Reversal of ITC on failure to pay within 180 days from the date of issuing invoice

Central Goods and Services Tax (Fifth Amendment) Rules, 2022 vide Notification 26/2022-Central Tax, w.e.f. 1-10-2022

Reversal of ITC on failure to pay within 180 days from the date of issuing invoice

The law related to payment of consideration (value along with tax payable) to the vendors within 180 days from the date of issue of invoice failing which the recipient is burdened with the liability to pay back the amount of ITC availed, proportionate to the unpaid amount, along with interest has always been a subject matter of discussion.

Recently, the Rule 37 was substituted to modify the references of compliance Forms as the original scheme of law has finally been abandoned with the introduction of Form GSTR-2B and prescribing Form GSTR-3B as a return u/s 39.

Legal Provisions

Section 16(2) of the GST Act provides that 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 specified conditions are fulfilled. These conditions relate to (i) possession of valid document, (ii) furnishing of details in Form GSTR-1 and communication thereof in Form GSTR-2B (applicable w.e.f. 01.01.2022), (iii) goods or services or both are received, (iv) details are not communicated as restricted in Form GSTR-2B (applicable w.e.f. 01.10.2022), (v) tax is paid to the credit of Central Government by the vendor, and (vi) return in Form GSTR-3B is filed.

The second and third proviso to section 16(2) provides as under:

“Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”

The manner of adding the amount in output tax liability has been provided in rule 37 of the GST Rules which has been amended recently. This pre-amended and amended rule reads as under:

Sub- rule	Rule 37 prior to 01.10.2022	Rule 37 w.e.f. 01.10.2022
1	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: Provided that 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: Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub- section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.	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: Provided that 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: Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub- section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.;
2	The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.	Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).
3	The registered person shall be liable to pay interest at the rate notified under sub-section (1) of section 50 for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.	—
4	The time 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.	The time 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.

Prior to 01.10.2022

As per original scheme of making compliances under GST law, the registered persons were supposed to furnish 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 which was to be added in the output tax liability while furnishing return in Form GSTR-3. An extract of these Forms is reproduced below for reference:

Form GSTR-2

11. Input tax credit reversal / re-claim 

Description for reversal of ITC	To be added or reduced from output liability	Amount of ITC
		Integrated tax	Central Tax	State/ UT tax	Cess
(1)	(2)	(3)	(4)	(5)	(6)
A. Information for the     current      tax period
(a). Amount in terms of Rule 37(2)	To be added

Form GSTR-3

Part A (to be auto-populated)

7. Addition and reduction of amount in output tax for mismatch and other reasons 

Description	Add to or reduced from output liability	Amount of ITC
		Integrated tax	Central Tax	State/ UT tax	Cess
(1)	(2)	(3)	(4)	(5)	(6)
(g). Input tax credit reversal/ reclaim	Add/reduce

However, these Forms were not operationalised and were replaced by way of Form GSTR-3B but the rule 37 remains unamended leaving it doubtful for taxpayers on manner of reversing the ITC under rule 37(2) / adding the same to output tax liability till 01.10.2022.

Rule 37 w.e.f. 01.10.2022 i.e., Effect of the Amendment

It has been provided that w.e.f. 01.10.2022, a registered person shall either pay or reverse the amount of input tax credit while furnishing return in Form GSTR-3B. An extract of Form GSTR-3B, as amended w.e.f. 05.07.2022, is given below for reference:

Form GSTR-3B

Eligible ITC 

Details	Integrated Tax	Central Tax	State/ UT Tax	Cess
(1)	(2)	(3)	(4)	(5)
(A) ITC Available (whether in full or part)
(5) All other ITC
(B) ITC Reversed
(2) Others
(C) Net ITC available (A-B)
(D) Other details
(1) ITC reclaimed     which was reversed under Table 4(B)(2) in earlier tax period

It is notable that rule 37(2) prior to 01.10.2022 specifically provided that amount of ITC reversal shall be added to the output tax liability of the registered person and accordingly a table in Form GSTR-3 was inserted. However, w.e.f. 01.10.2022, the manner prescribed under rule 37 r/w Circular No. 170/02/2022-GST dated 06.07.2022 in terms of second proviso to section 16(2) is in complete deviation i.e., it prescribes to reduce the eligible ITC instead of adding the amount in output tax liability. It is well settled that the executive organ while formulating the rules under statutory grant of power cannot overrule the same and in result formulate a different provision than provided in the statute. Therefore, validity of rule 37 w.e.f. 01.10.2022 is still questionable.

