1. The Government has envisaged GST as a completely revamped indirect taxation structure for the Indian industry. They have tried to design it in a way that it is beneficial to the industry, the consumers and the country as a whole. To achieve this goal, they have included a plethora of provisions which are aimed at simplifying indirect taxation and streamlining the business processes. Some of these provisions include doing away with multiple taxes, availability of ITC for inter-state transactions, cross utilisation of credit between inter-state and intra-state transactions, anti-profiteering, export benefits, etc. One of these supposed incentives provided for in the GST law, aimed mainly towards the SMEs, is the clause for payment for goods or services received to be made in 180 days from the date of invoice. Is it really beneficial to the taxpayer or the industry though? Let’s analyse.
2. Chapter V of the CGST Act, 2017 deals with the Input Tax Credit provisions of the GST law. This makes the chapter one of the most important topics in the entire scheme of the Indian GST. Section 16 contained in this Chapter deals with the eligibility and conditions for taking input tax credit. This means that only when the input tax credit passes the eligibility criteria and conditions of Section 16, can it be considered as final and lawful. The relevant extract of Section 16, which is the subject matter of this discussion, is reproduced below –
“16. .….
(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, –
(a) 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;
(b) he has received the goods or services or both.
……..
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.”
2.1. The second proviso to sub-section (2) of Section 16 (highlighted above) links the availability of ITC with the payment duration in respect of supply of goods or services between the vendor and the customer. The proviso aims to restrict the input tax credit of inward supplies received by a taxpayer if the payment towards such inward supplies is not made to the vendor within a period of 180 days from the date of the invoice. This move, which is reminiscent of the Rule 4(7) of the CENVAT Credit Rules, 2004, can be assumed to be inserted to safeguard the interest of the vendor by ensuring that he receives payment from the customer within 180 days, which is a decent amount of time for processing of payment for most industries. In case the customer fails to make the payment to the vendor within 180 days, he is liable to reverse the ITC on the respective inward supplies and this amount of reversal should be added to the output tax liability for the month in which such reversal becomes due. Additionally, interest at the rate of 18% per annum is to be paid in cash from the date of invoice till the date of reversal of the credit. However, once the payment to the vendor is made post effecting ITC reversal, the buyer will be entitled to claim back the credit of the tax amount in the month in which such payment is made. The interest, once paid, can not be claimed back as credit.
2.2. The above seems simple and fair when read the first time, without delving deep into the implications. But it is, indeed, the implications that make this provision scary, if not followed strictly. Let’s discuss few of the glaring dangers that lurk behind this visually simple provision.
2.2.1. Interest on “reversal” – The provision under discussion states that the input tax credit availed in contravention shall be added to the “output tax liability” along with the interest payable thereon, if the payment is not made within 180 days from the date of invoice. Section 49 lays down the provisions for payment of tax by utilising the Electronic Credit Ledger and Electronic Cash Ledger maintained on the GST portal. Imagine a scenario where the person liable for reversal of ITC has a balance lying unutilised in the Electronic Credit Ledger in the month of reversal. Section 49(4) lays down that “The amount available in the electronic credit ledger may be used for making any payment towards output tax under this Act or under the Integrated Goods and Services Tax Act in such manner and subject to such conditions and within such time as may be prescribed.” Hence, if the ITC reversal is added to the output tax liability, it is very well within the law to adjust this reversal against the balance available in the Electronic Credit Ledger. Rule 85 (3) of the CGST Rules lays down that “Subject to the provisions of section 49, payment of every liability by a registered person as per his return shall be made by debiting the electronic credit ledger maintained as per rule 86 or the electronic cash ledger maintained as per rule 87 and the electronic liability register shall be credited accordingly.” Rule 86 (2) of the CGST Rules, 2017 also reiterates this by stating “The electronic credit ledger shall be debited to the extent of discharge of any liability in accordance with the provisions of section 49.”
2.2.1.1. It is evident from the provisions of Section 49(3) and 49(4) of the CGST Act that the interest can only be adjusted against cash deposited in the Electronic Cash Ledger and the Electronic Credit Ledger can only be used for payment of output tax. The obvious question that crops up is whether interest liability arises in such cases where ITC is adjusted and not paid in cash? Rule 37 of CGST Rules deals with the procedure for reversal of ITC under Section 16(2). Sub-rule (3) of Rule 37, that deals with interest, is reproduced below for reference –
“(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.”
