Understanding Section 41 of CGST Act and Rule 37A of CGST Rules

Summary: This Article examines Section 41 of the CGST Act and Rule 37A of the CGST Rules, focusing on Input Tax Credit (ITC) eligibility when a supplier has not paid tax. Prior to October 1, 2022, Section 41 did not mandate ITC reversal due to supplier non-payment, making it difficult to deny ITC based solely on Section 16(2)(c). The amended Section 41, effective October 1, 2022, now requires reversal of ITC with interest if the supplier fails to pay tax, with re-availment possible upon subsequent payment. Rule 37A, introduced on December 26, 2022, provides the specific mechanism for this reversal and re-availment, allowing recipients until November 30 of the following financial year to reverse ITC before interest liability accrues. These provisions do not apply retrospectively. The current legal framework for demanding only interest, without a corresponding tax demand, is also discussed, highlighting potential challenges in standalone interest recovery. The author concludes that these provisions aim to protect recipients from supplier default and that demanding interest from both supplier and recipient for the same tax could be considered double taxation.

I. Introduction

Question whether a recipient is eligible to avail ITC even if the supplier hasn’t paid the tax to the govt has plagued public debate since long. Section 16(2)(c) specifically debars ITC if the same is not received by the government from the supplier. There has been a plethora of judgements on this count which say that irrespective of tax being paid by the supplier, recipient cannot be denied ITC. I completely agree with these judgements and also believe that a statute cannot impose impossible conditions which the recipient cannot fulfill, having said so, purpose of writing this article is to delve purely into the legal aspect of the below provisions only.

a. Section 16

b. Section 41 and amendment therein

c. Rule 37A

II. Bare text of the provisions

A. Section 16(2)(c)

From 1.07.2017 to 30.09.2022

(c) subject to the provisions of section 41 or section 43A, the tax charged in respect of such supply has been actually paid to the Government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and

From 1.10.2022 onwards

(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 utilisation of input tax credit admissible in respect of the said supply; and

B.  Section 41 of the CGST Act

From 1.07.2017 to 30.09.2022

41. Claim of input tax credit and provisional acceptance thereof

(1) Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, asself-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.

(2) The credit referred to in sub-section (1) shall be utilised only for payment of self-assessed output tax asper the return referred to in the said sub-section.”

From 1.10.2022 onwards

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 hiselectronic 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.

C. Rule 37A of the CGST Rules

From 1.07.2017 to 25.12.2022

No rule of this kind was there in the CGST Rules

From 26.12.2022 onwards

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

37A. 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 if any, 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.

III. Analysis of above provisions

Question that I am looking to answer in this article is:

1. Does the law provide for demanding of Tax & Interest from the recipient who has availed ITC of a tax which has not been paid by the the supplier, or has been paid by the supplier after some delay?

2. Can the amendment in section 41 and introduction of rule 37A be applied retrospectively and thereby tax and / or interest be demanded for period prior to these amendment and / or introduction of rule?

3. Is there a mechanism under law for demand of ONLY Interest devoid of demand of tax?

Lets delve into these aspects in a chronological way:

a. Section 16(2)(c) provides for recipient to make sure that the tax is paid to the government, it does not say that the supplier has to file GSTR 3B. There are many ways that the supplier can pay the tax, only one of them is vide GSTR 3B, he can pay it through a voluntary DRC 03 or department can recover it from him under section 83 and so on. In view of this it is next to impossible for the recipient to squarely prove that the tax is paid. However, merely because the supplier has not filed GSTR 3B cannot be a reason to issue a demand notice to the recipient. Theoretically it is possible that even if GSTR 3B is filed, tax may remain unpaid.

b. Secondly condition prescribed in section 16(2)(c) has always been subject to section 41 and 43A (upto 1.10.2022 – 43A was never notified hence not implement). Therefore, it was not a standalone condition, section 41 in the earlier avatar (upto 1.10.2022) was of a general nature, it did not talk about reversal of ITC on account of non payment by supplier.

