Input tax credit under GST – complications vis-à-vis payments to suppliers : 23-05-2017

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

THE input tax credit scheme under the GST regime would seem to be far more regimental and regressive, as compared to the current cenvat credit scheme.As we know, under Rules 4(1) and 4(7) of the Cenvat Credit Rules, 2004, cenvat credit can be takenwithin a period of one year from the date of issue of the invoices by the vendors and service providers in respect of inputs and input services. Under Rule 4(7) of the CCR, there is further stipulation to the effect that, if the payment to the service provider is not effected within 90 days from the date of the invoice, cenvat credit availed would need to be reversed. The benevolent Board, vide its circular No. 990/14/2014-CX-8 dated November 19, 2014 has been kind enough to clarify that, the one year limitation prescribed by Rule 4(7) will not affect the re-taking of credit on the basis of payments made to the service providers.

So far so good.

Under Section 16(4) of the CGST Act, input tax credit, in respect of the financial year, will have to be claimed before the due date of filing the return for the month of September of the succeeding financial year, i.e. before October 20, 2018 or before the actual date of filing the annual return, whichever is earlier. Thus, the effective period for claiming ITC could vary depending on the date of the invoice or debit note. For instance, in the case of an invoice dated, let’s say, March 31, 2018, the ITC would have to be claimed on or before October 20, 2018 or before the actual date of filing of the annual return, whichever is earlier. Of course, if an enthusiastic registered person files the annual return for the financial year on, let’s say, on April 30 of the succeeding year, the effective time frame for availment of credit, especially for invoices dated in the subsequent months, say, January, February and March of the financial year would be significantly lower.

Taking this discussion forward…. I’ve reproduced the two provisos to Section 16(2)(d) of the CGST Act, below:

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:

Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.
I’ve also reproduced Rule 2 of the Input Tax Credit Rules…

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 indicates to me that, if the registered person avails credit on accrual basis and does not pay the invoice value to his supplier of goods or services or both within 180 days from the date of (issue of) the invoice, he would be required add the ineligible credit so availed, as his output tax liability in Form GSTR-2 in the month immediately succeeding the six-month period and also the interest thereof.

The question that would arise is whether, the registered person who has availed of ITC and who does not pay his supplier within 180 days from the date of the invoice, can re-avail the credit and if so, within what time frame? Under the GST regime, it seems to me that, there is no provision for re-availment of credit by the registered person who does not pay his supplier within 180 days of the invoice . Neither Section 16 nor the ITC Rules talk of such re-availment or re-taking of credit. Even from a practical perspective, once ITC has been taken by the registered person based on the fulfilment of the conditions specified in Section 16(1) of the CGST Act on the basis of suppliers’ invoices, the GST network may not allow credit for the same input unpaid invoices of the suppliers to be again used for re-availment of credit. From my limited understanding of the GST process, it seems to me that the supplier invoices once considered by the registered person for availment of ITC, cannot be used again to re-avail the same ITC, which would get necessitated when supplier invoices are paid after 6 months.

Even in cases where ITC is not availed on accrual basis but on the basis of payment of supplier invoices, the overall limitation of one year from the date of the invoice as prescribed by Section 16(4) would still apply, in my view.

If my views are confirmed, these provisions could create huge issues for Industry, given the fact that while input tax credit under the VAT law and cenvat credit of duties paid on inputs is not linked at all to the payments to suppliers, under the current service tax law, there is no limitation as to re-availment of cenvat credit on the basis of payments to suppliers, once cenvat credit has been reversed on the expiry of 90 days from the date of (issue of) the supplier invoices.

It would then seem that the ITC scheme under the GST regime is far more regressive than one would have expected.

Before concluding….

Under the current dispensation, cenvat credit provisions are contained in the Rules making it easier for the Government to amend the cenvat credit rules, from time to time. On many occasions, the Board has come out with welcome amendments, to the benefit of Industry. Unfortunately, under the GST law, input tax credit related provisions are contained in the Act itself and consequently, any amendment thereof would require the approval of the Parliament as well as all the States and the Union Territories. Hence, any drafting error by the babus could prove very costly for Industry.

Note : This Article was carried on by Taxindiaonline.com website on 23rd May 2017

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