INPUT TAX CREDIT - FAILURE TO PAY WITHIN 180 DAYS

Provisions of the Act (Including Amendments of Budget 2023):

Sec. 16(2) Notwithstanding anything contained in this section, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless,--

 

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 added to his output tax liability, along with interest thereon paid by him along with interest payable under section 50, in such manner as may be prescribed:

 

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him to the supplier of the amount towards the value of supply of goods or services or both along with tax payable thereon.

 

Interpretation of the Provisions:

⮚      Every Registered Person;

⮚      Who avails input tax credit of goods or services;

⮚      And fails to pay to the supplier within 180 days from the date of invoice;

⮚      Shall pay input tax credit along with interest to the government.

 

My Analysis of the Provision:

 

Ø  Amount Payable

 

Registered person is liable to pay an amount equal to Input Tax Credit claimed on the inputs/services which he fails to pay to the supplier within 180 days.

 

Ø  Interest Calculation

 

As per my opinion, Interest as provided in S.50 (3) is to be calculated @18% p.a. from date of availment of ITC till the date of payment to the government. Here, Date of availment is to consider even though ITC availed but not utilized.

 

Ø  GSTR 3B or DRC 03?

 

Until Budget 2023, as per S.16 (2) payment was to be done through GSTR2 which has never been implemented.  Then came Rule 37 w.e.f. 01.10.2022, which talks about reversal of ITC.

 

Now with the amendment in the S.16(2), word “pay the input tax” used which says payment can be done through disclosure in GSTR3B return in the form of output tax liability.

 

Ø  Payment has already been done to supplier

 

As till date due to no specific mechanism to disclose the payment or reversal of the Input, I believe, many of the registered persons may not have acted upon. And as 5 years have completed, Most of this suppliers’ already been paid till date.

 

In case, payment has already been done to the suppliers, in that case, Registered person may pay interest only and strongly argue that proviso to S.16(2) talks about re-availment once payment released to the supplier.

 

Ø  Reavailment of Input

 

As per Rule 37, once payment to supplier is released, one can re-avail ITC. Time limit as mentioned in S.16 (4) does not apply to the re-availment. Re-availment can be done at any time.

 

Ø  Retention Money / Performance Guarantee Hold

 

Many a time’s suppliers have agreed to the terms of retention money / security deposit / performance guarantee hold, etc. That retention of money from supplier’s invoices does not mean failure to pay to supplier. One need to strongly argue for such retentions / deposits / holds, if any.

All such retentions / holds / deposits should not be disclosed under the head of Creditors. And that should be grouped under the head “Security Deposits – Suppliers”.

 

Ø  Not Wrong availment of ITC but Ineligible ITC

 

ITC claimed on the original invoice was eligible ITC and it cannot be termed as wrongly availed. However, on failure to pay to the supplier within 180days, such ITC becomes ineligible.

 

Ø  Applicable Dates

 

This amendment is applicable from 01.07.2017. Retrospective effect.

 

Case study:

 

ABC has supplied goods to XYZ Invoice Date 01.08.2022, XYZ has availed input on goods in the month of August 2022 but fails to pay within 180 days.

 

Events	Actions
On receipts of Invoice	XYZ is eligible to claim ITC, he can claim in GSTR3B return of respective month.
On failure to pay to ABC within 180 days from the date of invoice	XYZ has to pay ITC along with Interest through GSTR3B return.
When payment is released to ABC	XYZ can re-avail ITC through GSTR3B return. There is no time limit to re-avail such ITC.
As on today, Payment has already been released to ABC and Dept identifies the issue.	XYZ can calculate interest and pay interest only. And he shall not pay ITC and re-avail, as payment to supplier has already been released.
XYZ retain 5% as performance money	Retention of money from supplier invoices as per terms agreed upon by both the parties does not mean failure to pay to supplier. This does not attract S.16 (2).

 

Suggestion to Registered Person:

 

Department may identify all such cases and raise demand for interest.

Disclaimer: This is my personal analysis of the provisions of the act and I may be interpreting wrongly, read provisions of the act before acting upon.