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ITC under CGST Act - Where is need for linking of payments to suppliers?

APRIL 19, 2017

By S Sivakumar, LL.B., FCA, FCS, MBA, ACSI, Advocate

THE Industry has been led to believe that the input tax credit scheme under the GST regime would be seamless with little scope for harassment. However, a look at Section 16(2) of the CGST Act, 2017 would belie this belief.

The proviso to the Explanation to Section 16(2) reads:

"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 ".

Rule 2 of the Draft rules on Input Tax Credit (dated March 31, 2017) reads as under:

2. Reversal of input tax credit in case of non-payment of consideration

(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof the value of such supply along with the tax payable thereon within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply and the amount of input tax credit availed of in   FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of issue of invoice.

(2) The amount of input tax credit referred to in sub-rule (1) shall be added to the output tax liability of the registered person for the month in which the details are furnished.

(3) The registered person shall be liable to pay interest at the rate notified under sub-section (1) of section 50 for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.

A combined reading of the above would indicate how complicated these provisions could prove to be.

In industries like construction and heavy engineering, some amounts, typically calculated as a percentage of the overall contract values are retained as retention monies, to be paid to the contractor after, say, one year of the satisfactory completion of the work. We could have a lot of confusion in these industries vis-à-vis the rule to reverse ITC if the payment is not made within 180 days of the date of the invoices of the supplies.

The draconian part of these provisions is that, the recipient of the supply is required to pay interest for the period that he has availed of the input tax credit, with a requirement that such recipient of the inward supply (who has not effected payment within 180 days) should also treat ineligible credit as his output tax credit in the month following the said period of 180 days.

It is a common practice in manufacturing sector for customers to pay on ad-hoc basis and in these cases, a lot of practical difficulties could arise for the recipient of inward supplies to prove the fact of payments to their suppliers against specific invoices. Moreover, this could also require reconciliation of accounts of the recipients of inward supplies and their suppliers on a continuous basis. I would not be surprised if the Department insists on certificates from the suppliers that they have been paid within 180 days, for allowing credit to the recipient of suppliers.

From an accounting perspective, it would become very difficult to adjust part-payments against suppliers' invoices that would include the tax component. For instance, if a supplier has supplied goods worth Rs 1,00,000/- and has charged GST, lets' say, of Rs 9,000/- towards CGST and Rs 9,000/- towards SGST, how would an ad-hoc payment of, let's say, Rs 50,000/- be distributed between the value of goods and the respective tax components. It would seem that the registered taxable person would need to be adept in handling issues concerning accounting as well as arithmetic.

One wonders as to the need for the Government to link input tax credit availment to payments to suppliers in the first place. This concept, which has been in vogue in respect of procurement of services is unknown to the central excise law and more importantly, to the VAT law, in respect of procurement of goods. This concept can just not work in the context of taxation of goods and where is the need to bring this element into the GST regime and make the input tax credit mechanism more difficult, as compared to the existing systems of credit availment under the central excise and VAT laws?

And, how about a recipient of supply of goods and or/services, who is into exports? Can Section 16(2) require such recipient to pay output tax along with interest in respect of ITC claimed on input invoices which have been paid in 180 days, even when the input tax is not utilized and refund thereof is claimed?

Given the wide expectation that the SGST law would largely be similar to the CGST law, linking ITC to payments to suppliers, especially in respect of goods, is fraught with a lot of unknown problems and issues leading to harassment of the taxpayers.

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Sub: Whether there is need for linking ITC under CGST Act - Where is the need for linking payments to supplier

The second proviso to Sec. 16(2) of CGST Act and Rule 2 of the draft Input Tax Credit Rules ,linking availability of input tax credit in respect of input supplies to payment, within the stipulated period ,of the value of the supply along with the tax payable thereon to the supplier of the input goods or service , has been adopted from the 2nd proviso to Rule 4(7) of the Cenvat Credit Rules, 2004, which is applicable only to ‘input service’ and which provides that in case the payment for the value of the input service and the service tax payable thereon, as indicated in the invoice/bill/challan, on the basis of which credit has been taken by an assessee, is not made by him to the service provider within three months from the date of the invoice/bill/challan, the assessee shall pay an amount equal to the cenvat credit availed on such input service. Only the credit of the service tax which was paid by the assessee as service recipient on reverse charge basis is not subject to this condition. This provision of Rule 4(7) of the Cenvat Credit Rules, 2004 dates back to the period prior to 01/04/2011 when liability to pay service tax arose only on receipt of payment by the service provider; but strangely, the same has been retained even during the period w.e.f. 01/04/2011, when in terms of the Point of Taxation Rules, 2011, liability to pay the service tax is no longer linked only to the date of receipt of payment, but can be from the date of issue of invoice also,if the issue of invoice precedes the payment. While Rule 4(7) of the Cenvat Credit Rules, 2004, was applicable only to input service, the analogous provisions in GST– Sec 16(2) of the CGST Act and Rule 2 of I T C Rules are applicable not only to the supply of services, but also to the supply of goods .
The availability of input tax credit in respect of any input goods or input services received by a GST assessee for use in relation to his business can be linked only to the actual payment of tax on those inputs , not to the payment by the assessee of the amount towards the value of the inputs along with tax payable thereon to the input supplier. The only purpose which I can think of for these strange provisions of CGST Act and draft I T C Rules (which are very much like the provisions of the 2nd proviso to Sec. 75(1) of the Customs Act ,1962 linking availability of duty drawback in respect of the goods exported to the receipt from the foreign buyer within the time limit stipulated under Foreign Exchange Management Act, 1999 of the payment for the goods exported ) would be to make the issue of bogus invoices without supply of any goods or services difficult. But there are other ways of dealing with the problem of bogus invoices. Insisting on payment to the supplier of the value of the goods and / or services supplied along with the tax payable thereon for permitting input tax credit to the recipient in respect of those goods and / or services, besides the question of how the payment to the supplier would be ascertained, would cause harassment to a large number of bona fide assessees like the cases mentioned in the Article, where as a trade practice, in the construction or erection, installation & commissioning contracts, some amount, mostly 5% of the overall contract value, is retained as a ‘retention money’ to ensure successful completion of the contract as per the contract terms and specifications and which is paid to the contractor later on after successful completion of the contract - very often after one year from the date of the invoice. In the CGST Act , there is no explicit provision that if the payment is made by a GST assessee in respect of some input supplies after 180 days, he will become entitled to refund of the input tax credit and interest on it paid earlier, as the way the third proviso to Sec 16(2) is worded , it can not be interpreted to cover such cases of delayed payments. Therefore, once the payment by a GST assessee to his input supplier in respect of some input supplies is delayed beyond 180 days, he will lose the input tax credit even if he makes the payment after 180 days and even if his input supplier had paid full tax in respect of the supplies without receiving the payment. Since the CGST Act has already been passed, deleting the 2nd and 3rd proviso to Sec 16(2) would require an amendment to this Act which may take time. But since the draft I T C Rules are yet to be notified , at least the Rules should be modified to moderate these harsh provisions of Sec 16(2) by making a provision in the Rules to provide for restoration of the input tax credit and refund of interest in the cases where the payment to the supplier has been made after 180 days.

Rakesh Kumar
Member , CESTAT (Retd)


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