2.2.1.2. As per the above sub-rule, the interest is to be “paid” from the date of availing the input tax credit till the date when the amount is added to the output tax liability. There is no specific provision for covering the cases where ITC is added to the output tax liability and ultimately adjusted in the available balance of Electronic Credit Ledger. This entails that the interest shall have to be paid in cash even where there is no actual payment of tax being made in cash by virtue of Section 49.
2.2.1.3. This could give rise to questions on the validity of such interest. The taxpayer can argue that since there is a closing balance of Input Tax Credit in the Electronic Credit Ledger, the ITC availed on purchases where the payment has not been made for more than 180 days is not utilised for the payment of tax. As such, since the ITC is lying unutilised, the liability to pay interest should not arise. There are also judgments supporting this view.
2.2.2. Payment terms between supplier and recipient – It can be reasonably stated that the second proviso to Section 16(2) is mandatorily to be followed by all persons. There is no exception carved out in the proviso for any kind of transaction, other than tax payable on reverse charge basis. In certain industries and transactions like construction, research and development, pharmaceuticals, contractual agreements etc., it is standard to have payment terms ranging more than 180 days owing to large sums being payable or payment being subject to delivery or quality check or other contractual agreements. However, owing to the accounting and reporting standards or other contractual obligations, the suppliers may be required to raise invoices and consequently, book the revenue in their books of accounts. In such cases of milestone invoicing, it is usually deemed that the goods or services to the extent invoiced have been received by the recipient of the supply. What is the applicability of the provisions under discussion in such cases? As mentioned above, there are no exceptions carved out to this provision other than reverse charge transactions. Does that imply that even where the contractual terms allow for a payment period of more than 180 days, the provisions of Section 16(2) shall apply? This should not have been the intention of the law while drafting these provisions. However, there is no clarity provided by the Government in respect of such scenarios.
2.2.3. Delayed recording of invoices – Similar to the above, there may be cases where the invoices received from the vendors are not recorded in the books of accounts at all. Such practice is most common in industries where quality checks are required before acceptance of the goods. The purchases or expenses are recorded in the books only on the goods passing the quality checks. The quality check may take a lot of time, even more than 6 months in rare cases. The proviso under discussion mentions that the recipient of supply is required to make the payment of “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…” As discussed later on in this article, there are no exceptions to this provision other than reverse charge transactions. This would imply that the recipient of supply is required to make the payment of goods or services received within 180 days, even in cases where such purchases or expenses are not recorded in the books of accounts, if they wish to claim the input tax credit. This would be just absurd and against the common principles of doing business itself.
2.2.4. Re-availability of Credit on payment – The third proviso, in continuation of the second proviso to Section 16(2), states as below –
“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.”
2.2.4.1. The above seems fairly simple, in the sense that a recipient of supply shall be eligible to reclaim the input tax credit on payment towards the value of supply received along with the tax applicable thereon. Note that this proviso does not mention anything about payment of interest being a pre-requisite for reclaim of such ITC. Also, the time limit for claiming ITC specified under Section 16(4) does not apply to such cases by virtue of Rule 37(4) of the CGST Rules.
2.2.4.2. Now, let’s take a hypothetical case where the recipient of supply does not follow the provisions of Section 16(2) due to oversight and does not reverse the ITC where payment to the vendor is delayed more than 180 days. He makes the payment to the vendor in the next financial year from the date of issue of invoice. The financial year in which the invoice is issued to the recipient comes under scrutiny by the Department for the recipient of such supply. While checking the ITC of the recipient, the proper officer finds out that the recipient has not made the payment to his vendor within 180 days and the officer issues a show cause notice under Section 74 as to why ITC should not be reversed with interest. The recipient of supply accepts the contention of the SCN as it was a genuine oversight and agrees to reverse the ITC in the financial year under scrutiny, assuming that the third proviso would allow him to reclaim the credit in the next financial year, when the payment is made to the vendor. However, this assumption is barred by Section 17 of the CGST Act. Section 17(5) is reproduced below for ease of reference –
“(5) Notwithstanding anything contained in sub-section (1) of section 16 and sub-section (1) of section 18, input tax credit shall not be available in respect of the following, namely: —
…………
- any tax paid in accordance with the provisions of sections 74, 129 and 130.”
