Rule 37 of CGST/SGST Rules: Reversal of ITC in case of Non-Payment of Consideration
There are conditions while taking credit of input tax under section 16 of CGST Act,2017
Conditions under Section 16(1):
- Registration under GST
- Goods/services to be used for business purposes
Conditions under Section 16(2):
- Possession of tax paying document
- Receipt of the goods and/or services
- Tax leviable on supply actually paid to Government
- Filing of return
But there is proviso under Section 16(2) which is connected with Rule 37 that states:
The registered person must pay to the supplier, the value of the goods and/or services along with the tax within 180 days from the date of issue of invoice. In the event of failure to do so, the corresponding credits availed by the registered person would be added to his output tax liability, with interest.
Interest will be paid @ 18% from the date of availing credit till the date when the amount added to the output tax liability is paid.
However, once the recipient makes the payment of value of goods and/or services along with tax, he will be entitled to avail the credit again without any time limit. In case part-payment has been made, proportionate credit would be allowed.
What Rule 37 of CGST/SGST Rules states:
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 180 days from the date of issue of invoice, 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 180 days from the date of the issue of the invoice.
There are 2 exceptions to Rule 37 which are:
1.Value of supplies made without consideration as specified in Schedule I of the Act shall be deemed to have been paid for the purposes of the second proviso of section 16(2).
Section 7(1)(c):Transactions without consideration but still supply. In such case, there is no question of payment of consideration to supplier. So above exception is clarificatory.
2.Value of supplies on account of any amount added in accordance with the provisions of section 15(2)(b) shall be deemed to have been paid for the purposes of the second proviso to section 16(2).
XYZ entered into a contract with customer. Supply price agreed between the two is Rs.4,00,000 plus GST. One of the expenditure of Rs.60,000 which XYZ(supplier) was to incur was actually incurred by the customer(recipient).XYZ billed the customer -Rs.3,40,000(4,00,000-60,000) plus GST on full value of Rs.4,00,000.
- Value of supply as per section 15(2)(b)=Rs.4,00,000(Rs.3,40,000+Rs.60,000)
- Actual payment to XYZ(supplier)=Rs.3,40,000
Still it will deemed that customer(recipient) has made full payment to XYZ(supplier) i.e. ITC reversal not required under section 16(2).
2.The amount of input credit availed 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 @18% p.a. for the period starting from the date of availing credit on such supplies till the date when the amount added to output tax liability.
XYZ entered into a contract with PQR. Supply price agreed is Rs.1,00,000.Incoice issued on 12th May. PQR availed the input tax credit of Rs.18,000[Rs.1,00,000*18%(tax rate)] on the same day. PQR does not pay price within 180 days. On 9th November(After 180 days),
Ans. PQR has to add the input tax credit of Rs.18,000 into the output tax liability in the return of November and has to pay interest of Rs.1598(18000*18%*180/365).Interest Period is from 12th May(Invoice date) to 8th November (Date on which amount is added to output tax liability).
4.The time limit specified in section 16(4) shall not apply to a claim for re- availing of any credit that had been reversed earlier.
Suppose in the above example, PQR made a payment along with the tax after 180 days i.e. On 24th December. Now PQR can claim input tax credit of Rs.18,000. The limit specified in Section 16(4) will not apply in this case because it is re-availing of credit that has reversed earlier.
Some more examples for understanding:
1.Certain supplies mentioned in Schedule I of the Act are deemed to be supplies even if made without consideration. Will the payment within 180 days rule apply even to such cases?
Ans. No. The value of supplies made without consideration as specified in Schedule I shall be deemed to have been paid for the purposes of the second proviso to section 16(2).(Proviso to Rule 37 of the CGST Rules,2017)
2.M/s ABC Ltd. has establishments in Mumbai and Kolkata. Supply of goods (open market value of Rs.5,00,000) made by M/s ABC Ltd. Mumbai to M/s ABC Ltd. Kolkata. M/s ABC Ltd. Mumbai paid IGST of Rs.60,000. Accordingly, M/s ABC Ltd. Kolkata availed the ITC of Rs.60,000. 2nd proviso to section 16(2) of CGST Act,2017 is applicable in the given case(i.e. to reverse the credit where payment is not made within 180 days from the date of invoice). Advise.
Ans. As per proviso to Rule 37(1) of the CGST Rules,2017, the value of supplies made without consideration as specified in Schedule I of the Act shall be deemed to have been paid for the purposes of the second proviso to section 16(2).
In the given case, M/s ABC Ltd. Kolkata is not required to reverse the input tax credit. Since as per section 25(5) of the CGST Act, 2017 two establishments are considered as establishment of distinct person and accordingly, supply made by one establishment to another establishment will be covered under Schedule I without consideration.
3. As per section 15(2)(b) of the CGST Act, 2017, any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both are added in the value of a supply. In such cases, no consideration is to be paid to the supplier. Whether ITC is available in such cases?
Ans. Value of supplies on account of any amount added in accordance with the provisions of section 15(2)(b) is deemed to have been paid for the purposes of the second proviso to section 16(2). Therefore, ITC is admissible. (Second proviso to Rule 37 of CGST Rules, 2017)