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Fulfilling condition of the proviso (d) of Sec.16(2) of CGST Act for taking Input Tax Credit (ITC)

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Fulfilling condition of the proviso (d) of Sec.16(2) of CGST Act for taking Input Tax Credit (ITC)
By: Ganeshan Kalyani
July 1, 2020
All Articles by: Ganeshan Kalyani       View Profile
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One of the conditions for a taxpayer to claim input tax credit is that the value of inward supply along with tax payable thereon shall be paid within a period of 180 days from the date of issue of invoice to the supplier. If the taxpayer fails to make the payment within said period then the input tax credit so claimed by him shall have to be reversed along with interest applicable thereon. And, thereafter, whenever he makes the payment of the value of supply and tax thereon then he becomes eligible to claim the input tax credit which was reversed earlier.

The value of supply in the above para means the invoice value and tax charged in the invoice. Or, it can also mean the amount which is payable by the taxpayer to the supplier and not the invoice value. The reason for not paying full value of supply could be because the taxpayer while receiving the goods has found some quality issue and therefore denies to make full payment to the supplier.  

In GST, either credit note or debit note, the supplier has to issue it. But because the supplier does not accept the complaint of the buyer for some reason, he does not issue a credit note thereby the ledger account of the supplier in the buyer’s book indicate an ‘x’ amount as outstanding. In such situation, as per proviso to section 16(2)(d) the input tax credit proportionate to the outstanding amount shall have to be reversed by the buyer.

The same is applicable in case of inward supply of services. The recipient of service finds deficiency in service but the supplier of service denies it for some reason. In such case the ledger account of the supplier in the buyer’s book shall show x amount as outstanding. And, the recipient of service shall have to reverse proportionate input tax credit so claimed earlier.

In civil project of installation and erection of plant and machinery, the recipient of service holds 1% or 2%, as the case may be, from each running bills of the contactor as a retention money. This practice is generally followed in civil project case. In such case, the proviso to section 16(2)(d) comes into effect and becomes a reason for reversal of proportionate input tax credit so claimed earlier. At the time of final settlement of the project the retention money is paid to the contractor. At that time the recipient becomes eligible for credit.

In the first instance stated above, a buyer can issue a financial debit note i.e. debit note without GST to the supplier. This is because the supplier is denying to issue a credit note with GST. There is no restriction to issue financial debit/credit note in GST for the buyer. By issuing debit note the buyer can fulfil the condition of the proviso to section 16(2)(d) and thus the reversal of input tax credit will not be required.

In the second instance, the retention amount of first invoice should be settled before the time period of 180 days expires of that invoice and the said equivalent amount should be retained from the second invoice along with the retention amount that has to done on second invoice. This way the reversal of input tax credit proportionate to retention amount on first invoice can be avoided. In any case, the retention money is ultimately payable to the contractor while settling the accounts. So, one can plan to settlement the bills on FIFO basis so as to avoid reversal of input tax credit on any invoice issued by the contractor. But at the same time keeping the retention amount so agreed and decided in the agreement as payable in the buyer’s book. In other word the retention amount will be same but settlement of invoices will be on FIFO basis.

Proviso to section 16(2)(d) is reproduced for ready reference:

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:”


By: Ganeshan Kalyani - July 1, 2020


Discussions to this article


When you have received defective goods or services, whether receiver should be availing on the invoice? Whether availment of ITC on accrual basis (2A) can be done by recipient in a mechanical manner?

In case of retention money, what if the subsequent bill is for a very low amount. Whether retention money can be kept in Suspense on the account of supplier after obtaining a letter from supplier ?

Dated: 02/07/2020

Query-wise reply

1. Sir, if the goods received is totally defective, the buyer will reject it in total. So, no question of taking credit.

2. No, Sir. The credit cannot be taken mechanically. Conditions given in section 16 should be fulfilled.

3. I was referring to RA invoice of civil contractor where the recipient is aware of the payment structure which is generally a certain percentage of total contract billed after slab wise construction is finished.

4. I am not aware of this, Sir.

By: Ganeshan Kalyani
Dated: 04/07/2020


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