The concept of Input tax credit (ITC) has been a significant boon for businesses, allowing them to offset their GST outward tax liabilities by claiming credit for the taxes paid on their purchases. However, as with any tax-related benefit, there are rules and regulations that govern its utilization. One such pivotal rule is the 180-day time limit for making payments to the vendors. In this article, we delve into the intricate world of ITC and the reversal of credits when payments are not made within the prescribed 180-days period. Understanding this aspect is crucial for businesses to navigate the complex landscape of Goods and Services Tax (GST) and ensure they are in full compliance with the tax laws in India.
Second Proviso to Section 16(2)-
"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 paid by him along with interest payable under section 50, in such manner as may be prescribed: [Rule 37]"
“(1) A Registered person, who has availed of Input tax credit on any Inward supply of goods or services or both, other than the supplies on which tax is payable on Reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply, whether wholly or partly, along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall pay or reverse an amount equal to the Input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the Tax period 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) Where the said Registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the Input tax credit referred to in sub-rule (1).
(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 reavailing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.”
From the reading of above it can be concluded where payment has not been made within the period of 180 days the Input tax credit claimed thereon is liable to be reversed along with interest under section 50. However, the same can be reclaimed if subsequently the consideration payable in respect of such supplies are ultimately paid to the supplier.
What comes as relief is that there is no limitation under the act with regards to the time period within which such Input tax credit can be reclaimed. Inshort limitation u/s 16(4) wold not apply.
Now here comes the question of reversal of ITC on retention amount. Numerous taxpayers, particularly in the construction sector, have been served with GST notices from the tax department, instructing them to reverse the Input Tax Credit related to the retention money connected to invoices received from suppliers or contractors. This issue has ignited a substantial controversy, causing concern among taxpayers. The underlying reason for this demand is the common business practice where the payer withholds a portion of the invoice amount from their supplier. However, the central question revolves around whether taxpayers should be mandated to reverse their Input tax credit in relation to these retained amounts.
It`s important to note that the Second Proviso to Section 16(2) in conjunction with Rule 37 applies only when a recipient fails to make the payment to the supplier for goods or services, excluding supplies subject to tax under the reverse charge mechanism, within 180 days from the invoice date.
A critical point is that both the section and the rule use the term "fails to pay" rather than "does not pay." There`s a significant distinction between these two terms: "fails to pay" refers to a situation where the payment was due according to a contract but wasn`t made, while "does not pay" has a broader interpretation, covering non-payment for any reason.
In this context, the argument is that the provision for reversing the credit becomes applicable when the recipient fails to make a payment. "Fails to pay" is tied to a specific scenario where payment was expected due to a contractual obligation.
The core argument is that retention money, a common practice in various industries, should not be considered a case of "fails to pay." Retention money is withheld based on mutually agreed terms within the contract. Therefore, when a taxpayer isn`t obligated to make a payment for retention money within the contractually stipulated 180-day period, it cannot be claimed that they failed to make a payment to the supplier.
Additionally, it`s crucial to emphasize that the second proviso to Section 16(2) of the CGST Act primarily serves as an anti-evasion measure within the law. The legislative intent behind introducing this provision was to ensure that suppliers, particularly those in the Micro, Small, and Medium Enterprises (MSME) sector, are paid promptly.
Therefore, the argument is that the language of the law and its intent do not align with the application of the second proviso to retention money situations where no obligation to pay exists. This argument seeks to clarify that the provision should be reserved for instances where there is a clear obligation to pay, as intended by the legislation, and not for cases involving retention money.
A further argument can be put forth that the amount withheld is on account of security deposit and the recipient of supply has discharged the entire consideration by giving the supplier an asset in form of security deposit which can be released subsequent to fulfilment of pre-decided conditions. Both the section and the rules provide for payment of consideration but nowhere is it mentioned that such payment should only be in cash. The payment can also be in form other than cash and therefore it can be said that the amount retained is essentially a payment in forms other than cash wherein as a consideration the supplier receives a right to refund of security deposit.
There isn`t much judicial clarity on this matter as of now and therefore the issue shall remain subject to litigation and judicial scrutiny.
CA Pranay Jain is a young and aspiring Chartered accountant. He qualified Chartered Accountancy Course in 2021 and has a well-established practice in various fields of taxation and auditing, with his core area of practice being in the field of litigation i.e., handling assessment and appeal-related matters and representing assesses before various tax departments.
He is also socially active on LinkedIn at linkedin.com/in/capranayjain
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