According to the second proviso to Section 16 of the CGST Act with reference to CGST Rule 37, the recipient who fails to pay to the supplier of goods or services, or both, the value of the supply, whether wholly or partly, along with tax thereon within 180 days from the date of the invoice, has to pay an amount or reverse the input tax credit proportionate to the amount that is not paid to the supplier.
Section 50 requires that interest be paid on such a reversal of ITC or the amount. The ITC reversal or payment of the amount plus interest must be made when filing the GSTR-3B return for the period immediately following the 180-day period from the date of the invoice.
The proviso does not, however, apply to supplies for which the recipient is responsible for paying tax on a reverse charge basis.
Further, CGST Rule 37 provides relief to related and distinct persons who supply goods or services or both among themselves, so that they no longer have to make payment for the supplies received from the related or distinct persons to avail input tax credit on such goods or services.
According to the new proviso to the rule as amended by Notification No.19/2022-Central Tax dated 28th September 2022, 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.
Where any transaction like branch transfers of goods or supply of services occurs among related or distinct persons, these transactions are usually adjusted in the books and no payments or receipts are made to each other, especially when the organisations are under the same group of companies. Bill-to-bill adjustment may be tedious work, and there is no such necessity to make payments among themselves. This proviso makes the work simple.
Also, when any branch or company is merged with the existing branch or company of a related or distinct persons – where there is a permanent transfer or disposal of business assets – there is no need to make payments for such transactions for the purpose of availing input tax credit.
This is also applicable to the import of services from a related person or from any of his establishments outside India in the course or furtherance of business.
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Disclaimer: This article is only for the purpose of understanding the provisions of the Act, The author bears no responsibility on decisions taken by the readers whatsoever. E&OE.