ITC reversal under GST in case of non-payment of consideration within 180 days
Input Tax Credit or ITC is the tax that a business pays on a purchase and that it can use to reduce its tax liability when it makes a sale. In other words, businesses can reduce their tax liability by claiming credit to the extent of GST paid on purchases. In order to avail the Input Tax Credit the following conditions must be satisfied by the taxpayer as per section 16 of the CGST act, 2017:
a. The taxpayer must have a valid tax invoice/ debit note/ prescribed document.
b. The taxpayer must have received the goods or services. In case goods delivered to 3rd person on the direction of the registered person deemed to be received by the registered person and ITC will be available to registered person.
c. Tax paid on such supply is actually paid to government either in cash or through utilisation of input tax credit admissible in respect of the said supply.
d. He has furnished the return under section 39 i.e. GSTR 3B
e. In case goods are received in lots or instalment then ITC can be taken upon receipt of the last lot or instalment.
f. ITC is not admissible if depreciation is claimed on tax component
As per section 16(2) of the CGST act where a recipient fails to pay to the supplier of goods or services or both, other than the suppliers on which tax is payable on reverse charges mechanism 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 added to his output tax liability along with interest thereon in the manner prescribed.
The above provision can be explained as follows:
Where the taxpayer do not make payment to the supplier within 180 days from the date of issue of invoice, an amount equal to the input tax credit by recipient shall be added to his output tax liability, along with interest thereon
The recipient shall be entitled to re avail the credit of input tax in case of subsequent payment of the amount towards the value of supply of goods or services or both along with tax payable thereon
In case taxpayer makes part payment of value of supply as well as tax amount within 180 days, reversal of credit shall apply only to the extent of proportionate amount not paid by recipient
(a) This payment time limits concept apply both supply of goods as well as services
(b) 180 days criteria is applicable only from the date of issue of invoice by the supplier. 180 days should be computed from date of invoice but irrespective of date of avail of ITC
(c) If supplier allowed the credit period beyond 180 days based on their contract terms may be in purchase order then may not be any requirement for reverse of ITC with genuine terms
As per Rule 37; registered person is required to furnish details in GSTR -2 of month following 180 days but since GSTR -2 is not operational, the reporting is required to be done in GSTR-3B with interest applicable on when made reverse of ITC. The interest is applicable from date of availing of credit and not from date of invoice.
Rule 37 (3) determine the period for the interest amount as registered person shall be liable to pay interest at rate notified under section 50 (1) of CGST Act for the period to start from the date of availing of credit on such supplies till the date when the amount is added to the output tax liability is paid & also interest would be cost to the recipient
The condition of payment of value of supply plus tax within 180 days does not apply in the following circumstances:
(a) Supplies on which tax is payable under reverse charges mechanism covered both section 9(3) & 9(4) of CGST Act
(b) Deemed supplies without consideration the value of supplies made without considerations as specified in schedule 1 of the said Act shall be deemed to be have been paid for the purposes of second provision to section 16 (2) Act. Hence ITC reversal will not apply
(c) The value of supplies on account of any amount added in accordance with the provision section 15(2)(b) of CGST Act ( on that part of VOS which is met by recipient )
Below are some of the FAQs with respect to ITC reversal:
(1) Can the taxpayer reclaim ITC revered earlier upon payment?
A receipt can reclaim the tax credit reversed earlier due to non-payment to supplier on following making the payment section 16(4) of the CGST Act for availing credit time period whichever is earlier before the due date for furnishing return for the month of September of the following year or annual return, but sec 16 (4) of the CGST Act shall not apply for re-claiming the credit which was reversed earlier under rule 37(4) of the CGST rule a receipt can re- claim at any time there is no time bar.
(2) Can taxpayer claim ITC on partial payment?
Yes the receipt can claim ITC on partial payment made , as per pro–rata basis on the value of tax paid by way of back calculations because rule 37 (1) of the CGST rules talks about reverse of the amount of ITC availed of proportionately to such amount not paid to the supplier.
(3) Can taxpayer adjust debit / credit entries in books of account by way of payment mode?
Second proviso to section 16 (2) of the CGST ACT only provides the ITC reverse shall apply in case of non payment to their supplier with time frame , there does not prescribe any particular mode of payment and also which mode neither indicated anywhere in CGST ACT nor CGST rules Ruling by AAR West Bengal; the applicant consideration paid by way of setting off book debt is proper payment & hence ITC reverse under second proviso to section 16 (2) is not applicable