An analysis of Section 16 of Central Goods and Services Tax Act, 2017 related to Eligibility and conditions for taking input tax credit.
Chapter V to the Goods and Services tax Act 2017 deals with the Input Tax Credit and the mechanism of its availment. The general rule is that every registered person is 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. The cardinal rule is that every rupee of input tax credit allowed to a supplier shall generate an equal amount of revenue to the government. If it is not so then the government will fall short of huge revenue collection. However as per the policy of the government certain exemptions are provided to some goods or supplies from tax are charged 0% rate of tax. In such a case the revenue that would have been collected, but because of these exemptions, would be a total loss to the government. In order to avoid such a situation the concept of matching input tax credit and output liabilities has been put in place. Simply stated, the Input Tax Credit on any transaction that does not result in an accrual of tax revenue to the government will be disallowed to the extent of ITC used in providing such exempt goods are services.
In addition to the above general restriction, some specific restrictions are also provided on the availment of ITC depending upon the circumstances. Such restrictions are contained in section 16, Chapter V of the Goods and services tax act 2017. All the conditions provided in section 16 of the Act are all within the rights of the government. However the condition provided in second proviso to section 16(2) is an avoidable condition and an onerous one also as it infringes the right of a businessman to conduct his business as per the policies which best suits him. The second proviso is as under:
“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:”
It is this second proviso which is going to be analyzed in this write up. But before starting the analysis, a look at the provisions of section 16 would be quite in place so as to better comprehend the subject.
Extract of of Section 16 of Central Goods and Services Tax Act, 2017 related to Eligibility and conditions for taking input tax credit.
CHAPTER V
Eligibility and conditions for taking input tax credit.
16 (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.
(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.
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;
(c) 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 utilisation of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39:
Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:
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.
(3) 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 (43 of 1961), the input tax credit on the said tax component shall not be allowed.
(4) 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.
An analysis
1) The way the 1st , the 2nd and the 3rd provisos are placed, it appears that these provisos are attached to clause (d) only whereas these provisos apply to different clauses.
The first proviso “Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:” should have been placed under clause (b) which deals with the condition of actual receipt of goods.
Likewise the second and the third provisos should have been placed under clause (c) which deals with the condition of actual payment of GST.
2) Contradiction between clause (c) and 2nd Proviso. According to clause (c) in order to avail ITC, it is necessary that the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply. So this is very clear that without actual payment of GST, the recipient can avail the ITC.
(a) However the 2nd proviso provides 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.
(b) Now as per clause (c) ITC can’t be availed without actual payment of GST then the question relating to increasing the output liability by an amount equal to ITC availed does not arise at all because the recipient just could not have availed the ITC in view of the restriction in clause (c) and therefore there is no question of increasing the output liability.
3) Linkage of payment for supply and Input Tax Credit (ITC)
So long as the availment of ITC is linked to the actual payment of GST it is quite reasonable. The government is quite within its rights to provide for any restriction subject to which ITC can be availed . But why the availment of GST is also linked to the payment of supply is quite a bit not easily comprehensible. As per this condition if the recipient does not make the payment of the supply within 180 days of issue of invoice by the supplier then 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.
Granting of credit period for payment of the supply is purely a decision to be taken by the businessman. Restricting the same to a maximum of 180 days without considering the actual realities of the business, market conditions, industry norms etc is most inappropriate. The government should be concerned only with its revenue and timely payment of the GST. So long as the GST is being paid as per schedule, the government should not have any reason to interfere in the business policies of the businessman. In some industries the default credit period is already more than 180 days, like textiles, heavy industries. In such a case to put a restriction on the period of credit may be tantamount to putting unreasonable restriction on the fundamental right of a citizen to carry on business.
The Supreme Court (2007 (1) SCC 781) SA Builders Ltd. versus Commissioner of Income-Tax in In para 35 has observed as under:
“……the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.”
4) Court should resist from interfering government policy decision: SC
Putting a curb on judiciary to review government’s policy decisions, the Supreme Court said that policy decision should not be open to judicial review if it passes the test of reasonableness.