2.2.4.3. Since the tax has been paid or reversed by the assessee in pursuance of a SCN issued under Section 74, the department may take a stand that he is not be eligible to reclaim the credit even when the payment is made to the vendor and the conditions of third proviso to Section 16(2) are satisfied.
2.2.4.4. Of course, the above example may seem far-fetched and subject to too many variables like GST audit, non-issuance of SCN etc. But the possibility is very much relevant as, in my practical experience, a lot of taxpayers have not followed the provisions of Section 16(2) and a lot of practitioners have also overlooked these provisions.
2.2.5. Applicability in case of Imports – The second proviso to Section 16(2), which is the subject matter of this discussion, carves out an exception to supplies on which tax is payable on reverse charge basis. This would mean that in cases where the recipient is liable to pay tax under the reverse charge mechanism (like GTA services or legal services received from an advocate), the recipient will not be required to reverse the ITC even if payment to vendor is made beyond the specified period of 180 days. The logical explanation behind this would be that the Government has to receive tax from the recipient and not the supplier in such cases. This puts in question the very fact that the provisions under discussion are in fact in the interest of the taxpayers or the Government.
2.2.5.1 Importers are liable to pay Customs Duty and IGST to the Government on imports of goods made into the territory of India. The IGST paid is available as input tax credit to the importer. This transaction, however, is not covered under the reverse charge mechanism of GST. In fact, the Customs Duty and IGST payable on imports of goods are actually a forward charge, i.e. they are a taxable supply under GST. This implies that the second proviso to Section 16(2) should apply squarely to goods import transactions as well, since the input tax credit provisions of the CGST Act apply equally to IGST Act. As discussed in the earlier para, the Government has carved out the reverse charge transactions from the liability of payment within 180 days, possibly owing to the fact that tax is payable by the recipient. However, since imports of goods are not covered under reverse charge, the exception doesn’t apply to such transactions, despite the tax being paid by the recipient only. It is pertinent to note that the second proviso mentions that the amount payable to the vendor shall be “the amount towards the value of supply along with tax payable thereon”. There is no tax payable to the vendor in cases of imports of goods. Would this then imply that such transactions are outside the purview of the second proviso to Section 16(2)? Or could the assessing officers suggest that the proviso would apply equally to import transactions and the tax element should be considered as zero? These questions become especially relevant considering that the payments for imports or exports usually do take more than 180 days.
2.2.6. Interest to Government – As mentioned earlier, the provision under discussion seems to be introduced for the benefit of the suppliers, to enable them to receive their dues within a particular time frame. If that indeed is the intention of the law, why is there a provision for interest being payable to the Government when the payment is not made to the vendor? The Government has received tax from the vendor when he made the sale. There is no revenue loss happening to the Government in this transaction. The recipient of the supply is also entitled for credit once the tax is paid to the Government by the supplier as per the provisions of Section 16(2)(c). Why then, under the proviso to Section 16(2), should the Government collect interest where it is not due any tax by either of the parties?
2.2.6.1 It is interesting to note that in the proposal for amendments to the CGST Act, released for public comments, there was a proposed amendment for removal of the interest in the second proviso to Section 16(2). However, by the time the Amendment Bill was introduced in the Parliament, this proposal had been removed! Doesn’t this mean that the Government is aware of this fallacy but wishes to continue with it? As discussed in cases of reverse charge and imports above, maybe the provisions have indeed been introduced as a way to ensure that tax is received in the Government coffers. The benefit to the suppliers is only incidental and not intentional.
2.2.6.2 It is also interesting to note that some experts, with whom I have discussed the subject matter of this article, hold the view that this proviso is invalid constitutionally! Their argument is that the Government is already receiving the tax from the suppliers in most cases. There is no revenue loss happening to the Government. Then why should the Government benefit from the interest charged? They argue that this is against the Doctrine of Unjust Enrichment and the Government is unconstitutionally trying to earn income from the recipient of supply despite there being no default in the tax payments by the supplier.
3. As is popularly opined, every provision of the GST Act has hidden implications that come to the fore only when they are analysed and discussed in depth. While the Government has been actively trying to simplify the GST law, it is only being done as a reaction to the industry’s backlash. Such a seemingly harmless proviso in such a huge Chapter of the GST law warrants a thorough explanation and clarification from the Government. If not, the taxpayer is at the mercy of the assessing officers to exploit such doubts and amplify the frustration of the taxpayers. Discussion, opinions and counter-views are most welcome and, in fact, solicited.
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