Interest

Without prejudice to the validity of rule 37 pre and post amendment, prior to 01.10.2022, it was specifically provided that interest at the rate notified under section 50(1) shall be payable. This was because of the reason that reversal of an amount equivalent to the ITC availed is in the nature of “addition to output tax liability” and it was provided in second proviso to section 16(2) r/w rule 37(2).

However, amended rule 37 provides that the registered person shall pay or reverse the amount which is to be reduced from the input tax credit while furnishing return in Form GSTR-3B and it simply makes a reference to section 50 wherein different provisions are prescribed for calculation of interest if payable under sub-section (1) or sub-section (3) thereof.

Going by the Act, a registered person is liable to pay tax as the amount of reversal has to be added in output tax liability. Therefore, interest appears to be payable under section 50(1) of the Act but is questionable in terms of rule 37 r/w manner of furnishing details in Form GSTR-3B which provides to reduce the same from input tax credit.

Further, section 50(3) is applicable on ITC wrongly availed and utilised. Whether failure to pay within 180 days makes the ITC ineligible i.e., to say that the credit was wrongly availed? This itself is a question of law because of various reasons. First, section 16(2) deals with the conditions for entitlement of ITC and proviso thereof has to be understood in the same sense. Hence, failure to pay within 180 days dis-entitle a registered person from availing the ITC. Second, the provisos to section 16(2) are not in the nature of conditions and hence, failure to pay within 180 days does not dis-entitle the registered person from availing ITC. That is the reason why legislature has provided in third proviso that the registered person shall be entitled to re-avail the ITC when payment is made to the registered person notwithstanding the time limit given under section 16(4). Since the time limit u/s 16(4) has been made inapplicable to re-availment of credit, the entitlement of ITC cannot be questioned and hence, the same cannot be termed as “wrongly availed” on failure to pay within 180 days.

Hence, the applicability of sub-section of section 50 is a subject matter of debate between trade and jurisdictional authorities and is required to be specifically provided in the rules. It is also notable that interest u/s 50(1) is payable on full amount of ITC for the period starting from date of availing the same whereas interest u/s 50(3) is payable on amount that remains unutilised and that too for the period during which balance in electronic credit ledger falls below the amount of ITC required to be reversed.

Period of interest

Prior to 01.10.2022, period of interest was specifically provided to begin from the date of availing credit on such supplies till the date when the amount added to the output tax liability i.e., from day 1. However, the period of interest is not specified under amended rule 37. In this background, reading of second proviso to section 16(2) suggests that legislature intention behind it was to impose interest from the date of availing ITC. That is the reason to mention “shall be added to his output tax liability, along with interest thereon”.

Since the period for reversal is not specified in amended rule 37, reference is required to be made to the provisions of Rule 88B in background of second proviso to section 16(2). Rule 88B provides that interest u/s 50(1) shall be paid “for the period starting from the date on which such tax was due to be paid till the date such tax is paid”. Since the ITC is required to be reversed in the return furnished 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, does it mean that taxpayers are burdened with additional interest liability for one month?

Interest u/s 50(3) is payable for the “period starting from the date of utilisation of such wrongly availed input tax credit till the date of reversal of such credit or payment of tax in respect of such amount”. Here, the date of utilisation means the due date or actual date of furnishing return in Form GSTR-3B or date of debit from electronic credit ledger, as the case may be, when the balance in electronic credit ledger falls below the amount of wrongly availed ITC.

Paksh Remarks

The amount required to be reversed is to be added in output tax liability. Doing so, the provisions of section 49 are applicable which provides the manner of utilisation of balance lying in electronic credit ledger and electronic cash ledger for the purposes of discharging output tax liability. However, as per manner prescribed, the ITC is required to be reversed in table 4(B)(2) of Form GSTR-3B, thereby, completing surpassing the provisions of section 49 which provides the order of utilising the balance in electronic credit ledger for the purposing of making payment of output tax liability. Therefore, to the extent as well, amended rule 37 is questionable.

Besides above points, the validity of provisos as well as meaning of term “failure to pay” is expected to be put to judicial scrutiny which can have a bearing on trade.

Therefore, there are many issues which are still required to be clarified. We expect that once the rules are aligned with provisions of Act and Form GSTR-3B is substituted to provide a separate table for addition/reduction of amounts in output tax liability, there would not be chaos amongst taxpayers while ensuring compliance with statutory provisions.

[Date: 30/12/2022]

(The views expressed in this article are strictly personal.)