CBIC Clarification on Section 16(4) Time Limit in respect of RCM supplies from unregistered persons

The GST Policy Wing of the Central Board of Indirect Taxes and Customs (CBIC) has issued a very important clarification on time limit under Section 16(4) of CGST Act, 2017 in respect of reverse charge mechanism (RCM)

According to information provided, some field formations believe that in these situations, the year the supply was received counts as the relevant year for the purposes of section 16(4) of the CGST Act. As a result, the window of opportunity for claiming Input Tax Credits (ITC) under section 16(4) of the CGST Act is limited to the months of September and November of the subsequent fiscal year, which is the fiscal year that follows the fiscal year in which the afore mentioned services were received. However, industry has stated that because the recipient must issue the invoice under section 31(3)(f) of the CGST Act for supplies received from unregistered suppliers where tax must be paid on an RCM basis, the relevant year of the invoice for the purposes of section 16(4) of the CGST Act is the financial year in which the invoice has been issued. As a result, ITC should be available on the said invoice under section 16(4) of the CGST Act until the September/ November of the financial year that follows the financial year that the invoice has been issued. To prevent legal action, a request for clarification has been submitted.

Discussion:

However, industry has stated that because the recipient must issue the invoice under section 31(3)(f) of the CGST Act for supplies received from unregistered suppliers where tax must be paid on an RCM basis, the relevant year of the invoice for the purposes of section 16(4) of the CGST Act is the financial year in which the invoice has been issued. As a result, ITC should be available on the said invoice under section 16(4) of the CGST Act until the September/November of the financial year that follows the financial year that the invoice has been issued.

To prevent legal action, a request for clarification has been submitted.

According to the CGST Act’s section 16(2)(a), unless a registered person has a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed, he is not entitled to the credit of any input tax in respect of any supply of goods or services, or both.

The Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the CGST Rules) stipulate in Rule 36(1)(b) that an invoice issued in compliance with the terms of clause (f) of sub-section (3) of section 31 of the CGST Act is one of the ways in which a registered person may obtain input tax credit, subject to tax payment.

Furthermore, a registered person who is required to pay tax under sub-section (3) or sub-section (4) of section 9 must issue an invoice for goods or services, or both, that he receives from a supplier who is not registered on the date that he receives the goods or services, or both. This requirement is stated in clause (f) of sub-section (3) of section 31 of the CGST Act. Therefore, in the event that the recipient is entitled to pay tax on the said supply on an RCM basis and the supplier is not registered, the recipient must issue an invoice in accordance with section 31(3)(f) of the CGST Act and pay the tax in cash on the same under RCM.

It is evident that the CGST Act’s section 16(4) connects the deadline for claiming an ITC to the fiscal year that the debit note or invoice relates to. In situations where the recipient is registered and the supplier is unregistered, and the recipient is required to pay the tax on an RCM basis, the recipient must issue an invoice in accordance with section 31(3)(f) of the CGST Act and pay the tax on the same in cash under RCM. According to section 16(2)(a) of the CGST Act, a registered person is not eligible to claim input tax credit (ITC) for any supply of goods or services, or both, that he receives, unless he possesses a tax invoice, debit note, or other prescribed tax-paying papers.

The above provisions taken together result in the following conclusion: since the recipient can only claim ITC based on an invoice, debit note, or other duty-paying document, and because the recipient must issue the invoice in the case of RCM supplies received from an unregistered supplier, the relevant financial year—which the invoice relates to—is the only one that counts toward the time limit under section 16(4) of the CGST Act for claiming ITC in these situations. Should the recipient issue the aforementioned invoice subsequent to the delivery date and then pay the applicable tax, interest will be charged on the delayed tax payment.

Clarification

Therefore, it is made clear that, in the event that supplies are received from unregistered suppliers, where the recipient is required to pay tax under the RCM and issue an invoice in accordance with section 31(3)(f) of the CGST Act, the relevant financial year for calculating the time limit for utilizing an input tax credit under the provisions of section 16(4) of the CGST Act will be the financial year in which the recipient issues the invoice under section 31(3)(f) of the CGST Act, subject to the recipient paying tax on the said supply and fulfilling all other requirements and restrictions outlined in sections 16 and 17 of the CGST Act.

Should the recipient issue the invoice subsequent to the supply date and thereafter pay the tax due, interest will be charged on the improperly delayed payment of taxes.

Furthermore, under the terms of Section 122 of the CGST Act, the recipient may also be subject to criminal action in circumstances of such delayed invoice issuance.