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.