Repercussions for Non-Payment of Consideration within 180 Days in GST Mechanism

[NIPUN MANGLA]

Goods & Service Tax Act was introduced with an objective to provide a simpler and transparent taxation system. GST is a path-breaking indirect tax reform that attempts to create a common national market. GST has subsumed multiple indirect taxesand the focus of the GST was to bring all assesses under a single tax structure and simplified return filing mechanism. The Government also intended to inculcate more financial discipline in the business community. With this objective,the GST Act came with a very special feature of linking the Input tax credit with the payment of consideration of the value of supply alongwith tax thereon, received by a registered person. The GST Act provides for payment of consideration of the value of supply alongwith tax thereon within 180 days from the date of Invoice and also provided for repercussions in case of non-payment. It means that the registered person has to pay the consideration for any supply of goods or services or both within 180 days from the date of invoice and in case of non-payment, the registered person will have to face the statutory consequences and the Input Tax Credit (ITC) claimed by the said registered person got impacted.

By way of this article, we shall attempt to examine the repercussions for non-payment of the consideration within 180 days of the date of invoice and the complexities involved.

The relevant provision concerning the present issue are contained in Section 16 of the Central Goods and Services Tax Act, 2017 (hereinafter for the sake of brevity also referred to as the CGST Act or Act). Section 16 of the Act deals with eligibility and conditions for taking Input Tax Credit (ITC). Besides many other conditions mentioned in Section 16, the second proviso to Section 16(2) of the CGST Act imposes a condition in claiming ITC. Second Proviso to Section 16(2) of the CGST Act, 2017 reads as under:

Second Proviso to Section 16(2):

‘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:’

Few important questions which we shall endeavor to address, are:

• When is the second Proviso to Section 16(2) applicable?
• What is the procedure to be followed, if the second proviso to section 16(2) gets attracted?

• Whether the amount claimed as ITC is to be reversed or is it to be added in the output tax liability of the registered person?

• Whether any interest is payable by the registered person and if yes what shall be the Rate of Interest?

• What shall be the period for which interest would be payable?

• What procedure isto be followed after the considerations for the invoices have been paid after 180 days?

• What method is to be adopted in the event of partial payment of consideration?

• What method is to be adopted where no impact has been taken in books of accounts or the returns filed with the GST Department in relation to second proviso to section 16(2) of the CGST Act, 2017?

In order to answer the aforementioned queries, first, we will have to understand the mechanism of filing of return as provided in the statute.

1. As per the Section 37(1) of the CGST Act, 2017 read with Rule 59(1) of the CGST Rules 2017, every registered person (except few specified persons) is required to file details of outward supplies of goods or services or both in form GSTR-1 electronically on or before the tenth day of the month succeeding the said tax period.

2. As per the Rule 59(3) of the CGST Rules, 2017, details of outward supplies furnished by the supplier shall be made available electronically to the concerned registered persons (recipient of the supplies) in form GSTR-2A through the common portal after the due date of filing of Form GSTR-1.

3. Furtheras per the Section 38(1) of the CGST Act read with Rule 60(1) of the CGST Rules 2017, every registered person shall verify, validate, modify or delete such details of inward supplies and credit or debit notes, received by him in GSTR-2A and may include therein the details of inward supplies that have not been declared by the supplier in GSTR-1.

4. As per Section 38(2) of the CGST Act 2017, every registered shall include details of inward supplies of goods or services or both on which tax is payable by him on reverse charge basis and details of inward supplies of goods and services or both taxable under the IGST Act or on which IGST is payable under section 3 of the Customs Tariff Act, 1975 (i.e. IGST paid at the time of import of goods) in Form GSTR-2 and shall furnish detail of inward supplies in Form GSTR-2. Such details are to be furnished after the tenth day but on or before the fifteenth day of the month succeeding the tax period.

5. As per Section 38(3) of the CGST Act read with Rule 59(4) of the CGST Rules, the details modified, deleted or included by the recipient in Form GSTR-2 shall be communicated to the supplier of outward supplies electronically in Form GSTR 1A.

