Reversal of Input Tax Credit (ITC) in case of non-payment of tax by supplier and re-availment thereof (Rule 37A)
Introduction: GST Rule 37A, introduced under the CGST Rules, 2017, addresses the reversal and re-availment of Input Tax Credit (ITC) when suppliers fail to pay taxes. This article examines the legal framework, challenges, and practical implications of Rule 37A in the GST regime.
It is to be noted that Section 16(2)(c) of the Central Goods and Service Tax Act, 2017 (‘CGST Act, 2017’) provides that
“(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) …..
(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 utilization of input tax credit admissible in respect of the said supply; and
(d) he has furnished the return under section 39;
Section 16(2)(c) of the CGST Act, 2017 states that Buyers can claim Input Tax Credit (‘ITC’) on a supply if the tax on the invoice is deposited with the Government by the Supplier or Vendors, either in cash or by utilising ITC. On the other hand, clause (d) of Section 16(2) lays down another condition to allow ITC claims for buyers. Their corresponding supplier must have filed such Form GSTR-3B. Further, Section 41(2) of the CGST Act, 2017 states that the recipient of credit must reverse such ITC claims if the supplier has not deposited taxes. The proviso allows the buyer to re-avail or re-claim such reversed ITC later when the supplier pays tax. The extract of the said section 41(2) of the CGST Act, 2017 are as under-
(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to avail the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited to his electronic credit ledger.
(2) The credit of input tax availed by a registered person under sub-section (1) in respect of such supplies of goods or services or both, the tax payable whereon has not been paid by the supplier, shall be reversed along with applicable interest, by the said person in such manner as may be prescribed:
Provided that where the said supplier makes payment of the tax payable in respect of the aforesaid supplies, the said registered person may re-avail the amount of credit reversed by him in such manner as may be prescribed.]
[Substituted (w. e. f. 1st October, 2022 vide Notification No. 18/2022 – CT) by s. 106 of The Finance Act 2022 (No. 6 of 2022) for “Section 41. Claim of input tax credit and provisional acceptance thereof.]”
During the past five years of the GST, there are many cases in which ITC has been reversed by the recipient of goods or services in case FORM GSTR-3B has not been filed by the supplier (Because tax liability is discharged under GST by the filing of Form GSTR-3B). The department generally invoked Section 16(2)(c) of the CGST Act, 2017 contesting that the pre-condition for availing ITC that the corresponding tax should have been paid, has not been fulfilled in such cases. It is important to note that Section 16(2)(c) of the CGST Act, 2017 provides another condition that the tax has been actually paid to the Government for availing of input tax credit by the buyer.
Please note that non-reflection of ITC in Form GSTR-2A/2B is possible due to multiple reasons and one of the reasons can be that the Supplier has not filed the returns and evaded the payment of due tax to the Government. Sometimes the Suppliers file Form GSTR-1 and the details are also reflected in Form GSTR-2A/2B but the Suppliers do not pay tax to the Government. In such cases, section 16(2)(c) of the CGST Act, 2017 comes into play. However, to curb such issues the Government has mandated the filing of Form GSTR-3B before filing Form GSTR-1 of the subsequent period [Please refer Rule 59(6) of the CGST Rules, 2017] and also inserted the provision for recovery of tax without the issuance of show cause notice where the liability is self-assessed in Form GSTR-1 but not paid through Form GSTR-3B.
Further, it is pertinent to note that in some cases, it has been found that the recipient actually did reverse the ITC and later on the supplier paid the taxes, therefore, in this situation there was no mechanism for the recipient to reclaim the ITC so reversed. So, it leads to collection of taxes by Government without any authority of law and is simply violation of Article 265 of the Constitution of India.
It is to be noted that denial of ITC on non-payment of tax by Supplier under GST Law is under the scrutiny of the Indian judiciary. Section 16(2)(c) of the CGST Act, 2017 has been challenged before multiple High Courts through various Writ Petitions. However, for natural justice this condition was relaxed by the Courts in various decisions (like M/S. D.Y. Beathel Enterprises 24 February, 2021) due to the fact that suppliers were existing and that the department should start the recovery proceedings against the suppliers rather than the recipients. In case the suppliers do not pay, then the department could come to the recipients for recovery of the said taxes.
It is notable that Section 41 of the CGST Act, 2017 has been fully substituted through Finance Act, 2022. With the amendment by Finance Act, 2022 a now ‘Provisional ITC and Matching Concept’ has been scrapped. Further, in the said substituted section 41, mechanism for the recipient to reclaim the ITC so reversed, was provided. Now, Section 41(2) of the CGST Act, 2017 provides that the recipient of credit must reverse ITC claims if the supplier has not deposited taxes. Further, proviso to section 41(2) of the CGST Act, 2017 allows the buyer to re-avail or re-claim such reversed ITC later when the suppler pays tax. The CBIC vide Notification No. 18/2022–Central Tax dated 28th September, 2022 notified the above-mentioned amendment w.e.f. 1st Day of October, 2022.
