Denial of ITC in case of non-payment of tax by Supplier

The underlying object of Input Tax Credit (‘ITC’) regime brought in, is to avoid the cascading effect of tax.  The ITC is tied to certain conditions stipulated under the provision and non- fulfilment of which would result in denial of such credit. Claiming the ITC is subject to stringent compliance requirements provided under Section 16 of Central Goods and Service Tax Act, 2017 (‘CGST Act’) which includes possession of valid tax invoice, having received the goods and/or services, filing of GSTR-3B returns by the suppliers and actual payment of taxes related to the tax invoice. The tax authorities have the power to deny ITC if these conditions are not met.

Section 16(2)(c) of the CGST Act stipulates that for a supply to qualify for ITC, the tax charged on it must have been actually paid to the Government, either through cash payment or through the utilization of eligible ITC. Section 16(2)(c) of the CGST Act 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 states that buyers can claim 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 return such as GSTR-3B (Rule 61).

It is to be noted that GSTR-3B is the monthly return to declare supplies made during the period, ITC claimed or reversed, and taxes paid under the forward and reverse charge mechanisms. Further, the supplier is required to declare the details of supplies in GSTR-1 which reflected in GSTR-2B of the recipient of goods and/or services. From 1^st January 2022, the reflection of details in GSTR-2B has become an additional eligibility condition for claiming ITC. [Clause (aa) of Section 16(2) – the details of the invoice or debit note referred to in clause (a) has been furnished by the supplier in the statement to the recipient of such invoice or debit note in the manner specified u/s 37]

Please note that non-reflection of ITC in 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 files GSTR-1 and the details are also reflected in 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 GSTR-3B before filing 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 GSTR-1 but not paid through GSTR-3B.

It is pertinent to mention that from 1^st July 2017 to 30^th September 2022, the GST law required suppliers to pay the tax as stipulated by Section 41 of the CGST Act wherein there was no mechanism for reversing ITC in cases where the supplier failed to pay the tax. This reversal mechanism was established through the Finance Act 2022, which amended Section 41 in the CGST Act and introduced Rule 37A in the CGST Rules. Prior to this amendment, there was no legal procedure in place for the reversal of ITC due to the supplier’s non-payment of tax. As a result, the tax authorities cannot enforce ITC reversals for this period. But there were many cases in which ITC has been reversed by the recipient of goods or services in case GSTR-3B has not been filed by the supplier (Because tax liability is discharged under GST by the filing of GSTR-3B). The department had 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. Further, it is pertinent to note that in some cases, it has been found that the recipient actually did reverse the ITC as forced by the department and later on the supplier paid the taxes, but, in this situation there was no mechanism for the recipient to reclaim the ITC so reversed.

To curb the above mentioned situations, Section 41 of the CGST Act 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 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 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 28^th September, 2022 notified the above-mentioned amendment w.e.f. 1^st Day of October, 2022.

The extract of the amended Section 41(2) of the CGST Act 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.]”

Reversal of input tax credit in the case of non-payment of tax by the supplier and re-availment thereof.

GST Rule 37A, introduced under the CGST Rules, 2017, addresses the reversal and re-availment of ITC when suppliers fail to pay taxes. 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.”

Buyer/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 GSTR-3B by the Seller/Supplier and accordingly ITC is availed to recipient based on GSTR-2B. 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 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 ITC claimed on such supplies declared in the GSTR-1/IFF but not declared in GSTR-3B by the Seller/Supplier and accordingly ITC is availed to recipient based on GSTR-2B.

The Buyer/Recipient of goods and service would have initially claimed the ITC appearing in GSTR-2B through Table 4(A)(5) of GSTR-3B. However, if Rule 37A is attracted (i.e. in case Supplier did not filed GSTR-3B), Buyer/Recipient must reverse such claimed ITC by reporting it in Table 4(B)(2) of 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 GSTR-3B. If credit is availed based on GSTR-2B however, GSTR-3B is not filed by the supplier till 30^th September of the subsequent financial year, such credit to be reversed before 30^th November of the subsequent financial year. However, where the supplier files his GSTR-3B subsequently, then credit could be re-availed in GSTR-3B.

Buyer/Recipient of goods and services have defined time/date under Rule 37A which are as under-

Re-claiming of ITC reversed under Rule 37A-

Rule 37A provides that in case Supplier subsequently furnishes the return in GSTR-3B for the said tax period, Buyer may re-avail the amount of such credit in the return in GSTR-3B for a tax period thereafter. The buyer/recipient can re-claim or re-avail the ITC in Table 4(D)(1) of GSTR-3B of any subsequent return periods.

Whether Section 16(4) is applicable for re-availment?

Section 16(4) provides that credit should not be taken after 30^th November of the subsequent financial year or date of furnishing of annual return, whichever is earlier.

 Rule 37(4) states that the time limit specified in Section 16(4) shall not apply to a claim for re-availing of any credit, that had been reversed earlier. The said rule is as follows:

“(4) the tile 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 earlier.”

Therefore, re-claims are allowed despite the restriction put under Section 16(4) of the CGST Act.

Conclusion: Combined reading of all the provisions of Section 16, Section 41 and Rules 37A, it can be concluded that the buyer can avail ITC on supplies of which supplier has not paid tax / not filed GSTR -3B, but buyer will be required to reverse such ITC where supplier has not filed GSTR-3B on or before 30th September of the year following the financial year. However, the such reversal was not made by the buyer on or before 30^th November of the year following the financial year, the interest under section 50 will get attracted. Moreover, the buyer will be entitled to re-avail ITC on such supplies once supplier has filed GSTR-3B discharging tax liability on such supplies.

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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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Reversal of ITC in case of non-payment of tax by supplier & reavailment thereof (New Rule 37A)

(Republished with amendments)