Timely Payment To Vendors Amidst Covid-19 To Avoid Loss of Input Tax Credit- A Challenge
Reversal of input tax credit coupled with interest during these days of downturn of the economy due to COVID-19 would make the life of taxpayers gloomy in the circumstances where some business houses are struggling for survival in COVID-19 pandemic.
A doubt lingers as to whether the registered person under GST can avail relaxation till 30 June 2020 towards reversal of input tax credit on non-payment of consideration to vendors within 180 days of the invoice, by virtue of Notification No. 35/2020-Central Tax.
Amongst other critical effects of COVID-19 on the economy, this article intends to provide an insight on impact of GST on taxpayers due to pandemic. Peculiarly, when businesses are confronting challenges to make timely payment to its vendors due to lack of operational liquidity requirements.
The Indian Economy is witnessing a significant slowdown in terms of GDP growth rate at 4.7% in Q3 2019-20, its lowest in nearly seven years. Economic impacts are far reaching and largely disruptive. COVID-19 which was declared as ‘pandemic’ by World Health Organisation (WHO) on March 12, 2020 has brought the world to the standstill. In addition to the humanitarian impacts of this global crisis, quarantine, lockdown, travel bans, denial of access and other restrictive measures have severely affected global supply chains and contracting parties’ ability to comply with contractual obligations. Given the supply chain disruption caused by COVID-19 pandemic, it is likely that performances under many contracts will be delayed, interrupted, or even cancelled.
Businesses (Small, Medium and/or Large) are now forced to face financial stress due to closure or reduction in operations which has consequently impacted working capital requirement. In the current scenario, businesses especially with unstable cash flows or low cash flows are struggling its hardest to sustain themselves.
There are concerns as to where will the Government find the funds to fight against destruction being caused by COVID-19. Businesses have incurred huge losses to the extent of having to cut capital expenses, the curtailment on the expansion plans in the near future and some are now finding alternate ways to pay salaries.
Amongst other significant impacts on the economy, one of the aspect related to GST is that the current scenario may give rise to the circumstances that businesses may seek delay towards payment of consideration to their vendors and thereby avoid performance of their contractual obligations, say, temporarily. Given the unfortunate state of affairs, parties to commercial contracts are incessantly assessing their contractual provisions for seeking suitable rights and obligations, especially on the potential routes for discharging the commercial arrangement or contract, mostly force majeure.
Law Relating To ‘Force Majeure’
The law relating to Force Majeure is a French phrase which means ‘superior force’ is embodied under Section 32 of the Indian Contract Act, 1872. It is a contractual provision agreed upon between the parties. The occurrence of a force majeure event protects a party from liability for its failure to perform a contractual obligation. Ideally, force majeure events include a natural disaster or an Act of God, war or war-like situations epidemics or pandemics etc.
The COVID-19 has caused severe disruptions to day-to-day business and commercial activities. It is indispensable to note that the consequential lockdown has the effect of rigid interference. Notwithstanding the severity and the effect of the COVID-19 outbreak, it is not a foregone conclusion that a contractual force majeure provision will apply
Force majeure clauses are mostly expressly provided for under the contract and safeguard given depends upon the language of the clause. Obviously, a COVD-19 has made it difficult for parties to perform their contractual obligations which inter alia includes making timely payment towards the contract value to the other party.
The party claiming force majeure is usually under an obligation to show that it has taken all reasonable efforts to avoid or to mitigate the event and its effects in the instant scenario i.e. efforts to ensure timely payment to other party to the contract.
There exist various remedies as a consequence of force majeure, each of them depends upon the manner in which the clause of force majeure has been outlined under the contract. Few of remedy namely, termination of contract or contract may be put on hold till force majeure event is resolved or certain contract provide for limitations in time after which either party may terminate the agreement and lastly, under some contracts parties require the contract to remain in effect until the force majeure event is settled with temporary suspension of some obligations i.e. delayed payment to vendor in the instant case.
In case, the contract does not include a force majeure clause, the affected party could claim relief under the doctrine of frustration under Section 56 of Indian Contract Act, 1872. However, in order to claim that the contract is frustrated, it must be established that the performance of contractual obligations has become impossible by reason of some untoward event and such event is not self-induced by the claiming party or due to his negligence.
