Impediment of payment to supplier within 180 days: Legislature should act before the Judiciary steps in
Impediment of payment to supplier within 180 days: Legislature should act before the Judiciary steps in
Undoubtedly the provisions relating to claim of Input Tax Credit were, are and would be most prone to litigation. If that be the case, one wonders who is to blame the tax collector or the tax payer. I think the answer lies somewhere in between. On one hand the legislature should not impose conditions / restrictions which are in violation of the Constitution of India or settled judicial precedents. On the other hand the taxpayer should not misuse / play the system for ulterior motives.
ITC: whether a vested right?
With regard to Input Tax Credit, one school of thought which was prevalent earlier was that it is an indefeasible / vested right of the assesses. In the context of MODVAT Scheme under the erstwhile excise regime, the Supreme Court in the landmark case of COLLECTOR OF CENTRAL EXCISE, PUNE VERSUS DAI ICHI KARKARIA LTD. - 1999 (8) TMI 920 - SUPREME COURT held that unless there is anything to the contrary, a person is entitled to take credit without any limitation in time. The Supreme Court again in the case of EICHER MOTORS LTD. VERSUS UNION OF INDIA - 1999 (1) TMI 34 - SUPREME COURT, in the context of MODVAT, said that the credit is as good as tax paid.
The other school of thought is that it is not the right of the assesse to get the benefit of ITC but a statutory benefit Right, Benefit, Reward or Privilege conferred to him – JAYAM & CO. VERSUS ASSISTANT COMMISSIONER & ANR. - 2016 (9) TMI 408 - SUPREME COURT.
The provisions of ITC under the CGST Act, 2017 flow from the later school of thought as decided in the case of Jayam & Co. It means that ITC is a benefit / right / reward which is conferred onto the taxpayer by way of a statutory provision. Which in turn means that the legislature can impose as many conditions / restrictions for a taxpayer to avail the same. The legislature may (if it so intends) even go to the extent of saying that no ITC can be availed and the taxpayer will not get any credit of taxes paid by it on its inputs.
What we are concerned in this article, is one such impediment imposed by the legislature vide second proviso to section 16(2) regarding the payment of the value of supply along with tax payable within a period of one hundred and eighty days by the recipient to the supplier.
“Section 16(2) ………
Provided that ………
…… 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:”
Exception to the proviso
Reversal of ITC on non-payment of invoice value within 180 days would not be applicable in the following scenarios:
Now let us critically analyze the second proviso to section 16(2) on various parameters:
The said second proviso to section 16(2) uses the words “fails to pay”. That means that the recipient is intending to pay to the supplier of goods the amount towards the value of supply along with the tax payable thereon, but there is a failure on the part of the recipient to pay the same. The said proviso does not use the words “non payment”. There is huge and substantial difference between “failure to pay” and “non payment” on the part of the recipient. An act of non payment is trigerred once the recipient is contractual obligated to make the payment but is not able to fulfil its contractual obligation. What would be situation if both the recipient and supplier have contractual agreed to have a credit period beyond a period of one hundred and eighty days?
The Hon. Allahabad High Court in the case of Badri Prasad v. District Judge, Gonda (1983) All LJ 41 at 42 held that the parties can be said to have “failed to pay” only if it can be said that they neglected to do something which they were expected to do, or they left some possible or expected action unperformed. Further, several High Courts have analyzed the meaning of “failure” in various cases viz.
By virtue of the above interpretations provided for the term 'failure', it is possible to contend that a failure can occur only in the presence of an obligation to do or perform an act. Accordingly, since the words used in the proviso are “fails to pay”, it is possible to contend that the above provision would only be triggered when contractually there is an obligation on the recipient to pay the amount within 180 days and the recipient subsequently fails to pay the amount within 180 days.
In case of payment terms beyond 180 days, it can be said that the proviso doesn't apply, and ideally there is no requirement of reversal in such cases. Therefore, it is pertinent for the taxpayers to revisit their contractual arrangements timely to save on the ITC.
The said proviso undermines the Privity of Contract between the recipient and supplier which is of paramount importance. In layman’s language Privity of Contract means a relation between the parties in a contract which entitles them to sue each other but prevents a third party from doing so. Does the second proviso to section 16(2) of the CGST Act, 2017 supersedes the Privity of Contract which ultimately governs this commercial transaction.
Is the said proviso not violative of Article 19(1)(g) of the Constitution of India which allows to practice any profession, or to carry on any occupation, trade or business subject to reasonable restriction as enshrined under clause 6 of the said article. The restriction of payment within a period of one hundred and eighty days from the date of invoice, in our humble submission is not a reasonable restriction but a direct and fatal attack on the right granted to two business entities to run their trade in a manner suitable to them.
As per the provision of section 16(2)(c), the recipient can take final input tax credit only if tax has actually been paid by supplier. Thus when Government has received the tax amount from the supplier, it has no locus standi in as to whether the recipient has paid to the supplier or not. As discussed above, the Privity of Contract is between the Supplier and Recipient and the Government has no role to play in case it has received due taxes. One may visualize that intent of such a provision is to avoid colorable devices wherein if a person has excess input tax credit he can without any supply pass on this credit to others. However a remedy of reversal of credit is worse than disease as many genuine transactions are getting hit by current provision.
