In past 21 months, several notifications and circulars have been issued from time to time to address the plight of GST dealers. Irony is that these circulars and notifications are more voluminous than the provisions of GST law thereby posing greater challenges for trade to be updated and comply with the provisions of law.

In this article we shall analyse how availment of input tax credit without discharging vendor payment obligation and non-discharge of GST obligation on payments made to unregistered vendors backfires in GST regime.

Input Tax Credit:

In Pre-GST regime around 40% of tax disputes were relating to irregular availment of CENVAT Credit. Though GST law has been simplified w.r.t. availing of input tax credit, there are certain mistakes committed by many registered dealers elucidated in foregoing Para.

Non reversal of Input Tax Credit in the case of non-payment of consideration to Vendors

As per Second proviso to Section 16(2) read with Rule 37 of CGST Rules, every registered dealer who has availed input tax credit on any inward supplies has to discharge their payment obligation (including tax) within period of 180 days from the date of invoice.

 Otherwise registered dealer shall be liable to add to his output tax liability, the input tax credit availed on such transactions. The registered dealer shall also be liable to pay interest on such transactions from date of availing credit till the date amount added to his output tax liability.

Many registered dealers were availing input tax credit but not making payment to their vendors due to non-uploading of tax invoices by the vendor in his GSTR 1. Based on aforesaid rule, registered dealer may fall trapped under Second proviso to Section 16(2) read with Rule 37 of CGST Rules

So GST dealers need to be vigilant on payment obligation to their creditors otherwise it may invite unnecessary tax litigation with interest and penalty obligation.

Reverse Charge Mechanism

Section 9(4) of CGST Act and Section 5(4) of IGST Act provides GST obligation on registered dealers under reverse charge mechanism while making payment to unregistered persons. CBIC Vide Notification No. 38/2017-Central Tax (rate) and Notification No.32/2017- Integrated Tax (Rate) deferred the applicability of aforesaid provisions and they were under suspended animation for the tax period 13.10.2017 to 31.03.2018.

It is relevant to note here that the aforesaid notifications were prospective in nature and therefore registered dealers were liable to discharge their liability under reverse charge mechanism for the tax period 01.07.2017 to 12.10.2017.

 It poses great challenge to registered dealers who have not discharged their reverse charge obligation for aforesaid period as the same cannot avail input tax credit as per Section 16(4) of CGST Act but they are obliged to make payment along with interest. So these should be properly taken care of while filing GST Annual returns by the dealers.

(The author of this article can be reached at [email protected])

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May 2021