Input Tax Credit Limitations: Unravelling Section 16 and Rule 37 under GST

The Goods and Services Tax (GST) regime in India, governed by the Central Goods and Services Tax (CGST) Act 2017, outlines provisions and rules for the availing of Input tax credit by Registered persons. Section 16 of the CGST Act, along with Rule 37 of the CGST Rules 2017, imposes certain limitations and conditions on the entitlement to Input tax credit.

Payment within 180 days [Section 16(2) read with Rule 37]:

Second proviso to Section 16(2) states that if a recipient fails to pay to the supplier of goods or services (other than 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 180 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. In practicality, such ITC is required to be reversed instead of paying it.  

Further Rule 37 of CGST Rules, 2017, provides better clarity on this topic. Sub Rule 1 states If the payment is not made within a period of 180 days from the date of issue of invoice by the supplier, the Registered person is required to pay or reverse an amount equal to the Input tax credit availed for the unpaid supply. This payment should be made along with the applicable interest under section 50 while filing the return in FORM GSTR-3B for the tax period immediately following 180 days from the date of the invoice.

For example, the Invoice date of a supply is 1st March 2023. Now if the recipient does not pay to the supplier for such supply till 27th August (i.e., within 180 days), then the recipient shall have to reverse an amount equal to ITC availed on such supply, in the GSTR-3B of August month. However, if the invoice date is 4th March 2023, in that case due date for payment will be 31st August 2023, in that case, recipient is required to reverse ITC amount in GSTR-3B of September month.

Also, the interest is to be calculated from the date on which ITC was availed. In case, invoice was issued on 1st March 2023, but ITC on such invoice was availed through GSTR-3B of April month, let’s say on 15th May 2023, so interest shall be calculated from 15th May 2023, till the date on which such ITC is reversed or paid back.

Supplies Covered in Schedule I of CGST Act 2017: It is important to note that the provision specifies that supplies made without consideration, as outlined in Schedule I of the Act, are deemed to have been paid for the purposes of the specified time limit.

Also, any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of Section 16.

What if such recipient subsequently pays the amount for the supply?

However, if the Registered person subsequently pays the amount for the supply along with the tax to the supplier, they are entitled to re-avail the Input tax credit that was reversed earlier.

Additionally, the time limit mentioned in sub-section (4) of Section 16 (i.e., 30th November following the end of the financial year) which pertains to the time limit for claiming Input tax credit, does not apply to the claim for re-availing any credit that had been reversed earlier, in accordance with the provisions of the Act or the provisions of this Chapter.

It means if the invoice date is 1st March 2023, the last date to avail ITC of such supply shall be 30th November 2023, however, if payment on such supply was not made within 180 days of the Invoice, and ITC was reversed thereof, and subsequently payment was made on 15th December 2023, then ITC can be re-availed through December month’s GSTR-3B.

Time limit for availing ITC [Section 16(4)]

According to Section 16(4) of the GST Act, a registered person is not entitled to claim Input tax credit (ITC) for any invoice or debit note related to the supply of goods or services after the thirtieth day of November following the end of the financial year to which the invoice or Debit note pertains or the filing of the relevant annual return, whichever comes earlier. This implies that the time limit for availing ITC on invoices or Debit notes for a financial year extends until the thirtieth day of November of the succeeding financial year or the date of filing the relevant annual return, whichever occurs first.

In the case of Debit notes, the relevant financial year for availing ITC is determined by the date of issuance of the Debit note, not the date of the underlying invoice. For instance, if a Debit note is issued in the next financial year for an original invoice from the previous financial year, the time limit for availing ITC is based on the financial year of the debit note.

For illustration, if a Debit note is issued in the financial year 2022-23 for an original invoice from the financial year 2021-22, the time limit for availing ITC for the Debit note is the thirtieth day of November of the financial year 2022-23 or the date of filing the relevant annual return, whichever is earlier.

Let us understand it with some examples for better clarity:

1. A Debit note dated 07.07.2022 is issued in respect of the original invoice dated 16.03.2022. As the invoice pertains to F.Y. 2021- 22, the relevant financial year for availment of ITC in respect of the said invoice in terms of Section 16(4) shall be FY 2021-22. However, as the Debit note has been issued in FY 2022-23, the relevant financial year for availment of ITC in respect of the said Debit note shall be FY 2022-23 in terms of Section 16(4).

2. Suppose Zenith Machinery delivered a machine to ABC Corp, a monthly return filer under GST, in January under Invoice no. 49 dated 28th January 2023. The relevant financial year for availing ITC on this invoice would be up to 30th November 2023. Suppose a Debit note for post-delivery activities, amounting to `50,000 plus GST, is issued in April 2023. As the Debit note is received in the next financial year, the time limit for claiming ITC on this Debit note is 30th November 2024, which is the earlier of the date of filing the annual return for the preceding financial year or 30th November of the succeeding year. This illustrates the application of Section 16(4) in determining the time limit for availing ITC.

Some Case Laws related to Section 16(4):

1. Gobinda Construction Vs Union of India (Patna HC dated 08/09/2023) [2023] 64 TAXLOK.COM 013 (Patna):

In this case, the Registered person faced disallowance of Input Tax Credit (ITC) for the financial year 2018-19 due to late filing of GSTR-3B for the months of February and March 2019. The Department issued a Show Cause Notice, and subsequently, an order was passed under section 73 of the CGST Act, 2017, imposing tax, interest, and penalty. The Registered person appealed to the Additional Commissioner and filed a Writ Petition in the High Court, challenging the order.

The primary issues raised include the constitutionality of Section 16(4) of the CGST Act, 2017, which restricts the valid ITC claims beyond the specified due date. The petitioner argued that the provision is confiscatory and violates Article 300A of the Constitution. Additionally, the petitioner contended that Section 16(4) is procedural and cannot override the substantive conditions of Section 16(2).

The respondent argued that ITC is a concession subject to the conditions prescribed by the Act and that Section 16(4) is a valid restriction. The court upheld the constitutionality of Section 16(4), stating that it does not violate fundamental rights. The judgment emphasized that the right to ITC becomes vested only if the conditions of Section 16(2) are fulfilled.

The conclusion highlights the financial setbacks and potential double taxation resulting from the denial of ITC due to non-compliance with Section 16(4). It acknowledges the complexities of GST return filing during the initial years, technical glitches, and the need for a careful process in determining eligible ITC. However, it also suggests that the case did not explore certain legal principles, such as the Doctrine of Legitimate Expectation or the harmonization of Section 16(4) with the legislative intent of ITC. The final settlement on whether ITC is a legal right and its nature as property under Article 300A remains open. The source provides insights from the Gobinda Construction case, emphasizing the need for a comprehensive view on GST-related issues.

2. Jain Brothers Vs Union of India (Chhattisgarh High Court dated 11/12/2023) [2023] 67 TAXLOK.COM 049 (Chhattisgarh):

In a similar case as case no.1 discussed above Chhattisgarh High Court also stated that “We are of the considered opinion that the provision contained in Section 16(4) of the CGST Act is violative of neither Article 14 of the Constitution nor Articles 19(1)(g) & 300A of the Constitution”. Since in this case petitioner was not a citizen of India, therefore Article 19(1)(g) is not available to the petitioner herein. Concludingly, the petitioner has failed to make out a case to question the constitutional validity of Section 16(4) of the CGST Act as it is a constitutionally valid piece of legislation.