Normally in large construction and other contracts, a certain percentage out of bill amount is retained and the same is released after completion of contract and end of warranty period. Further, some deductions from the bill amount due to various reasons are common. In all such cases the provision of reversal of credit creates hardship to the taxpayers as in light of existing provisions they need to reverse the proportionate input tax credit despite the fact that retention money has been deducted as per the Contract.
Post supply discounts after negotiations are a common practice in business. Such discounts if not emanating from any agreement are not allowed as deduction from “value” for GST as per section 15(3) of the CGST Act, 2017. In such cases the reversal of input tax credit with interest may be applicable as full payment is not made by recipient to supplier despite entire tax amount has been paid to Government by supplier. The said proviso is double whammy for the tax payers.
The payment of interest by the recipient for violation of the provisions of second proviso to section 16(2) of the CGST Act, 2017 should not be to the Government. The Government has in fact received its taxes [assuming section 16(2)(c) is complied with]. And it is the supplier who is yet to receive the amount. And it is the supplier to whom the recipient should pay interest if the payment is beyond the credit period (and not beyond 180 days). However the proviso requires payment of interest to the Government.
Ideally the second proviso to section 16(2) of the CGST Act, 2017 should be removed from the statute books. However if wisdom does not prevail and the legislature is adamant to continue the same, it can atleast do some modification to make it less regressive and give some relief to tax payers.
Interest is compensatory in nature. There is non-payment to supplier. The Government coffers are not at all affected. Therefore no interest should be charged by the Government. In case interest is charged by Government, it would lead to double interest for recipient; one to the Government and other to the supplier. Further the interest paid by recipient to Government upon reversal of credit is not allowed to be reversed upon payment of invoice made to supplier, when the input tax credit can be re-availed by the recipient. In case levy of interest cannot be dispensed with, modification should be made to provide that upon re-availing of credit on payment to supplier, the interest already paid can be reversed.
In order to avoid genuine hardship in reversal of ITC, on deductions made from bills due to contract provisions, it should be provided in law that provisions for reversal of credit shall not be applicable where full payment is not made by recipient to supplier due to operation of provisions of contract entered into between supplier and recipient.
If none of the above is possible, the Government should suspend the application of this proviso during the period of COVID – 19 pandemic. COVID-19 had created a panic not only in health sector but economy of the nation were also affected. After lockdown most of the business houses faced liquidity problem and tried to cut down their fixed expenses etc. to recoup the force majeure losses. Payment within 180 days in such a scenario were really difficult. Hence, in such a situation the reversal of input on account of non-payment of consideration within 180 days as prescribed will be an additional burden on the business.
However, contractual clauses having payment terms which exclude the period of delay of payment on account of force majeure might safeguard the recipient from reversing ITC under these provisions. The legal maxims “Lex non cogit impossibilia”- meaning law does not compel a man to do that which he cannot possibly perform and “Impossibilium NullaObligatio Est” - meaning law does not expect a party to do the impossible, are well known maxims in law and would squarely apply to this scenario.
The Supreme Court in the case of STATE OF MADHYA PRADESH VERSUS NARMADA BACHAO ANDOLAN & ANR - 2011 (5) TMI 914 - SUPREME COURT applied this maxim and held that where the law creates a duty or a charge and the party is disabled to perform it without any fault on his part and has no control over it, the law will in general excuse him. Hence, it becomes sine qua non to be careful in structuring the terms of the contract to cover these force majeure contingencies to safeguard the recipients from ITC reversal on account of delay in payment due to the pandemic.
The legislative intent behind the enacting this proviso was to act as an anti-evasion measure and to plug revenue leakages. In practice too, this proviso should work towards attainment of that primary objective of the legislature and should not lead to any absurd and unintended results. For a Government, which has pulse of the situation, removal of this tax neutral (as tax is already in the Government coffers and intension to earn interest can never be in their mind) proviso would not be difficult. Hope the big hearts and wise minds prevail to cut the losses vis-à-vis this proviso. Or else it is just a matter of time, the judiciary when confronted with the issue, may do then, what the legislature can do now.
By: Sunil Keswani - January 25, 2023
Discussions to this article
Nice Article, Shri Sunil Keswani Ji!
Once supplier is not an aggrieved party on account of mutually agreed payment-terms despite the fact that recipient has not made payment within 180 days from date of invoice (in other words, as recipient does not fail to pay to the supplier within 180 days from date of invoice), subject proviso does not come into picture (i.e. till the time where recipient actually fails to pay to the supplier) in my view.
Similarly, ITC availed need not be reversed subsequently when supplier gives post-supply discount against 'basis value / taxable supply' by way of commercial credit-note etc. (i.e. without disturbing / recovering initial gst charged) in my view.
In the context of the ongoing discussion, Circular No. 122/03/2010 - ST dated the 30th April 2010 (bearing F. No. 137/71/2009 - CX.4) is relevant to my mind (even though it deals with period wherein Cenvat Credit of service tax was available to the recipient only when he pays value of services and service tax to the supplier).
Similar clarification/s from GST council will help avoid needless litigation.
On this topic, one may also read lengthy discussions, we had, on TMI fourm under Issue-ID 118298, bearing subject line - input credit.