Please note that Rule 37A of the Central Goods and Service Tax Rules, 2017 (‘CGST Rules, 2017’) was added to the CGST Rules on 26th December 2022 vide the Notification No. 26/2022-Central Tax dated 26.12.2022. The said Rule 37A is notified in compliance with clauses (c) and (d) of Section 16(2), read with Section 41(2) and its proviso under the CGST Act, 2017. It is also pertinent to mention that there were no corresponding rules to govern the procedure and timelines until the new Rules 37A got notified. Now, the CBIC has inserted Rule 37A in The CGST Rules 2017 w.e.f. 26th December, 2022 vide Notification 26/2022-Central Tax. Below is the extract of the Rule 37A –
“37A. Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof.- Where input tax credit has been availed by a registered person in the return in FORM GSTR-3B for a tax period in respect of such invoice or debit note, the details of which have been furnished by the supplier in the statement of outward supplies in FORM GSTR-1 or using the invoice furnishing facility, but the return in FORM GSTR-3B for the tax period corresponding to the said statement of outward supplies has not been furnished by such supplier till the 30th day of September following the end of financial year in which the input tax credit in respect of such invoice or debit note has been availed, the said amount of input tax credit shall be reversed by the said registered person, while furnishing a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year:
Provided that where the said amount of input tax credit is not reversed by the registered person in a return in FORM GSTR-3B on or before the 30th day of November following the end of such financial year during which such input tax credit has been availed, such amount shall be payable by the said person along with interest thereon under section 50.
Provided further that where the said supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, the said registered person may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter.”
Buyers/Recipient of goods and services will need to reverse ITC claimed on such supplies declared in the GSTR-1/Invoice Furnishing Facility (‘IFF’) but not declared in Form GSTR-3B by the Seller/Supplier of goods and services. Rule 37A of the CGST Rules, 2017 provides that the GST-Registered Buyers of goods and services must reverse ITC claimed before when their corresponding supplier fails to deposit such taxes in their Form GSTR-3B within a defined time. All regular taxpayers must comply with CGST Rule 37A.
Practical approach to reverse ITC under Rule 37A-
It is pertinent to mention that Buyer/Recipient of goods and services will need to reverse Input Tax Credit (‘ITC’) claimed on such supplies declared in the GSTR-1/Invoice Furnishing Facility (‘IFF’) but not declared in Form GSTR-3B by the Seller/Supplier of goods and services.
The Buyer/Recipient of goods and service would have initially claimed the ITC appearing in GSTR-2B through Table 4(A)(5) of Form GSTR-3B. However, if Rule 37A is attracted (i.e. in case Supplier did not filed Form GSTR-3B), Buyer/Recipient must reverse such claimed ITC by reporting it in Table 4(B)(2) of Form GSTR-3B. There will no interest in case reversal is done within the defined time limit.
Time limit to revere ITC under Rule 37A-
Buyer/Recipient of goods and services need not reverse ITC immediately upon knowing that supplier has not filed Form GSTR-3B. Buyer/Recipient of goods and services have defined time/date under Rule 37A which are as under-
| Cases | Reporting by Supplier | Whether ITC is to be reversed? | Whether interest will be payable or not? |
| Case No. 1 | Supplier filed Form GSTR-3B on or before 30th September of the year following the financial year. | No need to reverse ITC claimed earlier. | Not Applicable |
| Case No. 2 | Supplier filed Form GSTR-3B on or after 1st October of the year following the financial year. | ITC earlier claimed must be reversed in Form GSTR-3B | No Interest, in case buyer reverse the ITC on or before 30th November of the year following the financial year.
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| Interest will be applicable, in case buyer reverse the ITC on or after 1st December of the year following the financial year. |
Re-claiming of ITC reversed under Rule 37A-
Rule 37A provides that in case Supplier subsequently furnishes the return in FORM GSTR-3B for the said tax period, Buyer may re-avail the amount of such credit in the return in FORM GSTR-3B for a tax period thereafter. The buyer/recipient can re-claim or re-avail the ITC in Table 4(D)(1) of Form GSTR-3B of any subsequent return periods. Note that such re-claims are allowed despite the restriction put under Section 16(4) of the CGST Act, 2017.
Conclusion: GST Rule 37A serves as a vital mechanism for ensuring tax compliance and accountability in the GST framework. Understanding its provisions, adhering to prescribed timelines, and adopting pragmatic approaches are crucial for businesses to navigate the complexities of ITC reversal and re-availment. Compliance with Rule 37A not only fosters transparency but also strengthens the integrity of the GST regime.
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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the author whatsoever and the content is to be used strictly for informational and educational purposes. While due care has been taken in preparing this article, certain mistakes and omissions may creep in. the author does not accept any liability 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.
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