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Reversal of ITC in case of non-payment of tax by supplier & reavailment

Reversal of input tax credit in the case of non-payment of tax by supplier and reavailment thereof (New Rule 37A)

The Central Board of Indirect Taxes and Customs (CBIC) has notified many decisions taken by the GST council in its 48th meeting held on December 17, 2022. The GST Council in their said meeting recommended to insert Rule 37A in CGST Rules, 2017 to prescribe the mechanism for reversal of input tax credit (ITC) by a registered person in the event of non-payment of tax by the supplier by a specified date and mechanism for re-availment of such credit, if the supplier pays tax subsequently. This would ease the process for complying with the condition for availment of input tax credit under section 16(2)(c) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017). Section 16(2)(c) of the 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)…….

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. However, for natural justice this condition was relaxed by the Courts in various decisions (like M/S. D.Y. Beathel Enterprises vs. The State Tax Officer (Data Cell) on 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.

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 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 made vide Section 100 of the Finance Act, 2022 w.e.f. 1st Day of October, 2022. The newly substituted section 41 of the CGST Act, 2017 is as under-

Reversal of ITC in case of non-payment of tax by supplier & reavailment

“41. Availment of input tax credit.

(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.”.

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 of GST from the CGST Rules-

“37A. Reversal of input tax credit in the case of non-payment of tax by the supplier and reavailment 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.”

In view of the above, the below conditions must be satisfied for Rule 37A of GST to apply-

i) The recipient has claimed ITC on such invoice based on the record shown in GSTR-2B.

ii) The supplier has not deposited the tax on such invoice/debit note.

iii) The supplier has not filed the GSTR-3B with the corresponding invoice/debit note

Means this rule applies when the value of supply in supplier’s GSTR-1 is more than their GSTR-3B, or an invoice declared in GSTR-1 is missed out in GSTR-3B by the supplier or vendor.

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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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