One of the major steps to curb false/fraudulent claims of input tax credit was initiated under Goods and Services Tax regime by introducing a procedure to reverse the amount of input tax credit availed within 180 days in case no or part payment is made to the supplier of goods or services with interest as notified under section 50(1).
The idea behind introducing this process was to eliminate exchange of accommodative invoices without actual supply of goods or services or both to avail input tax credit resulting in loss of revenue to the State and using such invoices as means of financing. This practice was existing under earlier laws also but since the books of accounts and information was confined within the four walls of an organisation thus one could manage the things. Technically speaking after the enactment of Goods and Service Tax Act the details pertaining to Purchases, sales, debit notes and credit notes are now available in public domain. In simple words, we can say an organisation’s Purchase Book, Sale Book and related debit notes and credit notes are available on the server of Goods and Services Tax Department. This has brought in a regime of transparency between the Tax authorities and the business houses and has also reduced the incidences of false input credit claims.
Section 16(2) of the Central Goods & Service Tax (“CGST”) Act 2017 provides for the reversal and re-availment of input tax credit in the case of:
In case no payment is made to supplier against the value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed the receiver of such goods or services is required to reverse the ITC availed by crediting the same to its liability.
In case part payment is made to supplier against value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed the receiver of such goods or services is required to reverse the proportionate ITC availed by crediting the same to its liability.
In case only payment of tax under GST is made to supplier against value of supply of goods or services within 180 days from the date of issue of invoice by the supplier on account of which ITC was availed the receiver of such goods or services is required to reverse ITC availed by crediting the same to its liability.
The reversal of Input Tax Credit must be made along with interest as notified under section 50(1) [i.e. 18% p.a.] of the GST Act. The interest to be calculated is from the date of the invoice issued by the supplier of such goods or services.
However, the above rule does not apply to the transactions of supply of goods and services on which tax is payable on the reverse charge basis.
Also provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall have been paid for the purposes of the second proviso to sub-section (2) of section 16.
The input tax credit reversed due to non -payment, part-payment or by making payment of taxes only can be reclaimed at the time of making actual payment/ book adjustments to such suppliers against their dues without any time limit.
Adjustment book entries to settle the amounts will be treated as actual payment as section 16(2) does not prescribe any specific mode of payment.
Things to Consider:
Interest @18% to be calculated at the time of reversal of input credit as per section 16(2) ITC availed earlier to the extent of the amount not paid shall be reversed and added to tax liability under the current liabilities of the Balance Sheet. The interest has to be calculated as per the rates prescribed under section 50(1) as per the prescribed manner under Rule 37. As per Rule 37, the details shall be furnished in GSTR-2 by creating liability in the electronic ledger. Since GSTR-2 has been suspended thus machinery provisions to upload the desired details can not be compiled as required under GST Act. In the case of CIT vs. B.C. Srinivasa Shetty (1981) 2 SCC 460 the Apex court held in the absence of machinery provisions the charging provision shall fail.It seems that once GSTR-2 will be active on the GST Portal there will be lot of confusion and in majority of the cases the dispute of interest liability may be resolved through legal processes.
Organizations must follow the reversal system of ITC credit calculate interest liability and be ready with the details required for filling of GSTR-2.
The question as to from which date the interest is calculated the GST Act says from the date of the issuance of invoice till the date of reversal. But there is an argument put forward that the interest needs to calculate from the date of the availment of input credit till it is reversed.
It is better for the business houses to make a continuous review of the financial conditions of their organization to ascertain whether the payment to vendors can be made within 180 days. In case it is felt that due to some reasons payments can not be made within 180 days better reverse the input credit availed as soon as possible or do not avail input credit to save interest cost as the rate of interest is too high i.e. 18% p.a. Do not try to fix the finance problems by availing ITC as you will be funding your organization with an interest rate of 18%p.a.
Note: I have read many articles and the relevant sections of GST Act 2017.