“It is not in the domain of the courts to embark upon an inquiry as to whether a particular public policy is wise and acceptable or whether better policy could be evolved. The Court can only interfere if the policy framed is absolutely capricious and non-informed by reasons, or totally arbitrary, offending the basic requirement of the Article 14 of the Constitution,” the bench said.
The courts should not interfere with policy matters of the government and should not sit in judgment over policy decisions.
Making policies and executing them comes within the sphere of activities of the executive. It is not within the power of the judiciary. The judiciary does not have the expertise and the domain knowledge to make policies or to amend them. On the other hand, the executive has experts, professionals, administrators, advisors, etc., in a given field and has the expertise to make policies after taking into consideration all aspects of a matter.
Thus, generally, the judiciary cannot and will not interfere in the policy decisions of the Government which are in the domain of the executive.
Thus the basic principle remains the same. Judiciary will generally not interfere in the policy decisions of the Government.
If that is so then why the government should interfere in the policy decision of a business. The government must also be precluded from interfering in the policy decision of a business which might grant a credit period of more than 180 days
5) Fundamental right to do business
The right to do business is a fundamental right given to the citizens of India under Article 19 (1) (g) of part III of the Constitution of India.
“Right to do Business” under Article 19 (1) (g) gives a huge and general right to the people of India to carry on any business of their choice. The freedom to do Business includes the freedom to carry out any commerce, activity, trade or profession which is in benefit of the general public and is a legal activity as per the prevailing laws of the country. The freedom to carry on any business is subject to reasonable restrictions.
Imposing reasonable restrictions on the freedom to trade, occupation, profession and business in the interest of general public is an acceptable fact. Reasonable means which is supported with a reason behind it. Thus, reasonable restrictions refer to such limits or restrictions imposed on the right to do business of a citizen with which any logic or intelligent care and deliberations are taken into considerable before imposing such restrictions. Mere arbitrariness cannot be defined as a reasonable restriction. The Reasonable restrictions should always be in the interest of the general public and not in the interest of a particular person or citizen.
Thus the restriction of limiting the credit period to 180 days is un- reasonable and onerous against the buyer and the same shall also be open to judicial review, being a policy decision of the government not to permit credit period beyond 180 days.
6) Other Issues which need urgent clarification
- If the buyer purchases goods under any scheme like deferred payment scheme which provides an initial moratorium of say, 12 months for the payment of installment then why should the ITC be liable to reversal if the payment for the supply is not made within 180 days?
- What if the buyer pays just a portion of the GST say 80% within 180 days and pays the balance after 1 year? Should the entire ITC be liable to be reversed or just the amount equal to GST not paid?
- What if the buyer pays the full amount of GST but does not pay the value of supply or pays just a portion of it? Should the entire amount of ITC be liable to reversal even if it has been paid in full but value of supply has not been paid either in full or in part?
- What if the seller makes the payment of GST out of its own pocket without getting it paid by the buyer particularly when the buyer has not paid any amount towards the value of supply?
- The second proviso is not applicable to the case of supplies on which tax is payable on reverse charge basis. The provision does not clarify as to what should be done in such a case? Whether the buyer should be liable to reverse the ITC (or pay the output liability) if he has not paid for the supplies?
7) These questions and many more such questions may arise during the course of implementation of the provisions of Input Tax Credit which would need clarification.
Disclaimer: The contents of this document are solely for academic & informational purposes. It does not constitute professional advice or a formal recommendation. While due care has been taken in preparing this document, the existence of mistakes and omissions herein is not ruled out. The author does not accept any liabilities for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon. No part of this document should be distributed or copied (except for personal, education and non-commercial use) without express written permission of the Author.
Author: CA Lalit Munoyat is a Chartered Accountant in practice since June 1983. He has contributed many articles on direct & indirect taxes which have been published on open web domains of publishers. He can be reached at:
munoyat@gmail.com or on # 98201 93508
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