Interestingly, the above analysis may have profound impact to the business in the light of GST laws.
Section 16 of Central Goods and Services Tax Act, 2017 (‘CGST Act’) provides for eligibility and conditions for availing input tax credit. Attention is drawn to second proviso to Section 16(2) of CGST Act, 2017 which is reproduced 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”
In the backdrop of the current scenario where some of the businesses are trying to cope for their survival due to lack of sufficient cash flows, abiding with second proviso of Section 16(2) of CGST Act, 2017 would not only difficult for some of them rather impossible. One would acknowledged the fact that although the COVID-19 pandemic lasts for say 3-6 months, but the business which bore the brunt of slowdown during 2019, will take much longer to recover with COVID-19, thereby adding fuel to their misery.
Hence, the aforementioned proviso would certainly have powerful impact and recipient would be required to carry out reversal of ITC along with applicable interest in the event of non-payment of consideration to vendor within 180 days of the date of the invoice.
This would significantly impact the recipient’s working capital management. Such recipients in the emergent situation has to ensure that they do not default, which is an uphill task, else they might lose ITC and would require payment of tax along with applicable interest. Evidently, interest payment at these very tough times would burn the pockets of the businesses and it would be rather unfair and unjust to levy interest.
In this regard, it is utmost importance to observe that GST Council had issued recommendation relaxing payment of interest in its 28th GST Council Meeting held on July 21, 2018. Sl. No 10 of Press Note dated July 21, 2018 had suggested the following recommendations:
“In case the recipient fails to pay the due amount to the supplier within 180 days from the date of issue of invoice, the input tax credit availed by the recipient will be reversed, but liability to pay interest is being done away with”
However, in-spite of the above recommendation of the GST Council, no corresponding amendments are carried out so far in CGST Act, 2017. If the above recommendation is made operational/effective by the Government, this would assist the businesses to a greater extent especially during this critical time of uncertainty atleast to the extent of interest exposure.
In order to give effect to relief measures relating to statutory and regulatory compliance matters across sectors in view of COVID-19 outbreak, the Government has been pro-active and brought in an Ordinance on March 31, 2020 which provides for extension of various time limits under the Taxation and Benami Acts.
The Taxation and Other Laws (Relaxation of Certain Provisions) Ordinance, 2020 issued on 31-03-2020 has inserted a new Section 168A in the CGST Act, 2017, which empowers the Government to extend the time limit, in respect of actions which could not be completed or complied due to force majeure. For the purpose of this section, the expression “force majeure” means a case of war, epidemic, flood, drought, etc. or any other calamity caused by nature affecting the implementations of provisions of CGST Act, 2017.
Further, the Government vide Notification No. 35/2020-Central Tax dated April 3, 2020 (‘Notification’) covers certain Section and Rules to which Section 168A of CGST Act, 2017 shall apply. Relevant extract of aforesaid notification is reproduced below:
“(i) where, any time limit for completion or compliance of any action, by any authority or by any person, has been specified in, or prescribed or notified under the said Act, which falls during the period from the 20th day of March, 2020 to the 29th day of June, 2020, and where completion or compliance of such action has not been made within such time, then, the time limit for completion or compliance of such action, shall be extended upto the 30th day of June, 2020, including for the purposes of –
a) completion of any proceeding or passing of any order or issuance of any notice, intimation, notification, sanction or approval or such other action, by whatever name called, by any authority, commission or tribunal, by whatever name called, under the provisions of the Acts stated above; or
b) filing of any appeal, reply or application or furnishing of any report, document, return, statement or such other record, by whatever name called, under the provisions of the Acts stated above;
Additionally, the aforesaid Notification prescribes exceptions where such extension of time shall not be applicable which evidently does not encompass either Section 16(2) or second proviso to Section 16(2) of CGST Act, 2017. The interpretation of word ‘including’ can be broad and wide and when read with exceptions in the Notification, it may be observed that the relaxation from compliance of any provision shall apply to all sections in the CGST Act, 2017 subject to such exceptions as provided in the Notification. Exception as envisaged in the Notification is provided below:
“but, such extension of time shall not be applicable for the compliances of the provisions of the said Act, as mentioned below –
(a) Chapter IV;
(b) sub-section (3) of section 10, sections 25, 27, 31, 37, 47, 50, 69, 90, 122, 129;
(c) section 39, except sub-section (3), (4) and (5)
(d) section 68, in so far as e-way bill is concerned; and
(e) rules made under the provisions specified at clause (a) to (d) above;”
In view of the above, it may be appropriate to infer that time limit for compliance of second proviso to Section 16(2) if falls between March 20, 2020 to June 29, 2020, businesses would be allowed to reverse such input tax credit by June 30, 2020 and not on expiry of 180 days from the date of invoice.