6. As per Section 37(2) of the CGST Act read with Rule 59(4) of the CGST Rules registered person who has been communicated details in Form GSTR 1A, shall either accept or reject the details so communicated on or before the seventeenth day but not before the fifteenth day of the month succeeding the tax period. Form GSTR-1 of the supplier shall stand amended to the extent of the modifications accepted.

7. As per Section 39(1) of the CGST Act read with Rule 61(1) of the CGST rules every registered person for every calendar month or part thereof shall furnish a return in Form GSTR 3 electronically of inward and outward supplies of goods and services or both, input tax credit availed, tax payable, tax paid and such other particulars as may be prescribed on or before the twentieth day of the month succeeding such calendar month or part thereof. As per Rule 61(5) of the CGST Rules, 2017, if the time limit of filing Form GSTR-1 or Form GSTR-2 is extended, the return shall be furnished in Form GSTR-3B.

It is pertinent to mention here that till date GSTR-2 has not been made operational on GST Portal by the Government. Further, the department has been regularly issuing notifications to extend GSTR-1 by one day to compel the registered person to file Form GSTR-3B instead of GSTR-3.

Now we proceed to examine each of the issues in detail.

1. When is the Second Proviso to Section 16(2) applicable?

As per the second proviso to section 16(2) read with Rule 37, a registered person who has availed 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 period of one hundred and eighty days from the date of the issue of the invoice, shall furnish the details of such supply in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice and such amount of ITC shall be added to the output tax liability of the registered person for the month in which the details are furnished in GSTR-2.

The following points are pertinent to note here:

1. The period for non-payment of consideration of 180 days has to be calculated from the date of Invoice.The date of the actual supply of goods or services is irrelevant.
2. Details of such invoices, for which payment has not been made within 180 days have to be furnished in Form GSTR-2 of the month immediately following the period of one hundred and eighty days.

Rule 37 of the CGST Rules, 2017 reads as under:

Rule 37 of CGST Rules:Reversal of input tax credit in the 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 subsection(2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

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 subsection (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.

4. The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier

Conclusion: Second Proviso to Section 16(2) is applicable if consideration is not paid within 180 days from the date of the invoice.

2. What procedure is to be followed, if the second proviso to section 16(2) gets attracted?

As stated supra as per the second proviso to section 16(2) in case of non-payment of consideration the amount equal to ITC claimed has to be added in the output tax liability of the recipient. The procedure to be followed as stated in Rule 37 is as under:-

1. the amount of value not paid and the proportionate amount of input tax credit availed shall be declared in FORM GSTR-2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice.

2. the amount of Input Tax Credit on invoices for which consideration has not been paid shall be added to the output liability of the registered person for the month in which details, as stated above, are furnished by him.

Now the mechanism to furnish GSTR-2 on the GST portal has not been made operational by the department. Therefore, details of such invoices cannot be furnished with the GST Department.

At this juncture, an important question that arises for consideration is that if the machinery provisions for a particular section are not in place, which makes the section unworkable, then whether such a statutory provision is at all applicable?. This is a million-dollar question that begets an answer. 

It was held in the case of COMMISSIONER OF INCOME-TAX, BANGALORE VERSUS BC SRINIVASA SETTY (AND OTHER APPEALS) [1981 (2) TMI 1 - SUPREME COURT] that if the machinery or mechanism is not provided to comply with the provisions of statute, the charging section shall fail. The charging provisions and the corresponding mechanism together constitute a integrated code. When there is a case that the corresponding mechanism cannot apply it all, it is evident that such a case was not intended to fall within the charging section. It must be borne in mind that the legislative intent is presumed to run uniformly through the entire conspectus of provisions.

Conclusion: It is advised to the registered person, that the output tax equivalent to the input tax credit taken on invoices for which consideration has not been paid, must be added in the Form GSTR-3B and output tax should be paid on the same. It is further advised to prepare a reconciliation statement of output liability of the particular month.

3. Whether the amount claimed as ITC is to be reversed or is it to be added in the output tax liability of the registered person?

Although the caption of Rule 37 reads as “Reversal of input tax credit in the case of non-payment of consideration” but as per substantive law contained in Section 16 as well as the content of Rule 37, in case of non-payment of consideration it is not that ITC is to be reversed but an amount equal to the amount of ITC claimed has to be added in the output tax liability.

