By S Sivakumar, LL.B., FCA, FCS, MBA, ACSI, Advocate
ONE of the most litigation prone areas under the service tax law that has got carried into the GST regime is the reversal of credit on non-payment to vendors within 180 days from the date of the suppliers’ invoices. While the service tax law only covered payments to service providers, under the GST law, payments to suppliers of goods is also covered and, consequently this issue will have manifold ramifications under GST.
Of course, under the erstwhile VAT law, we had no such provisions.
It would perhaps make sense to compare the relevant statutory provisions that existed under the erstwhile Cenvat Credit Rules, 2004 with those that appear in the GST law.
Rule 4(7) of the Cenvat Credit Rules, 2004 read as under:
4[(7) The CENVAT credit in respect of input service shall be allowed, on or after the day on which the invoice, bill or, as the case may be, challan referred to in rule 9 is received:
x x x
Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9 is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service, except an amount equal to the CENVAT credit of the tax that is paid by the manufacturer or the service provider as recipient of service, and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:
X x x
Second proviso to Section 16(2) of the CGST Act,2017
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, in such manner as may be prescribed:
A brief comparison between the two statutory provisions would clearly point out that, under the GST law, the reversal of ITC is attracted only when there is a ‘failure’ on the part of the recipient to pay to the supplier of goods or services or both, the value of the supply along with the tax payable, within 180 days from the date of issue of the invoice by the supplier.
In contrast, under the service tax law, the reversal was attracted when the service receiver ‘did not pay’ within three months from the date of the issue of the invoice, to the service provider. Thus, while the service tax law covered all instances where payment was not effected within three months, the GST law would cover only when there is a failure on the part of the recipient to pay within 180 days. This ‘failure’ has to be a legal or a contractual failure. Thus, in instances where the recipient and the supplier of goods or services or both have specifically agreed that a certain portion of the consideration can be retained by the recipient, towards future performance (a common feature in the construction and engineering sector), there can be no ‘legal’ failure on the part of the recipient, within the meaning of the second proviso to Section 16(2) of the CGST Act.
Taking this discussion forward..….even when the payment is not effected by the recipient within 180 days, so long as the supplier of the goods or services or both is agreeable to the delay (let’s say, through an e-mail communication), there cannot be a legal or contractual failure on the part of the recipient and consequently, there is no need for reversal of ITC, on the expiry of 180 days, is my strong view.
There is another angle to this discussion.
The second proviso to Section 16(2) clearly states that the reversal of ITC is attracted only when there is a failure on the part of the recipient to pay the value of the goods or services or both along with the tax payable thereon, to the supplier. There is thus, a twin condition that needs to be attracted here… not only should there be a failure to pay the value of the supply, there should also be a failure to pay the value of the tax applicable on the supply. In cases where the recipient is not able to make the payment towards the value of the supply to his supplier within 180 days, the least he can do is to effect the payment of the tax applicable on the supply, to the supplier, so that, the second requirement related to failure to pay the tax payable on the supply is not attracted or violated.
It seems that, with a bit of planning, GST assessees would be able to legally ‘manage’ the draconian provisions contained in the second proviso to Section 16(2) of the GST Act.
This subject has been one of the most favourite areas for the Audit Parties in the earlier tax regime and would continue to do so with more potency in the present scenario.
(The views expressed are strictly personal.)