Under the Goods and Services Tax (GST) regime in India, a registered taxpayer can claim an “input tax credit” (ITC) on the taxes paid on purchases of goods and services used for their business. However, this claim is subject to certain conditions, including timely payment to the supplier.

Reversal of Input Tax Credit (ITC) in case of Non-Payment of Consideration

Here’s what happens if a registered taxpayer fails to pay the supplier for the goods or services within the stipulated timeframe:

• Time Limit:As per Section 16(2) of the CGST Act, 2017, the taxpayer has 180 days from the invoice date to make the payment to the supplier, including the applicable GST.
• Non-Payment:If the payment is not made within the 180 days, the ITC claimed on that purchase must be reversed. This means the previously claimed credit is now added to the taxpayer’s output tax liability, effectively negating the initial benefit.
• Proportionate Reversal:Since Rule 37(1) of the CGST Rules came into effect, the ITC reversal is only proportional to the unpaid amount. This means if only a part of the invoice remains unpaid, only the corresponding ITC portion needs to be reversed.
• Interest Payment:In addition to reversing the ITC, the taxpayer is also liable to pay interest on the reversed amount. The interest rate is calculated from the date the ITC was availed to the date it is reversed, using the rate notified under Section 50 of the CGST Act.

Recent Changes:

• Notification No. 19/2022-CT (R)clarified that the ITC reversal applies only to the unpaid tax portion, not the entire invoice value.
• Rule 37Awas introduced based on Section 16(2)(c) of the CGST Act, requiring buyers to reverse ITC on taxes not deposited by their supplier by September 30th of the following year through the GSTR-3B form filed by November 30th.

EXAMPLE

The Goods and Services Tax (GST) allows registered businesses to claim Input Tax Credit (ITC) on the GST paid on purchases like goods and services used for their business. However, there are situations where this credit might need to be reversed, one of which being non-payment to the supplier within a specific timeframe.

Here’s an example to understand the concept:

Scenario:

• Company A purchases goods worth Rs. 100,000 (including 18% GST) from Company B on 1st July 2023.
• Company A claims ITC of Rs. 18,000 on the purchase.
• As per the current regulations (as of February 2024), Company A has 180 daysfrom the invoice date (1st July 2023) to make the payment to Company B.
• If Company A fails to pay Company B within 180 days (i.e., by 31st December 2023), they are liable to reverse the ITC claimed, which is Rs. 18,000 in this case.

Reversal Process:

1. Company A needs to reverse the ITC of Rs. 18,000 in their GST return (GSTR-3B) for the month of December 2023.This reduces their eligible ITC for that month.
2. Additionally, Company A will be liable to pay intereston the reversed ITC amount from the date it was initially claimed (1st July 2023) until the date of payment to Company B. The interest rate is determined by the government and is currently 18%.

Points to Remember:

• The reversal of ITC only applies to the proportion of the invoice value that remains unpaid. If Company A partially pays Company B within the 180 days, they only need to reverse ITC on the remaining unpaid amount.
• Recent amendments to the GST rules (effective from 1st October 2022) have brought significant changes to the ITC reversal provisions. It’s crucial to stay updated with the latest regulations and consult a tax professional for specific guidance.

FAQ QUESTIONS

Reversal of Input Tax Credit (ITC) for Non-Payment of Consideration under GST

Q: Under GST, can I claim ITC if I haven’t paid the supplier the full consideration (invoice amount) for the goods or services received?

A: Generally, no. As per Section 16(2) of the CGST Act, 2017, claiming ITC is subject to fulfilling specific conditions, one of which is paying the consideration for the supply along with the tax within 180 days from the invoice date.

Q: What happens if I don’t pay the supplier within 180 days?

A: In such cases, you will be required to reverse the ITC claimed on the purchase through Rule 37 of the CGST Rules. This means you’ll need to add the previously claimed ITC amount to your output tax liability in your GST return, effectively negating the credit you initially availed.

Q: Are there any exceptions to the 180-day rule?

A: Yes, there are a few exceptions:

• Supplies under reverse charge mechanism:If you are liable to pay tax under the reverse charge mechanism (RCM), the 180-day payment rule doesn’t apply. You can claim ITC even if you haven’t paid the supplier.
• Payment beyond 180 days with specific reasons:While not a complete exception, if you have specific and verifiable reasons for the delayed payment beyond 180 days, you might be able to approach tax authorities for condonation of the delay and potential reinstatement of ITC. However, this is subject to their discretion and approval.

Q: Are there any additional consequences for not paying within 180 days?

A: Apart from reversing the ITC, you might also be liable to pay interest on the reversed ITC amount for the period between the due date of payment to the supplier and the date of reversal.

CASE LAWS

The concept of reversing Input Tax Credit (ITC) in cases of non-payment of consideration within a stipulated timeframe is governed by the provisions of the Central Goods and Services Tax (CGST) Act, 2017 and the corresponding rules. However, there aren’t specific “case laws” related to this topic as it’s primarily governed by statutory provisions.

Here’s a breakdown of the relevant regulations:

1. Statutory Provision:

• Section 16(2) of the CGST Act, 2017:This section lays the groundwork for claiming ITC, mentioning that a registered taxpayer can avail ITC only if certain conditions are met. One such condition, introduced through a proviso, states that the taxpayer must have paid the consideration for the supply of goods or services and the tax payable on them within 180 days from the invoice date. If this condition isn’t fulfilled, the ITC claim is liable to be reversed.

2. Rule Governing Reversal:

• Rule 37 of the CGST Rules, 2017:This rule elaborates on the mechanism for ITC reversal in case of non-payment within 180 days. It clarifies that the reversal needs to be done only proportionally to the unpaid invoice value and the tax payable thereon. Additionally, a recent amendment introduced Rule 37A which mandates reversal of ITC on taxes not deposited by the supplier by September 30th of the following year, to be filed through GSTR-3B by November 30th.

It’s crucial to note that the 180-day provision for ITC reversal has been subject to various revisions and clarifications over the years. It’s recommended to consult with a tax professional or refer to official government updates for the most recent guidelines.

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