One may think that this is just legal jugglery and in effect it does not make any difference that the ITC is being reversed or an amount equal to the ITC claimed is being added to the output tax liability. Prima facie yes it appears so, but it actually makes a lot of difference. The rate of interest to be charged gets varied which we shall be considering hereinafter.

4. Whether any interest is payable by the registered person and if yes what shall be the Rate of Interest?What shall be the period for determining the amount of interest?

Section 50(1) of the CGST Act, 2017 stated that every person liable to pay tax, but fails to pay thereof to the government within the prescribed period, shall for the period for which tax or part thereof remains unpaid, pay on his own interest at eighteen percent.(Notification No. 13/2017-Central Tax dated 28.06.2017)

As per section 50(3) of the CGST Act, 2017, the rate of interest of twenty-four percent is applicable in cases when there undue or excess claim of input tax credit or there is undue or excess reduction in output tax liability.(Notification No. 13 /2017-Central Tax dated 28.06.2017)

Section 50 of the CGST Act, 2017 reads as under:

1. Every person who is liable to pay tax in accordance with the provisions of this Act or the rules made thereunder, but fails to pay the tax or any part thereof to the Government within the period prescribed, shall for the period for which the tax or any part thereof remains unpaid, pay, on his own, interest at such rate, not exceeding eighteen per cent., as may be notified by the Government on the recommendations of the Council.

2. The interest under sub-section (1) shall be calculated, in such manner as may be prescribed, from the day succeeding the day on which such tax was due to be paid.

3. A taxable person who makes an undue or excess claim of input tax credit under sub-section (10) of section 42 or undue or excess reduction in output tax liability under sub-section (10) of section 43, shall pay interest on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council.

Further, as per Rule 37(3) stated above in case of non-payment of consideration 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 is paid.

It is important to note that in the case of non-payment of consideration within 180 days the interest charging section i.e. Section 50 does not gets triggered off if the amount is paid within the prescribed period of the month in which it is added in output tax liability. However, it is under Rule 37(3) that interest gets computed from the date of availment of credit. On the basis of equity and logically it is correct that interest must be computed from the date of availment of credit an important legal question that will need to be tested is whether such an interest charging provision be introduced by way of Rules and whether Rule 37(3) is ultra-vires the Act?

As per Rule 37(3) of the CGST Rules, 2017, the interest shall be levied 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 is paid.

Following points can be interpreted from above:

1. The interest shall be applicable for the period starting from the date of availing of ITC up to the date the amount of ITC is added in the output tax liability and tax is paid.
2. Now, had the mechanism of furnishing of return of Form GSTR-2 and GSTR-3, as mentioned in the statute, would have been made available to a taxpayer and followed then it was possible to figure outthe date of availing ITC and the GST portal would have automatically calculated the period for which interest shall be levied.
3. Since GSTR-3B is now the only mechanism available to avail ITC on goods or services or both, therefore, the date of filing of GSTR-3B (GSTR-3B in which the ITC of inward supplies, for which consideration has not been paid within 180 days, have been availed) will be considered as the date of availing of ITC.
4. Also, GSTR-3B is the only mechanism wherein the output tax liability can be paid. Therefore, ITC shall be added to the output tax column of GSTR-3B.

Conclusion: From the above discussion it can be concluded:

1. As per Rule 37(3), it is amply clear that in case of non-payment of consideration interest has to be calculated as per Sec 50(1) and the case of non-payment of consideration does not fall in any of the cases as mentioned in section 50(3). Thereforethe rate of interest applicable shall be eighteen percent.

2. It is also to be noted thatinterest is to be computed from the date of availing credit and not from the date of invoice and ending on the date of filing GSTR-3B in which such ITC has been added as output tax liability.

5. What procedure is to be followed if the consideration for the invoices has been paid after 180 days?

As per the third proviso to Section 16(2) of the CGST Act, 2017, the registered person shall be entitled to re-avail the Input Tax Credit (which has been added as output tax liability due to non-payment of consideration within 180 days from the date of invoice) after the consideration has been paid by him towards the value of supply of goods or services or both along with tax payable thereon.

