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CA Sanjeev Malhotra | Jul 3, 2021 | Views 1965894



One must not have come across a provision in tax law, for which no effective regulatory or compliance framework exists under the relevant law. Besides the accounting and auditing framework effective as on date, also does not require the information to be kept and documented in the manner, which could fulfill the requirement of relevant provision of tax law. The second proviso of section 16(2) of CGST Act, 2017 provides for the relevant provision of reversal of Input tax credit with interest in case payment of an invoice is not made within 180 days of date of invoice. The system of GSTR 2 has not taken off till date and is not expected to become a reality in future as well. In the absence of GSTR 2, there is no system of compliance or regulation existing as on date in regard to second proviso of section 16(2) of CGST Act, 2017. In the absence of any legal or regulatory mandate for the recipient to make payment only with reference to the invoices outstanding on date of payment, the situation gets further compounded by the practice of receipt of adhoc payments and  marking with different invoices. Can it be forced that invoices coming first should be adjusted first. It is an open secret that in the absence of legal framework in regard to some practice, the enforcement field force becomes a law unto themselves and start prescribing according to their convenience. In the present article, I have attempted to analyse the effect of the relevant provision, with a special reference to how and to whom does this provision help.

Relevant provision of law and its rules

The spirit of the relevant provision of law makes an exception of general provision of law which allows the recipient to take credit of ITC on satisfaction of certain conditions other than payment in respect of such  invoice. Whereas the input tax credit on invoices, the payment of which is made beyond a period of 180 days of invoice date, will be available on cash basis.

Section 16 of CGST Act, 2017 and Rule 37 of CGST Rules, provides for input tax credit as under:

Section 16 (2) Notwithstanding anything contained in this section, 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,––

(a) he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed;

(b) he has received the goods or services or both.

[Explanation.— For the purposes of this clause, it shall be deemed that the registered person has received the goods or, as the case may be, services––

(i) where the goods are delivered by the supplier to a recipient or any other person on the direction of such registered person, whether acting as an agent or otherwise, before or during movement of goods, either by way of transfer of documents of title to goods or otherwise;

(ii) where the services are provided by the supplier to any person on the direction of and on account of such registered person

(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

(d) he has furnished the return under section 39:

Provided that where the goods against an invoice are received in lots or instalments, the registered person shall be entitled to take credit upon receipt of the last lot or instalment:

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.

Rule 37. Reversal of input tax credit in the case of non-payment of consideration.-(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.

Regulatory and Compliance framework

A. In GST Law, the framework of records and documents has been prescribed in Rule 56 of CGST Rules. The sub rule 4 of Rule 56 provides that accounts of input tax and input tax credit claimed needs to be maintained by taxable person.

(4) Every registered person, other than a person paying tax under section 10, shall keep and maintain an account, containing the details of tax payable (including tax payable in accordance with the provisions of sub-section (3) and sub-section (4) of section 9), tax collected and paid, input tax, input tax credit claimed, together with a register of tax invoice, credit notes, debit notes, delivery challan issued or received during any tax period.

Besides, in the absence of the requirement of filing GSTR 2 return, there is no requirement of compiling of such information and submission of the same with regulators except for requirement prescribed in section and rules.

B. The Companies Act, 2013 in Schedule III prescribes the disclosure requirement in financial statements of the Companies, besides the accounting standards also provide the accounting, record keeping and disclosure requirements in the financial statements. In the schedule III or in accounting standards, there does not seem to be any requirement of recording and disclosing information in respect of payments not made within 180 days of invoices.

In the absence of any such requirement, the information as required in this regard is not compiled by most of the taxable persons. The situation is further compounded by the fact that there can not be prescribed any system of marking off the invoices. Imagine of a situation where 10 invoices of different periods of Rs. 1 lac each are outstanding and a payment of Rs. 5 lacs has been received without the reference to any invoices. It is adjusted out of total receivables of Rs. 10 lacs without invoice wise adjustments.

Discipline of adjustment of payments

There is no legal or regulatory mandate on the recipient of goods or services to make payments only in reference to the invoices. Under such circumstances, what rules will apply for adjustment of payments received. It can not be said that invoice received first would be deemed to have been paid first. Imagine that there are 5 different invoices issued at different times. The payment has been adjusted for first 4 invoices, whereas the intention of the recipient is to pay for last 4 invoices as he has some dispute pending in respect of the first invoice. Would it mean that intention of the person making the payment would also matter? It is no secret that in the absence of prescription in the law, the enforcement field force start prescribing the law in the manner of their choice.

Ground Reality

 This is a hard reality that all taxable persons have such cases of non payment of an invoice for more than 180 days due to one reason or the other. The quantum of such invoices would be different in case of different persons and biggest sufferers would be the taxable persons who are otherwise struggling with their working capitals. Such a situation has increased multifold in the pandemic era. The persons who are otherwise financially weak would suffer the most of this provision. It is also a reality that hardly few taxable persons have complied with this provision of law and in many cases such non compliance is not by design but due to non availability  of a system to bring out such cases.

In the presence of above fact, it has given a stick in the hands of law enforcing agencies to beat the taxable persons, they way they like. This provision is coming out to be more of a harassment tool in the hands of law enforcing agency than serving any real purpose. I find that sometimes the unpaid sellers have made complaints to the GST department of their purchasers not complying with the above provision of law and putting pressure on such purchasers to settle their dues. I am sure that the provision of law does not exist for such cases.


From the above, it is concluded that the presence of the above provision in statute is not helping the revenue as it is not fetching additional revenue, not helping the taxable persons as it has given them the burden to comply with a provision of law in the absence of compiling and reporting tools. The only persons who are getting benefitted from the above provision is the law enforcing teams who have been provided a stick in their hands to make taxable persons suffer to suit their own ends.

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