ITC Reversal Due To Non-Payment Within 180 Days
one would have come across cases where input tax credit (“ITC”) availed earlier for the month of July 2017 may require reversal due to non-payment within 180 days.
Second & third proviso to Sec. 16(2) of the Central Goods & Services Tax (“CGST”) Act, 2017 provides for reversal and reavailment of ITC on account of non-payment. Same is reproduced below for ready 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 :
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 prescribes the mechanism for implementing the above referred provisions.
Reversal of input tax credit in the case of non-payment of consideration. “RULE 37. -
- 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.
- The amount of input tax creditreferred 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.
- 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.
- 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.”
Following issues shall arise on closer reading of the above referred provisions:
Whether reversal of ITC shall apply if tax is fully paid but the value of supply remains unpaid after 180 days ?
Second proviso to Sec. 16(2) clearly provides that the same shall apply
when a recipient fails to pay the amount towards the value of supply along with the tax payable thereon.
Hence mere payment of tax within the stipulated period of 180 days is not enough. Even the value of supply needs to be paid within 180 days to avoid the reversal.
Whether reversal of ITC is required in cases of part payment of value of supply as well as tax thereon within 180 days ?
It may so happen that registered recipient might have paid part amount towards the value of supply as well as tax amount within 180 days.
In such scenario, whether ITC reversal shall apply to the entire tax amount charged in the invoice or only to the extent of proportionate tax amount not paid.
Calculate the period of 180 days
Second proviso to Sec. 16(2) provides that the same applies
in case of non-payment within the period of 180 days from the date of issue of invoice by the supplier.
Hence the period of 180 days for determination of ITC reversal needs to be calculated from the date of issuance of invoice and not the date on which said invoice is recorded in the books of accounts or the date on which ITC is claimed.
Mechanism for reversal of ITC
This is a very interesting question.
Second proviso to Sec. 16(2) provides that ITC availed earlier to the extent of amount not paid shall be added to the output tax liability of the recipient along with interest in the manner prescribed.
Rule 37 prescribes the manner. Please note following observations on said Rule 37:
Rule 37(1) provides that registered person who has earlier availed ITC and has failed to make the payment of the value of supply as well as tax thereon shall furnish such details in FORM GSTR – 2 for the month immediately following the period of 180 days.
As per Rule 37(2), such amount furnished in GSTR – 2 shall be added to output liability ledger for the month in which such details are furnished.
Here it is to be noted that GSTR – 2 has been suspended till further notice.
Hence can it be said that in view of the fact that the machinery provisions for the reversal of ITC prescribed under Rule 37 is not applicable at present, ITC reversal is not required.
Hence it is suggested that Rule 37(1) & (2) must be suitably amended to provide for an alternate mechanism to reverse the ITC in GSTR – 3B.
To avoid litigation, readers may voluntarily reverse the ITC in GSTR – 3B. It can be added to the output tax liability in GSTR – 3B.
Calculate the interest amount.
This is again a very interesting question.
Second proviso to Sec. 16(2) provides that ITC availed earlier to the extent of non-payment of value of supply along with tax shall be added to the output tax liability ledger along with interest.
As stated earlier, period of 180 days is to be calculated from the date of invoice.
Reference is invited to sub-rule (3) of Rule 37. As per said sub-rule, interest has to be paid at the rate notified u/s 50(1) (i.e. 18% p.a. (Notification No. 13/2017 – Central Tax) for the period starting from the date of availing credit on such supplies till the date when the amount is added to output tax liability is paid. Hence interest calculation shall start from the date of availment of credit and not from the date of invoice.
Sec. 41(1) of the CGST Act, 2017. Same is reproduced below:
“41. Claim of input tax credit and provisional acceptance thereof
“Every registered person shall, subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger.”
As per the above provision,
registered person can take the credit in his return and the same shall be credited on provisional basis to the electronic credit ledger. Hence the date of availment of ITC shall be the date of filing of the return (i.e. GSTR – 3B) when the said amount of ITC is reflected in the electronic credit ledger.
As an example, an invoice dated 15.07.2017 of INR 1,00,000/- along with tax of INR 18,000/- is received by the recipient on 25.07.2017. He enters the said invoice in his books of accounts on 25.07.2017 and credits the tax amount in the receivable account. He files the return (GSTR – 3B) for the month of July availing ITC on the referred invoice on 20.08.2017. He has failed to make the payment by 11.01.2018 (i.e. 180 days from date of invoice).
Hence as per second proviso to Sec. 16(2), he is required to reverse the ITC availed earlier. However interest under rule 37(3) shall be calculated from 20.08.2017 and not from 15.07.2017 (i.e. date of invoice) or from 25.07.2017 (i.e. date of entry in books).
Till what date is interest required to be calculated ?
Rule 37(3) prescribes that interest should be calculated till the date when the amount added in the output liability ledger through GSTR – 2 is paid.
System of filing GSTR – 2 has been suspended.
Hence as stated earlier, in absence of machinery mechanism, requirement of ITC reversal as provided u/s 16(2) fails.
To avoid litigation, readers may calculate the interest till the date of filing GSTR – 3B for the month of reversal as on that date the amount to be reversed shall stand paid.
Can one reavail earlier reversed ITC ?
Third proviso to Sec. 16(2) clearly provides that the registered recipient shall reavail ITC reversed earlier on making the payment of the value of supply along with the tax thereon.
Hence one can reavail the ITC on subsequently making the payment.
Even Rule 37(4) provides that the time limit prescribed u/s 16(4) for availing ITC (i.e. before the due date for furnishing return for the month of September of the succeeding year or annual return, whichever is earlier) shall not apply for reavailing the credit which was reversed earlier.
Hence reavailment can be claimed anytime in future when the payment is made.
Is interest payable even if ITC availed earlier is not utilized ?
Second proviso to Sec. 16(2) provides that interest has to be paid on account of reversal of ITC “availed” earlier.
Even Rule 37(3) provides that the interest shall be calculated from the date of availment.
Hence even if the ITC availed earlier is not utilized, interest is required to be paid.
It is thus suggested that if at the time of availment it is known that the payment may not be done within 180 days, one can reverse the ITC in the month of availment itself to save interest cost. Reavailment can be done on making the payment.
ITC reversal apply to invoices of pre-GST era
It is quite possible that registered person might have availed CENVAT Credit on let us say an invoice in the month of June 2017. Said CENVAT Credit remains as closing balance in the June return and hence is availed as transitional credit u/s 140(1) as CGST.
There is non-payment of such invoice within 180 days from date of invoice. Is the recipient required to reverse the CGST credit
Second proviso to Sec. 16(2) refers to non-payment of value of supply along with tax payable thereon.
Value of supply as defined u/s 15 is applicable only on supplies made under the GST era. Hence we are of the opinion that the reversal of ITC as contemplated u/s 16(2) shall apply only to invoices issued on or after 01.07.2017 under the GST law.
Will ITC reversal apply to ITC claimed under Reverse Charge Mechanism ?
No. Second proviso to Sec. 16(2) clearly excludes supplies on which tax is payable on reverse charge basis from its applicability.
Hence ITC is not required to be reversed even if payment is not made within 180 days against supplies covered under reverse charge mechanism.
It is worthwhile to note here that the definition of “reverse charge” is provided u/s 2(98) of the CGST Act, 2017 which is reproduced below:
“reverse charge” means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or sub-section (4) of section 5 of the Integrated Goods and Services Tax Act;”