The second proviso to section 16(2) of the CGST Act provides that where the amount towards value of supply along with tax payable thereon is not paid to the supplier within 180 days from the date of issue of invoice, an amount equivalent to input tax credit availed shall be reversed in manner prescribed under Rule 37 of the CGST Rules. Further, Rule 37 of the CGST Rules provides for the proportionate reversal of ITC to the extent amount not paid in relation to supply.
The above-said proviso does not apply on such supplies wherein the recipient is required to pay tax under reverse charge mechanism.
Such credit can be re-availed once the payment has been made to the supplier. Further, as per Rule 37(4) of the CGST Rules, the time limit prescribed under Section 16 (4) for the availment of credit shall not be applicable in such cases.
Common issues in applicability of this provision are as follows:
Issue 1 - Applicability in case of deemed supply or deemed addition of value of supply as no actual payment would be made by the recipient to the supplier. The following two cases are possible:
Case 1 - Supplies made to distinct person wherein requirement to charge tax arises as per Schedule I of the CGST Act (e.g. - Stock transfer between two states)
In such case, proviso to Rule 37 specifically provides that value of supplies made without consideration specified in Schedule I of the CGST Act shall be deemed to have been paid for the purpose of Section 16(2) of the CGST Act.
Case 2 - Addition of value to supply being made on account of the provisions contained in Section 15(2)(b) of the CGST Act. (i.e. Addition of amount to the value of supply which is required to be paid by the supplier but incurred by the recipient and not included in the actual price)
This issue was addressed by inserting a second proviso to Rule 37(1) of the CGST Rules with effect from 13 June 2018 wherein the value of supplies added on account of Section 15(2)(b) of the CGST Act shall be deemed to be paid for the purpose of second proviso to Section 16(2) of the CGST Act.
Issue 2 - Applicability in relation to credit availed on import of goods
What if the amount has not been paid by the recipient for the goods imported from outside India. Will the above said proviso would be applicable?
Transaction liable to reverse charge has been excluded from the condition to make payment within 180 days. Does import of goods amount to reverse charge? Reverse charge has been defined under Section 2(98) of the CGST Act. The said provision read as follows:
'reverse charge' means the liability to pay tax by the recipient of supply of goods or services or both instead of the supplier of such goods or services or both under sub-section (3) or sub-section (4) of section 9, or under sub-section (3) or subsection (4) of section 5 of the Integrated Goods and Services Tax Act;
Import of goods does not fall within ambit of either section 9(3) or 9(4) of the CGST Act. It also does not fall within purview of Section 5(3) or 5(4) of the IGST Act. Accordingly, import of goods does not fall under reverse charge and therefore, cannot be excluded from the proviso under discussion. However, as the import of services is covered under Section 5(3) of the IGST Act, the said proviso should not apply in such case.
Considering the above said discussion, a position may arise to reverse credit availed on account of import of goods as well if the payment has not been made within 180 days.
An alternate view is also possible that the said proviso restricts the availment of credit if the amount is not paid to the supplier within 180 days of the date of issue of invoice. 'Invoice' has been defined under Section 2(66) of the CGST to mean the invoice raised as per Section 31 of the CGST Act. However, as the supplier of goods in case of import of goods is located outside India, the invoice issued by him is not an invoice as per Section 31 of the CGST Act. Therefore, restriction of 180 days may not be applicable in such case
Issue 3 - Applicability in case of full payment of the tax portion of the supply and partial payment of the portion of taxable value (such as retention money)
As a general practice across industry, a certain amount is retained for payment from contracts basis mutual agreement between supplier and the recipient. Such amount is paid by the recipient only after the completion of the contract.
Question here arises that since the total value along with tax payable thereon in relation to supply has not been paid to the supplier, would there be requirement to reverse input tax credit in cases of retention money?
Similar case was also prevalent in the erstwhile service tax regime as Rule 4(7) of the Cenvat Credit rules, 2004 provided that if the payment of value of input service and service tax payable is not made within three months of date of invoice, bill or challan, then the CENVAT Credit availed is required to be paid back by the manufacturer or service provider. Vide Circular No. 122/3/2010-Service tax date 30.04.2010, it was clarified that where the receiver of the services reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service and thus, the service receiver is entitled to take credit provided he has also paid the service tax amount to the service provider.
The aforesaid circular was also referred in case of CCE Vs. Hindustan Zinc Limited [2014 (34) STR 440 (Tri. - Delhi)] wherein the Hon'ble Tribunal held that in cases where the service receiver has paid the full amount of service tax charged/reflected on the invoice value, rule 4(7) of CCR, 2004 should not apply and the service receiver would be eligible to claim credit of full value of service tax even if the full payment has not been made to the supplier. The said ruling has also been upheld by the Hon'ble Delhi High Court in its order dated 03 December 2019.
In light of the above judicial precedents, position may be taken to claim total input tax credit if the tax portion of the supply has been made in full. It is important to note here that recipient claiming credits in such situation would be required to substantiate that the tax payment has been made in full and the amount retained pertains only to the taxable/base value of the supply.
However, these issues are not crystal clear and may be put to test in the days to come.