Introduction: In the dynamic landscape of business, understanding the consequences of non-payment of consideration is crucial. This article delves into the intricate impact on both Goods and Service Tax (GST) and Income Tax, shedding light on the rules, regulations, and practical insights.
Treatment from Goods and Service tax perspective:
Entrepreneurs believe that profit is what matters most in a new enterprise, but profit is secondary and cash flow matters most. Lack of sufficient cash flow causes many big businesses and start-ups to struggle in their initial stages. The importance of the issue can be visualized in a way that the same is also addressed in GST law.
To begin with, as per Section 16(2) of the CGST Act, 2017, a registered person can claim input tax credit on the goods and/or services received from the supplier. Furthermore, in accordance with the second proviso of Section 16, payment for the goods and/or services as well as the tax component must be made within 180 days of the invoice’s issuance in order to qualify for input tax credit. It should be noted that such proviso is not applicable on reverse charge basis. It follows that the laws’ primary objective is to place emphasis on both taxation and consideration payment.
If the recovery of taxes had been the only priority, the aforementioned Section would not have specifically called for the payment for the supply as well.
The relevant Rules under the aforementioned discussion are Rule 37 and 37A of CGST Act 2017. Rule 37 deals with the reversal of input tax credit in the event of non-payment of consideration, while Rule 37A deals with a situation where the supplier fails to deposit GST, however the buyer has already claimed input tax credit. We will analyse both the Rules and its implication separately and then will reach to a conclusion.
Thus, it could be concluded that one of the pre-conditions for availment of the input tax credit is the fact that the payment has been made for the supply and the government has received the tax component. The reason for including such provisions can also be concluded to have a proper compliance and the discouragement to enter into business with the supplier with non- compliance.
Rule 37 of the CGST Rules 2017:
Previously, Rule 37(1) of the CGST Rules stated that “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”.
Such rule was amended to provide that “A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards 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 pay an amount equal to the input tax credit availed in respect of such supply along with interest payable thereon under section 50, 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”. The notification specifically states that instant amendment will be effective from 1st October 2022.
However, such Rule was again amended on 26th December 2022, which shall be effective from 1st October 2022, to provide that “A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply, whether wholly or partly, along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, 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”.
Moreover, reference should be Made to 48th council held on 17th December which provides that:
II. Amendment in sub-rule (1) of Rule 37
8.6.4 Principal Commissioner, GST Policy Wing informed that the second proviso to Section 16 (2) of the CGST Act, 2017 provides for cases where a 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.
8.6.5 He mentioned that such recipients had to follow the procedure prescribed in Rule 37(1) of the CGST Rules, 2017. However, the said Rule had been amended with effect from 01.10,2022 vide Notification No. 19/2022 – CT dated 28.09.2022 and the amended Rule 37(1) required the said recipient to pay an amount equal to the input tax credit availed in respect of such supply. That gave an impression that the whole of ITC pertaining to such supply was to be reversed even though a part of the payment could have been made by the recipient to the supplier. That appeared to be an inadvertent departure from the principle of proportionate reversal under the original rule. To rectify the anomaly, the Law Committee recommended that sub-rule (1) of Rule 37 be amended retrospectively with effect from 01.10.2022 to provide for reversal of an amount of input tax credit proportionate to the amount not paid by the recipient to the supplier vis a vis the invoice value.
Thus, analyzing the above provisions and explanations, it can be concluded that if only a part of the consideration is retained, be it for any reason, the proportionate amount of input tax credit shall be liable to be reversed.
Every legal provision generally has the potential to be misused in order to gain an unfair advantage. Issuing an invoice for the amount of the sum that is certain to be received and either issuing a separate invoice for the remaining amount or issuing debit notes is one of the way to prevent the input tax credit from getting reversed. This approach is most effective when considering whether to retain money owing to credit or quality.
