ 153 subject to provisions of Section 15(3)(b). If it does not include GST and discount is given only on the base value and supplier also supplier does not fulfill the condition of section 15(3)(b). In this case value of supply is ₹ 10000 and supplier needs to pay GST on 10000.
In the hands of recipient, value of supply received as per invoice is ₹ 10000 plus GST and discount received subsequently is ₹ 1000. So net payable to supplier is only ₹ 9000 plus GST. The question of whether recipient is required to reverse ITC on ₹ 1000 under section 16(2)(d) because recipient will not be making any payment to the supplier or not needs clarification.
Non-compliance of Section 15:
In many cases, it can be found that the supplier has offered a discount to the buyer which is neither shown in the tax invoice nor is it agreed upon between them. This is common in trade practice and is usually dependent on the supplier and buyer relationship.
In such a case, a discount is provided at the time of making payment and the supplier simply receives the invoice value of the supply less the discount he has agreed to provide.
Usually the supplier raises a Commercial / Financial credit note which will not contain the GST amount and will not be as per Section 34 read with Rule 53 of the CGST / KGST Acts and Rules. This will not result in a change in the supplier’s liability i.e. the taxable value remains as stated in the invoice and the GST on the same would also have been paid by him as stated in the invoice. For the buyer too, there is no change in the value and ITC to be claimed but only a reduction in the amount payable to supplier.
In order to understand the impact of 180 days on these types of discounts, we need to analyze the meaning of ‘payment’ and ‘value of supply’ in this scenario.
As clearly stated in Section 15, the value of supply will categorically not include discount if it does not comply with section 15 provisions. Hence, it’s understood that the entire value of supply along with the GST amount has to be paid to the supplier within 180 days of the invoice date in order for the buyer to be eligible for full claim of ITC and the discount offered shall not be reduced from the value of supply.
In case of payment to be made, the Merriam-Webster dictionary defines pay as ‘to make due return to for services rendered or property delivered’ and ‘to discharge indebtedness for’. The term payment is also not defined in GST acts. It’s also to be noted that the second proviso to Section 16 does not state the mode of payment to be made.
Now, it must be understood that in accounting for transactions like these, the supplier usually credits the buyer’s trade receivable account and debits the discount as an expense to his profit and loss account thus discharging the indebtedness from the buyer. Hence, if commercial or financial credit note is issued in order to settle such discounts, then it can be considered as payment for the purpose of payment within 180 days. The same interpretation was held for Service Tax as clarified in Board Circular No. 122/3/2010‐ST dated 30/4/10.
ITC reversed under section 16(2)(d) can be reclaimed whenever recipient makes payment to the supplier. This is creating one more problem for compliance.
As per Sub-rule 4) in Rule 36 of the CGST / KGST Rules, 2017, a taxpayer is eligible to claim ITC only if the same has been uploaded by the supplier in their GSTR 1 plus 20% of the ITC not uploaded (10% from January 2020)
When the recipient is reclaiming the credit after making payment, these invoices will not be appearing GSTR 2A of recipient. For example, value of ITC appearing in GSTR 2A is ₹ 100000 and reclaiming credit is ₹ 50000. We have to club these two and claim ITC of ₹ 150000 in GSTR 3B under all other ITC. There is no provision in GSTR 3B to show this reclaiming credit separately.
Since the ITC is restricted to the extent of 110% of ITC appearing in GSTR 2A, this will invite notice from department seeking clarification. If it is not clarified, then department is going ahead and blocking entire ITC lying in the credit ledger.
As per 3rd Proviso to Section 16(2)(d), interest shall be payable on any ITC being reversed due to non-payment of dues within 180 days. The interest payable is 18% per annum as per Section 50(1) and from the date of invoice for which payment is not made till the date it’s reversed in GSTR 3B. It’s to be noted that the GST Council had proposed removal of interest payment for 180 days nonpayment in the 28th GST Council meeting but the proposal was never implemented by change in law.
Disclaimer: The conclusions reached and views expressed in the article are matters of opinion based on our understanding of the facts, existing and anticipated tax laws and existing and anticipated rules. There can be no assurance that the tax authorities’ or regulators may not take a position contrary to our views. Further, the content of this article should not be used as a supporting to frame any opinions.