ITC Reversal on Failure to Pay Within 180 Days – Amendments & Issues

Background

1. Since the onset of GST, businesses have been struggling to comply with the provisions seeking for the reversal of the ITC along with interest on the failure to pay the taxable value along with tax amount to the vendor within 180 days from the date of the issuance of the invoice. The part blame lies on the cumbersome nature of the compliance and the part blame lies on the manner in which the concerned provisions have been worded leading to several ambiguities. Recently the provisions contained in Rule 37 (which deals with the manner for effectuating the reversal and re-availment) have been substantially amended and have been brought into effect from 01.10.2022. In the present article, we seek to analyze the given provisions as well as the issues emanating therefrom.

Legal provisions

2. Sec. 16(2) of the CGST Act, 2017 starting with a non-obstante clause overriding anything contained in the said Sec. 16 provides that no registered person shall be entitled to any input tax credit unless the stipulated conditions are specified. The said conditions relate to the possession of the valid document, furnishing of the details of the said document by the vendor, actual receipt of the goods or services or both, the actual payment of tax to the Government and filing of the return. The second and the third proviso to the said Sec. 16(2) further provides 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 : 

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. The aforesaid second proviso, therefore, seeks to provide that 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 where the given recipient fails to pay to the supplier the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of the invoice.

4. The third proviso further provides that the recipient shall be entitled to avail the credit (that has been added to the output tax by virtue of the second proviso) on payment made by him of the amount towards the value of supply along with tax payable thereon.

5. Rule 37 of the CGST Rules, 2017 contains the mechanism to effectuate the aforesaid provisions. Now w.e.f. 01.10.2022 vide Notification No. 19/2022-Central Tax dated 28.09.2022 the said Rule 37 has been amended. For a better appreciation of the amendments we draw a comparison table as follows:

6. Now we shall seek to discuss the issues that shall arise in the context of the aforesaid provisions:

Validity of the proviso(s) to Sec. 16(2)

7. A proviso is meant to carve an exception to the main provision. Hence it is inevitable that the main provision must deal with the subject matter that is dealt with by the proviso. 16(2) contains several conditions that are required to be satisfied for a registered person to the entitled to the input tax credit. None of the said conditions provides that the registered person must pay the supplier within a period of 180 days. Hence the proviso(s) in question appear to be inconsistent with the scheme of Sec. 16(2). Therefore the validity of such proviso(s) is required to be tested.

8. One may also have to consider whether the validity of the subject proviso(s) can be upheld by considering it as an independent provision and not as a proviso to any main provision. Here again one has to consider that Sec. 16(2) deals with the conditions related to the entitlement of the credit and not the reversal of the credit post entitlement. Hence even if the subject proviso(s) are considered to be independent, still the same appears to be incongruent with Sec. 16(2) itself and therefore even on this ground the validity is required to be tested.

9. One may also consider whether the subject proviso(s) shall remain applicable when it has been established that the tax (for which credit has been claimed) has been actually paid to the Government by the vendor. This is so because the purpose of the actual payment condition u/s 16(2)(c) is to allow the credit only if the Government has actually received the amount. Hence if the said purpose stands satisfied, can still there be a grievance to deny the credit on the failure of the registered person to pay the vendor within a period of 180 days? In such circumstances, the purpose of still denying credit is unreasonable and arbitrary. Therefore even on this ground, the validity is required to be tested.

10. Ostensibly the purpose behind the subject proviso(s) is to instigate the registered person to remit the dues to the vendors so that the said vendors can remit the tax payment without facing additional burden in terms of cash flows. However, the said ostensible purpose stands defeated by the very fact that the subject proviso(s) still grants time of up to 180 days to reach the desired point of instigation. Hence even on this ground, the purpose to deny the credit based on the ‘180 days’ test appears to be arbitrary. Therefore even on this ground, the validity is required to be tested.

Failure to pay

11. The subject proviso(s) apply to the failure of the registered person to pay the vendor within a period of 180 days from the date of the invoice. The term ‘failure’ has not been defined in the Act. The ordinary meaning of the said term ‘failure’ indicates neglect of an expected/required action. Hence there must be an expected/required action between the supplier and the recipient to remit the dues within a period of 180 days and the failure thereof can be said to invite the wrath of the subject proviso(s). Therefore it can be contended that the express contract to remit the dues beyond the period of 180 days is outside the ambit of the subject proviso(s). The said contention is supported by the ostensible purpose behind the formulation of the subject proviso(s). The purpose as discussed above is to ease the liquidity at the end of the vendor to allow the payment of the dues. Hence where the vendor expressly agrees to permit the recipient to remit the dues after a period of 180 days, it can be contended that in absence of any grievance of the vendor, can there still be a grievance to seek the reversal of credit in such circumstances? The said propositions shall equally apply in the context of retention payments, etc.

