ITC Reversal Under GST: The Hidden Weapon Against Non-Paying Buyers
Introduction
One of the biggest challenges faced by small and medium businesses in India is non-payment of dues by buyers even after a tax invoice is uploaded and GST is paid. While the Goods and Services Tax (GST) framework focuses on seamless credit flow and transparency, it doesn’t directly provide a mechanism for suppliers to recover unpaid invoices through the GST portal. However, several indirect remedies and legal tools exist that can pressure defaulters—especially through Input Tax Credit (ITC) reversal rules, contractual enforcement, and tax compliance checks.
This article explains whether you can seek relief through the GST system, how ITC reversal provisions create pressure on non-paying recipients, and what practical and legal steps can be taken to recover your dues.
Facts of the Case
Consider a common scenario:
A supplier raises a tax invoice, supplies goods or services, pays output GST, and reports it in GSTR-1. The buyer accepts the invoice and avails Input Tax Credit (ITC) in GSTR-3B—but fails to make payment within 180 days from the date of invoice.
Under Rule 37 of the CGST Rules, 2017, if payment to the supplier (including tax component) is not made within 180 days, the buyer is required to reverse the ITC proportionate to the unpaid amount and pay interest.
This provision, while not a recovery tool for the supplier, acts as a compliance burden on the buyer—often compelling them to settle dues to avoid losing ITC benefits.
Discussion
1. No Direct Recovery Mechanism on the GST Portal
The GST portal does not provide a feature to file payment disputes or recover dues from defaulting buyers. The portal’s function is limited to tax compliance—uploading invoices, filing returns, and reconciling ITC.
Therefore, suppliers cannot initiate recovery proceedings or block a buyer’s GST registration merely because of non-payment.
However, the digital trail of invoices and ITC claims creates a powerful evidentiary record that can be used in civil recovery suits, arbitration, or insolvency petitions.
2. ITC Reversal Pressure on Buyer
The ITC reversal rule is one of the strongest indirect enforcement tools under GST:
- Section 16(2)(d) of the CGST Act read with Rule 37(1) mandates that the buyer must make payment within 180 days.
- Failure to do so means:
- The ITC availed must be added back to output tax liability, and
- Interest @ 18% is payable from the date of availing ITC till the reversal date.
Hence, if a supplier formally reminds the buyer about the 180-day condition, it can act as a strong motivator for payment, since retaining unpaid ITC is risky and penalizable.
3. Legal Remedies Beyond GST
If the default continues, the supplier can pursue legal recovery under other laws:
- Civil Court/Commercial Court: File a money recovery suit under the Code of Civil Procedure, supported by GST invoices and payment records.
- Insolvency & Bankruptcy Code (IBC): If dues exceed ₹1 crore (threshold for corporate debtors), the supplier may initiate insolvency proceedings before the NCLT.
- Contractual Enforcement or Arbitration: If the contract has an arbitration clause, proceedings can be started under the Arbitration and Conciliation Act, 1996.
- Police Complaint (in fraud cases): If there’s deliberate evasion or cheating, the matter may qualify for criminal prosecution under the IPC.
4. Practical Tips for Suppliers
- Keep Proper Documentation: Maintain all invoices, delivery challans, GST filings, and communication proofs.
- Use E-invoicing & E-way Bills: These create strong legal evidence of supply and receipt.
- Send a Legal Notice: Before initiating court or arbitration action, send a demand notice referring to Rule 37 and tax payment proof.
- Follow Up via Email/Registered Post: Written follow-up helps establish intention and timeline for recovery.
- Inform the Buyer About ITC Reversal Liability: This often triggers faster payments.
Conclusion
While the GST portal does not directly offer a mechanism to recover unpaid invoices, it indirectly supports suppliers through the ITC reversal rule, which penalizes non-paying buyers by reversing their credit.
To recover dues, businesses must rely on contractual, civil, or insolvency remedies, but the digital records under GST—like invoices uploaded in GSTR-1 and ITC claimed by the recipient—serve as powerful legal evidence of supply and liability.
In essence, GST may not collect your payment, but it provides the compliance framework and documentation trail that can make defaulting buyers think twice before delaying dues.