Appreciating the efforts of the Government in timely addressing the concerns of the taxpayers by way of issuance of Circular No.136/06/2020-GST, dated 03.04.2020, Circular No.137/07/2020-GST, dated 13.04.2020 and Circular No. 138/08/2020-GST dated 06.05.2020 to clarify doubts regarding relief measures taken by the Government for facilitating taxpayers in meeting the compliance requirements which were relaxed by various notification inter alia included Notification No. 35/2020-Central Tax dated 03.04.2020.
Though the Notification does not explicitly spell out relaxation in complying the second proviso to Section 16(2) of CGST Act, 2017, Circular No. 136/06/2020 dated 03.04.2020 precisely address the same. Sl. No 11 of the Circular is reproduced below for clarity:
Issue: The time limit for compliance of some of the provisions of the CGST Act is falling during the lock-down period announced by the Government. What should the taxpayer do?
Clarification: Vide notification No. 35/2020- Central Tax, dated 03.04.2020, issued under the provisions of 168A of the CGST Act, except for few provisions covered in exclusion clause, any time limit for completion or compliance of any action which falls during the period from the 20th day of March, 2020 to the 29th day of June, 2020, and where completion or compliance of such action has not been made within such time, has been extended to 30th day of June, 2020
Even though the relaxation is categorically not notified with respect to second proviso to Section 16(2) of CGST Act, 2017, the aforementioned clarification would prove to be utmost importance to the taxpayers in these times of uncertainty and thereby assists the taxpayer to strive in order to meet operational liquidity which is the most essential pre-requisite in the midst of outbreak of global pandemic situation.
Interestingly, it would be pertinent to observe the future course of action post 30.06.2020, where business would be required reverse ITC as relaxation would cease w.e.f 01.07.2020. Extension of relaxation from reversal of ITC or increase in time-limit of 180 days would provide a sigh of relief to the businesses and in the absence of waiver for interest on such reversal , the financial impact is expected to aggravate.
Businesses would have to revitalize their business and financial strategies by implementing certain cost rationalisation measure inter alia includes reducing variable cost, robust supply chain management with minimal cost, extend payable intelligently and expedite receivables.
These businesses would surely require assistance from the Government by way of minor but effective measures to tide over the unprecedented crisis created by COVID-19.
Taxpayers are overwhelmed to by observing Government’s attempt to meet the requirement of managing cash flow by way of deferment of Rule 36(4) of CGST Rules, 2017 and now such condition has to be dealt cumulatively in GSTR-3B for the month of September 2020. Government’s efforts to announce mega Rs 20 lakh crore stimulus package to save the lockdown-battered economy and focuses on tax breaks for small businesses as well as incentives for domestic manufacturing are applauded. The combined package works out to roughly 10% of the GDP, making it among the most substantial in the world.
In the backdrop of the above, deferment of second proviso or waiver of interest or notifying amendment to recommendations laid down in 28th GST Council Meeting would undoubtedly prove as an economic stimulus package especially for MSMEs with an intention to achieve our Prime Minister vision of ‘’self-reliant India’’ or ‘’Atmanirbhar Bharat’’
Consideration of above aspect by the Government may prove to be an icing on the cake with other economic reforms undertaken so far and hence, would surely help in overcoming operational liquidity requirements in this unprecedented situation.
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