Validity of the amended Rule 37

12. The subject proviso(s) expressly provide that on failure to pay within 180 days, an amount equal to the input tax credit shall be added to output tax liability, along with interest thereon, in such manner as may be prescribed. Hence the Act grants the power to the Executive to formulate the Rule to prescribe the manner in which the amount in question shall be added to output tax liability, along with interest thereon. Hence the Act in other words does not grant the power to the Executive to formulate the Rule overruling the aspect dealing with the addition of the amount as ‘output tax liability’. Rule 37(1) as amended read with the revised Form GSTR 3B as well as Circular No.170/02/2022-GST dt. 06.07.2022 indicates that the credit in question is required to be reversed from the available credit during the concerned tax period. Hence the amended Rule 37(1) appears to be in conflict with the subject proviso(s) as it does not prescribe the addition of the amount as output tax liability but instead provides for the reversal of the amount from the available credit.

Validity of Rule 37 prior to 01.10.2022

13. Rule 37(1) r/w 37(2) as in existence prior to 01.10.2022 provided for furnishing the details of failure in making the payment within 180 days in GSTR 2 and the said amount was to be added to the output tax liability in the said period. Hence the said Rule, on one hand, provided for the addition of the amount to the output tax liability but that was to happen only after the taxpayer furnished the details in GSTR 2. It is only w.e.f. 01.10.2022 that the amount in question is required to be reversed in GSTR 3B as per the amended Rule 37. Now the furnishing of GSTR 2 has been abandoned. Therefore it is required to be considered whether the requirement of addition of the amount to the output tax liability prior to 01.10.2022 can be enforced in absence of any mechanism to furnish the details through GSTR 2. The validity of the said Rule 37 therefore prior to 01.10.2022 is again questionable given the recent amendments that are prospective in nature.

Partial payments within 180 days

14. Rule 37(1) as in existence prior to 01.10.2022 provided that only an amount proportionate to the invoice value that remains unpaid after the period of 180 days is required to be added. The amended Rule 37(1) ostensibly misses the word ‘proportionate’. Even the subject proviso(s) u/s 16(2) misses the word ‘proportionate’. Hence can it thus imply that the entire credit is required to be reversed even if only a proportionate amount remains unpaid at the end of 180 days? The words ‘failure to pay’ is required to be interpreted qua the amounts remaining outstanding at the end of the 180 days. Hence credit only to that extent deserves the reversal, if at all.

Imposition of interest

15. Rule 37 as in existence prior to 01.10.2022 provided that the interest on the amount that will be added to the output tax liability shall be determined u/s 50(1) of the CGST Act, 2017 for the period starting from the date of availing credit till the date when the amount added to the output tax liability. The amended Rule 37 w.e.f. 01.10.2022 omits the entire reference to Sec. 50(1) but provides that the interest shall be payable u/s 50 while furnishing the return in FORM GSTR-3B. As discussed earlier, the amended Rule 37 provides for the reversal of the credit instead of the addition of the amount to the output tax liability. Hence interest u/s 50(1) (which applies in the context of failure to pay the tax) cannot be applied w.e.f. 01.10.2022. Whether the interest can be imposed u/s 50(3)? Now Sec. 50(3) applies where the input tax credit has been wrongly availed and utilized. The entitlement of the credit at the time of receipt of the inward supplies (even if there is a subsequent failure to pay within 180 days) is not disputed. It is only on the occurrence of the subsequent failure that the requirement of reversal shall arise. Hence it can be contended that the given case is not where the taxpayer has wrongly ‘availed’ and utilized the credit. Further, the amended Rule 37 unlike the prior version fails to provide the period for which the interest is required to be calculated. Hence the amended Rule 37 seeking to impose interest u/s 50 appears to be inconsistent with the main provisions.

16. One must also consider that as per Sec. 50(3) r/w Rule 88B the interest shall not be imposed if the subject amount of credit has been availed but remains unutilized at the time of reversal.

Period of reversal

17. The amended Rule 37 provides that the taxpayer has to pay the amount while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice. Hence if the period of 180 days expires in let us say October 2022, the amount is required to be paid by furnishing the details in GSTR 3B of September 2022 (i.e. tax period immediately following). Will it thus imply that the taxpayer will be saddled with additional interest for a period of one more month? It may be considered that the taxpayer is always at liberty to undertake the reversal before the occurrence date of failure. Hence to that extent, the interest should not be imposed.

Conclusion

18. The above analysis indicates that numerous issues persist in effectuating the provisions requiring reversal of credit on failure to make the payment within 180 days. We shall not be surprised if we see more amendments in times to come to resolve the issues highlighted above.