It is pertinent to note here that as per Rule 37(4) of the CGST Rules, 2017, the time limit under section 16(4) of the CGST Act, 2017 is not applicable forre-availing the ITC reversed earlier.This means that the ITC can be claimed for the invoices or debit notes, for which the consideration has been paid after 180 days and the ITC have been reversed, even after furnishing of the relevant annual return or furnishing of the GSTR-3B for the month of September following the end of the financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return.

Conclusion: Therefore, it can be safely concluded that the registered person is eligible to take ITC after the consideration has been paid and the time limit prescribed under section 16(4) of the CGST Act, 2017 is not applicable.

6. What method is to be adopted in the event of partial payment of consideration?

As stated above as per Rule 37(1) the registered person is required to furnish details of invoices for which consideration has not been paid within 180 days along with the amount of value not paid and the amount of input tax credit availed of proportionate to such amount paid.

Conclusion: It is therefore concluded that quantum of ITC to be added in the output tax liability shall be proportionate to the amount of consideration not paid on such invoice. Standard accounting principles relating to the payment of consideration has to be followed.

7. What shall be the method to be adopted where no impact has been taken in books of accountsor in the returns filed with the GST Department with respect to second proviso to section 16(2) of the CGST Act,2017, but the consideration has been paid subsequently.

The next question that merits consideration is what will be the consequences if a registered person has not done any adjustments whatsoever in the books of accounts or in the returns filed with the department and no output tax has been paid. This needs to be examined especially in light of the fact that the consideration has been paid subsequently.

In such a case in the opinion of the authors, the concept of revenue neutrality will come into play. As per Rule 37(4), a registered person is eligible to re-avail the ITC, earlier reversed, on payment of consideration.

If we apply the revenue neutrality concept,the date of payment of consideration can be considered as the date whenthe registered person was eligible to re-avail the ITC which he ought to have paid as output tax liability due to non-payment of consideration within 180 days.Therefore in such a case, the registered person has availed himself of excess ITC from the date of availing of the credit upto the date of payment of consideration.

It can be argued by a registered person that since the mechanism of declaring invoices on which credit has been availed (GSTR-2) has not been made available to the assessee and the output tax liability declared by him does nor demarcate and earmark the liability on account of non-payment of consideration(as no such column has been provided in GSTR-3B) therefore he cannot be asked to pay any amount on account of interest.  It is settled principle that the taxpayer cannot be made to suffer for no fault VISION DISTRIBUTION PVT. LTD. VERSUS COMMISSIONER, STATE GOODS & SERVICES TAX & ORS. [2019 (12) TMI 1048 - DELHI HIGH COURT] wherein it has been held that the taxpayer cannot be made to suffer on account of the failure of the Government in devising smooth GST systems).

In the opinion of the author, though plausible, this would be too far-fetched an argument. However, the concept of revenue neutrality is a well-accepted principle in taxation jurisprudence and can be applied in the present case.

The Hon’ble Supreme Court of India, in the case of AMCO BATTERIES LTD. VERSUS COLLECTOR OF CENTRAL EXCISE, BANGALORE [2003 (2) TMI 66 - SUPREME COURT] establishing the revenue neutrality concept held that ‘there is no material on record from which it could be inferred established that duty of excise was not levied or paid by reason of any fraud, collusion or any wilful misstatement or suppression of facts or contravention of any of the provisions of the Act or the Rules made thereunder with intent to evade payment of duty. It was a bona fide belief on the part of the appellant that scrap and waste, which was recovered while manufacturing batteries, was exempt from levy of excise duty. Further, appellant was entitled to get benefit of MODVAT scheme, therefore, there was no justifiable reason for the appellant to suppress any fact.’ Similar view has been taken in the case of COMMISSIONER OF CENTRAL EXCISE, MUMBAI VERSUS MAHINDRA & MAHINDRA LTD. [2004 (9) TMI 115 - SUPREME COURT]

In addition to the above, since, the consideration already stands paid, output tax liability and input tax credit can be adjusted by the same amount in Form 3B of a particular month. Therefore, there will be a zero impact on net tax liability. However, interest, as stated above, needs to be paid.

Conclusion:In such a case it is advised to pay only interest from the date of availing credit up to the date of payment of consideration for the transactions for which consideration has only been paid. The registered person needs to maintain a reconciliation of the same.