Rule 37A of the CGST Act 2017:
Further, reference should be examined, as it provides that GST-registered buyers of goods or services or both must reverse input tax credit claims made prior to the supplier in question failing to deposit the corresponding taxes in their GSTR-3B within the allotted time frame. According to the interpretation of the aforementioned rule, Rule 37A of the GST cannot apply unless the following requirements are met:
1. On the basis of the records communicated in GSTR-2B, the buyer has claimed input tax credit on said invoice.
2. The supplier has not deposited the tax on such invoice/debit note.
3. The supplier has failed to submit the GSTR-3B along with the relevant debit note or invoice.
Moreover, reference should be Made to 48th council held on 17th December which provides that:
“III. Insertion of Rule 37A
8.6.6 Principal Commissioner, GST Policy Wing informed that sub-section (2) of Section 41 of the CGST Act, 2017, as substituted by Notification No. 18/2022-CT, provides for reversal of input tax credit availed by recipient of such supplies where tax payable has not been paid by supplier and re-availment of the said ITC after payment of tax by the said supplier. The Law Committee had deliberated the manner in which such ITC could be reversed and re-availed and after considering the various practical issues in the implementation of the said provision and for ease of doing business, the Law Committee recommended insertion of a new Rule 37A in CGST Rules, 2017 detailing out the mechanism for such reversal of credit and re-availment thereof. Principal Commissioner, GST Policy Wing stated that while there was agreement on this agenda in Officers’ Committee meeting, a suggestion was made by State of Bihar that GSTN may provide a functionality for making the data pertaining to Rule 37A available to the tax officers and the same was agreed to.”
Through adhering to the provisions mentioned above, it would be reasonable to conclude that the GST provisions are now much clearer regarding the need for reversal in both situation- where consideration has not been paid or where the supplier has failed to pay the government tax component. The reversal required by Rule 37A should be reported in GSTR-3B.
As regards the timeline, there is no requirement of reversal in case supplier has filled GSTR-3B on or before 30th September 2023. However, the rule also provides relaxation to buyers who could not claim input tax credit due to non-compliance by the supplier. The input tax credit can be re- claimed even after the time limit given above if the corresponding supplier:
1. Any one of the following conditions are fulfilled:
a. Files the relevant period’s GSTR-3B after 30th September of the year following the Financial Year.
b. Reports such as missed invoice/debit notes in any period’s GSTR-3B filed after 30th September of the year following the Financial Year
2. Pays tax on such invoice/debit note after 30th September of the year following the Financial Year.
Thus, concluding the provisions, it can be clearly seen that now there are separate rules for two different conditions. It was long believed that there ought to be different regulations for situations in which the buyer has paid the consideration, but the seller is still not complying. The said provisions are made effective from 1st October 2023. The implications and practicability of such changes will be known after the passage of time.
Treatment from Income tax perspective:
Unlike Goods and service tax, which provide the treatment from the perspective of buyer, the income tax act provides from the perspective of seller. The income tax act considers that it is a loss incurred by the seller and the same should be allowed as an expenditure while calculating tax profit (Section 36 of Income Tax Act). However, to claim the bad debt as deduction, one needs to write of the same as irrecoverable in the books of account for the previous year and the same must have been the part of income in any of the previous year. Moreover, after amendment of the said Section, it is now established that there is no requirement that the taxpayer should establish that there was a doubt full debt. (Direct Tax Laws (Amendment) Act, 1987). Further, attention should also be given to CBDT Circular No. 551, dated 23-01-1999, which provided a explanatory note regarding the said amendment. The extract of the circular is as follows for the reference:
“DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV
Amendments to sections 36(1)(vii) and 36(2) to rationalize provisions regarding allowability of bad debts.
6.6 The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the assessing officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.”
Thus, we have now concluded the effect of non-payment of consideration under both Goods and Services tax and Income tax. Income tax, being the old and well-established law, is more precise and clearer as compared to Goods and Services tax. GST on the other hand is still evolving. But at the end, both laws now provide the concise treatment of the non-payment of consideration which is explained in the above paras. Thus, till the time any new development takes place, we must follow the above set of rules and regulations as regards non-payment of consideration is concerned.
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