Provisions regarding reversal of ITC if payment not made to supplier within 180 days

Input Tax Credit is one of the important part of Goods and Service Tax Regime. Free flow of ITC was on of the moto of GST Era. Through this article let us read about Provisions regarding reversal of ITC if payment not made to supplier within 180 days.

Second Proviso of Section – 16, Central Goods And Services Tax Act, 2017 is given below for reference:

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

Rule – 37, Central Goods and Services Tax Rules, 2017

Reversal of input tax credit in the case of non-payment of consideration

37. (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.

(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.

(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.

Analysis

As per Second Proviso of Section – 16, of Central Goods And Services Tax Act, 2017 read with Rule – 37, of Central Goods and Services Tax Rules, 2017

Where a recipient fails to pay to the supplier, the consideration within a period of one hundred and eighty days from the date of issue of invoice by the supplier the input tax credit availed by the recipient shall be added to his output tax liability, along with interest.

Some of the cases where there is genuine requirement of removal of 180 days condition in case of non-payment of GST by the recipient

Retention Money kept in case of Large Contract

Normally in large contract some amount is retained and is paid at the end of warranty period. In this case it would not be justified that Input Tax Credit is reversed along with the interest on non-payment part.

Post Supply discount given by supplier

Post Supply discount given by supplier are very common in business. Here levying interest on ITC reversal is not justified.

Longer credit period due to good terms between buyer and seller

If Seller is ready to give longer credit period [i.e. of more than 180 days]. Then condition of ITC reversal and interest application is not justified.

Also sometimes there maybe genuine situations when buyer is unable to repay seller and seller is ready to give him long credit period, in such cases government should not burden the buyer with ITC reversal and interest application.

Partial Modification of Second Proviso of Section – 16, Central Goods And Services Tax Act

We understand here the motive of government is free flow of funds in the economy. But government should at-least understand these common situations and provide relief at least on interest part.

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