ITC Reversal Due To Non-Payment Within 180 Days

Second & third proviso to Section 16(2), of the Central Goods & Services Tax (CGST) Act, 2017 provides for reversal and reavailment of ITC on account of non-payment. Same is reproduced below for ready reference:

Second Proviso to Section 16(2) :- “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.”

Further Rule 37 prescribes the mechanism for implementing the above referred provisions. Said rule is also reproduced below:

“RULE 37. Reversal of input tax credit in the case of non-payment of consideration. —

(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 ”

For Example : Mr A purchased goods and /or availed services worth Rs 1,18,000 (1,00,000+ 18000 GST) from Mr. Y on 01 Mar 2019 and received invoice on the same date and avail the credit in the month of Mar 2019 . He paid to Mr Y against this bill on 01.12.2019 .

180 days from the date of invoice is 30^th Aug 2019 . Since he has not paid to the supplier in 180 days , Rs 18000/- shall be added in his outward liability in GSTR 3B for the month of Sep 2019 along with interest @18% calculated from the date of ITC availed ie 01.03 .2019 to the date of payment 01.12.2019

Following issues shall arise on closer reading of the above referred provisions:

1. Whether reversal of ITC on account of non-payment shall apply to only services or it shall also apply to goods ?

Under earlier regime, CENVAT Credit reversal applied only to services. From the plain reading of the second proviso to Sec. 16(2) of the CGST Act, 2017, it is clear that reversal of ITC under GST is required to be done in case of non-payment against invoices for goods as well as services and not just goods.

2. Whether reversal of ITC shall apply if tax is fully paid but the value of supply remains unpaid after 180 days ?

Second proviso to Sec. 16(2) clearly provides that the same shall apply when a recipient fails to pay the amount towards the value of supply along with the tax payable thereon. Hence mere payment of tax within the stipulated period of 180 days is not enough. Even the value of supply needs to be paid within 180 days to avoid the reversal.

3. Whether reversal of ITC is required in cases of part payment of value of supply as well as t ax thereon within 180 days?

It may so happen that registered recipient might have paid part amount towards the value of supply as well as tax amount within 180 days. In such scenario, whether ITC reversal shall apply to the entire tax amount charged in the invoice or only to the extent of proportionate tax amount not paid ? In our opinion, ITC reversal shall apply only to the extent of proportionate amount. This is because second proviso to Sec. 16(2) nowhere states that full amount is required be paid within 180 days to avoid the reversal. Hence to the extent of amount (including tax) paid within 180 days, ITC reversal is not called for.

4. How to calculate the period of 180 days ?

Second proviso to Sec. 16(2) provides that the same applies in case of non-payment within the period of 180 days from the date of issue of invoice by the supplier. Hence the period of 180 days for determination of ITC reversal needs to be calculated from the date of issuance of invoice and not the date on which said invoice is recorded in the books of accounts or the date on which ITC is claimed.

5. What is the mechanism for reversal of ITC ?

This is a very interesting question. Second proviso to Sec. 16(2) provides that ITC availed earlier to the extent of amount not paid shall be added to the output tax liability of the recipient along with interest in the manner prescribed. Rule 37 prescribes the manner. Please note following observations on said Rule 37:

Rule 37(1) provides that registered person who has earlier availed ITC and has failed to make the payment of the value of supply as well as tax thereon shall furnish such details in FORM GSTR – 2 for the month immediately following the period of 180 days. As per Rule 37(2), such amount furnished in GSTR – 2 shall be added to output liability ledger for the month in which such details are furnished. Here it is to be noted that GSTR – 2 has been suspended till further notice. Hence can it be said that in view of the fact that the machinery provisions for the reversal of ITC prescribed under Rule 37 is not applicable at present, ITC reversal is not required ? Answer seems to be yes relying on the decision of Apex Court in the case of CIT vs. B.C. Srinivasa Shetty [(1981) 2 SCC 460] wherein it was held that without machinery provision, charging provision shall fail.

Hence it is suggested that Rule 37(1) & (2) must be suitably amended to provide for an alternate mechanism to reverse the ITC in GSTR – 3B. It is advised to the registerd person that the output tax equivalent to the ITC credit taken on invoice for which consideration has not ben paid must be added in the Form B and output tax should be paid on the same .

6. How to calculate the interest amount ?

This is again a very interesting question. Second proviso to Sec. 16(2) provides that ITC availed earlier to the extent of non-payment of value of supply along with tax shall be added to the output tax liability ledger along with interest. As stated earlier, period of 180 days is to be calculated from the date of invoice. Does it then mean that even interest is to be calculated from the date of invoice ?

Reference is invited to sub-rule (3) of Rule 37. As per said sub-rule, interest has to be paid at the rate notified u/s 50(1) (i.e. 18% p.a. (Notification No. 13/2017 – Central Tax) for the period starting from the date of availing credit on such supplies till the date when the amount is added to output tax liability is paid. Hence interest calculation shall start from the date of availment of credit and not from the date of invoice. What shall be regarded as “date of availment”?

Kind attention is invited to Sec. 41(1) of the CGST Act, 2017. Same is reproduced below:

“41. Claim of input tax credit and provisional acceptance thereof

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.”