c. Post 1.10.2022, the new section – 41(2) – does talk about the issue at hand and says that if the supplier has not paid the tax, ITC shall be reversed along with applicable interest, by the said person in such manner as may be prescribed. Proviso also talks about re-availment in such manner as may be prescribed.

d. Manner of reversal and re-availment was prescribed vide rule 37A for the first time only from 26.12.2022.

e. Rule 37A allows a recipient to avail ITC even if the supplier has not paid the tax upto 30^th September of next year. Thereafter it further gives time for reversal of such ITC upto 30^th November of next year. Only if the said ITC is not reversed by 30^th November of next, then only the recipient is liable for levy of interest and not otherwise.

f. It is also worth noting that there is no provision in law or rules which says that section 41 or Rule 37A would have retroactive implementation.

In view of the above legal chronology it is safe to say that section 16(2)(c) which has always been subject to section 41, a section which upto 1.10.2022 never spoke about mechanism for reversal of ITC on account of non-payment of tax by supplier. Effective from 1.10.2022, new section 41 for the first time provided for reversal of ITC as per timeline and procedure to be prescribed.

Said procedure and timeline were prescribed for the first time vide rule 37A on 26.12.2022 only. Said rule further allowed time for reversal till 30^th November next year. Currently also there is no provision for immediate reversal or interest.

IV. My Views

Question 1:

Does the law provide for demanding of Tax & Interest from the recipient who has availed ITC of a tax which has not been paid by the supplier or where it has been paid by the supplier after some delay.

Answer:

As discussed above, sub-clause (c) of section 16(2) was always ‘subject to’ section 41, it was never a standalone condition. Section 41 was amended only on 1.10.2022, so prior to that there was no provision in law for demanding tax and interest for non-payment of tax by a supplier.

One cannot use section 73(1) or 74(1) to say that as the ITC itself was “wrongly availed” right to demand is there. Wrong availment has to be first proved by saying that the condition of section 16 has been violated and as demonstrated, condition of section 16(2)(c) has not been violated upto 1.10.2022 atleast.

Secondly, new section 41 also depends on mechanism which was notified for the first time on 26.12.2022. It is settled legal maxim, that levy fails if there is no mechanism.

Question 2:

Can the amendment in section 41 and introduction of rule 37A be applied retrospectively and thereby tax and / or interest be demanded for period prior to these amendment and / or introduction of rule.

Answer:

In view of answer above, section 41 (as amended) and rule 37A cannot be applied for any ITC availed prior to 26.12.2022, these provisions cannot be implemented retrospectively.

Question 3:

Is there a mechanism under law for demand of ONLY Interest devoid of demand of tax?

Answer:

Lets say a recipient availed ITC of 1 lac on January 2023, supplier did not pay the tax thereon, which it paid in June, 2024. However, the recipient did not reverse the ITC in November of 2023 as prescribed in rule 37A. As the supplier paid the tax in June 2024, recipient’s right to re-avail the ITC accrued in June 2024.

Question that arises, is the recipient required to pay Interest from January 2023 to June 2024?

In my view, section 50 has no mechanism for demanding interest, it is  mere code for levying of interest. Only section that remains for raising a demand of any kind is either Section 73, 74 or 127.

Section 127 is only for levying of penalty. Section 73 or 74 has mechanism for demanding tax ALONGWITH interest. It does not provide for raising of standalone demand for interest ONLY.

Hence in my view, even if section 41 read with rule 37A provide for levy of interest, demanding the same on a standalone basis will not be possible in the current law.

V. Conclusion

Section 41 of the CGST Act and Rule 37A of the CGST Rules have been introduced with an understanding that the recipients can’t and shouldn’t be penalized for a fault of supplier. They must be given enough time till the supplier comes around and pays the tax. It is also true that the supplier will be asked to pay interest for delay, seeking interest from the recipient for the same tax amounts to double taxation of sorts. Courts have struck down double taxation in numerous cases, it will do so for double interest as well.

Hope the tax administration learns from the rich jurisprudence we have on this count and leaves the hapless taxpayers who have so much more to look after beyond GST.