As per the above provision, registered person can take the credit in his return and the same shall be credited on provisional basis to the electronic credit ledger. Hence the date of availment of ITC shall be the date of filing of the return (i.e. GSTR – 3B) when the said amount of ITC is reflected in the electronic credit ledger.

In the example above Mr X received invoice on 01.03.2019 . He enters the said invoice in his books of accounts on 25.03.2019 and credits the tax amount in the receivable account. He files the return (GSTR – 3B) for the month of March availing ITC on the referred invoice on 20.04.2019. He has failed to make the payment by 01.12.2019 (more than 180 days passed from date of invoice). Hence as per second proviso to Sec. 16(2), he is required to reverse the ITC availed earlier. However interest under rule 37(3) shall be calculated from 20.04.2019 and not from 01.03.2019 (i.e. date of invoice) or from 25.03.2019 (i.e. date of entry in books).

Till what date is interest required to be calculated ? Rule 37(3) prescribes that interest should be calculated till the date when the amount added in the output liability ledger through GSTR – 2 is paid. System of filing GSTR – 2 has been suspended. Hence as stated earlier, in absence of machinery mechanism, requirement of ITC reversal as provided u/s 16(2) fails. To avoid litigation, readers may calculate the interest till the date of filing GSTR – 3B for the month of reversal as on that date the amount to be reversed shall stand paid.

7. Can one re-avail earlier reversed ITC?

Third proviso to Sec. 16(2) clearly provides that the registered recipient shall reavail ITC reversed earlier on making the payment of the value of supply along with the tax thereon. Hence one can reavail the ITC on subsequently making the payment. Even Rule 37(4) provides that the time limit prescribed u/s 16(4) for availing ITC (i.e. before the due date for furnishing return for the month of

September of the succeeding year or annual return, whichever is earlier) shall not apply for reavailing the credit which was reversed earlier. Hence reavailment can be claimed anytime in future when the payment is made.

8. Is interest payable even if ITC availed earlier is not utilized?

Second proviso to Sec. 16(2) provides that interest has to be paid on account of reversal of ITC “availed” earlier. Even Rule 37(3) provides that the interest shall be calculated from the date of availment. Hence even if the ITC availed earlier is not utilized, interest is required to be paid. It is thus suggested that if at the time of availment it is known that the payment may not be done within 180 days, one can reverse the ITC in the month of availment itself to save interest cost. Reavailment can be done on making the payment.

9. Will ITC reversal apply to invoices of pre-GST era?

It is quite possible that registered person might have availed CENVAT Credit on let us say an invoice in the month of June 2017. Said CENVAT Credit remains as closing balance in the June return and hence is availed as transitional credit u/s 140(1) as CGST. There is non-payment of such invoice within 180 days from date of invoice. Is the recipient required to reverse the CGST credit?

Second proviso to Sec. 16(2) refers to non-payment of value of supply along with tax payable thereon. Value of supply as defined u/s 15 is applicable only on supplies made under the GST era. Hence we are of the opinion that the reversal of ITC as contemplated u/s 16(2) shall apply only to invoices issued on or after 01.07.2017 under the GST law.

10. Will ITC reversal apply to ITC claimed under Reverse Charge Mechanism?

No. Second proviso to Sec. 16(2) clearly excludes supplies on which tax is payable on reverse charge basis from its applicability. Hence ITC is not required to be reversed even if payment is not made within 180 days against supplies covered under reverse charge mechanism. It is worthwhile to note here that the definition of “reverse charge” is provided u/s 2(98) of the CGST Act, 2017 which is reproduced below:

“(98) “reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act;”

Above definition covers only tax payable u/s 9(3) (i.e. specific reverse charge) or 9(4) (i.e. general reverse charge) of CGST Act, 2017 or 5(3) (i.e. specific reverse charge) or 5(4) (i.e. general reverse charge) of the IGST Act, 2017. It does not cover import of service since the charge of tax on import of service is created u/s 7(1)(b) of the CGST Act, 2017 read with Sec. 7(4) of the IGST Act, 2017. Not including import of service in the definition of “reverse charge” seems to be a drafting lacuna and needs to be corrected. Purposive interpretation suggests that ITC reversal on account of non- payment of value of supply to foreign supplier within 180 days shall not apply even to import of services.

11. Will ITC reversal apply even if payment is made by book entries?

Second proviso to Sec. 16(2) only provides that ITC reversal shall apply in cases of non-payment. It does not prescribe any particular mode of payment. Hence even if payment is made by book entries (e.g. commercial credit note issued by supplier) within 180 days, it shall constitute payment and hence ITC reversal is not warranted. One can also refer to Board Circular No. 122/3/2010‐ST dated 30/4/10 issued in the context of reversal under the CENVAT Credit Rule, 2004 wherein the said interpretation has been accepted.

12. Whether ITC reversal is required for transactions covered under Schedule?

Schedule – 1 to the CGST Act, 2017 covers transactions made without consideration (e.g. branch transfer outside State). Proviso to Rule 37(1) provides that the value of supplies made without consideration as specified in Schedule I of the CGST Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16. Hence ITC reversal shall not apply to transactions covered under Schedule – I.

(Republished with Amendments. Amendments been made by CA Anita Bhadra)