Reversal of ITC if payment is not made to supplier within 180 days

Section-16 of the CGST Act, 2017 provides the conditions on the fulfillment of which ITC can be availed by a registered taxable person under GST. However, some restrictions have been placed on availment of ITC in cases where the buyer or recipient of goods or services fails to make payment of consideration to supplier. According to second proviso to section 16(2) of CGST Act, 2017, the recipient of goods or services is required to make payment to supplier within 180 days from the date of issue of invoice. However, this condition is not applicable where tax is payable under reverse charge mechanism.

What happens if the recipient fails to make payment within 180 days?

If the recipient fails to make payment to the supplier of goods or services or both, within 180 days of the date of issuing invoice, the amount of ITC availed would be added back to his output tax liability. The recipient will also be liable to pay interest thereon. However, it is also provided that If the recipient later makes payment of consideration to the supplier, he can again take ITC after payment of the consideration.

It should also be noted that if the recipient has made partial payment of consideration, the above reversal will be made on a proportionate basis. For example, the recipient has made 70% payment out of total consideration in 180 days, then only 30% ITC taken will have to be reversed after 180 days.

Whether reversal of ITC is necessary in case of part payment of consideration and tax by the recipient within 180 days?

The answer to this question is 'yes'. In a case where the recipient of the goods or services has made part payment of consideration and tax within 180 days, then, the recipient will have to make a reversal of ITC on a proportionate basis for that part of consideration and tax which is remaining unpaid within 180 days. 

Whether ITC is to be reversed where the recipient has made payment for tax but the value of supply is unpaid after 180 days?

Proviso to section 16(2) states that "where a recipient fails to pay to the supplier of goods or services or both, the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of an invoice by the supplier, an amount equal to the ITC availed by the recipient shall be added to his output tax liability".
Thus, the proviso clearly indicates that both payment of tax as well as value of supply within 180 days is mandatory for non reversal of ITC availed by the recipient of goods or services. If the recipient makes payment of tax but fails to make payment of value of supply, the proportionate reversal of input availed is required to be made.

How is the period of 180 days calculated for the purpose of ITC reversal?

The period of 180 days for the purpose of ITC reversal shall be calculated from the date of issuing the invoice. The date of receipt of goods or services/ date of ITC claim is not relevant for deciding the period of 180 days.

I have procured services for the purpose of being used in my business for Rs. 10 Lakhs (GST Rs. 1,80,000) and failed to make payment to supplier of service within a period of 180 days. Am I required to reverse ITC of Rs. 1,80,000 already availed?

Yes, the second proviso to section 16(2) of CGST Act, 2017 is equally applicable to ITC availed in respect of input services. Theerfore, you are required to reverse ITC availed Rs. 1,80,000 on account of non payment of consideration to the supplier of services within 180 days.

How will ITC be reversed on account of non payment of consideration within 180 days?

We have discussed above that where a recipient fails to pay to the supplier of goods or services, the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of an invoice by the supplier, an amount equal to the ITC availed shall be added to his output tax liability.
Further, Rule-37(1) provides that the details of such ITC availed to be reversed shall be furnished in FORM GSTR-2 for the month immediately following the period of 180 days from the date of issue of invoice. But it should be noted that FORM GSTR-2 has been suspended by the Government. Therefore, it will not be possible for the registered person to furnish such details in FORM GSTR-2. So, a question arise that what the registered person should do in this case.
In our opinion, till the date suitable amendment is made in Rule-37(1), the registered person can furnish the details of ITC to be reversed in FORM GSTR-3B and thus paying appropriate tax to the Government. 

How to calculate interest amount on ITC to be reversed?

According to Rule- 37(3), the registered person shall be liable to pay interest at the rate notified u/s 50(1) 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. Interest rate of 18% p.a. has been notified for this purpose. Therefore, the interest will be calculated from the date of availing credit on such supplies till the date when the amount added to the output tax liability, is paid.The date of invoice is not relevant for this purpose.

Now, the question arises as to what will be the date of availing input tax credit? For this purpose, we will look into section 41(1) of CGST Act which states that every registered person, shall subject to such conditions and restrictions as may be prescribed, be entitled to take the credit of eligible input tax, as self-assessed, in his return and such amount shall be credited on a provisional basis to his electronic credit ledger. It means that the registered person can take the input credit while filing his return and the same shall be credited on provisional basis to the electronic credit ledger. Therefore, the date of availing input tax credit shall be the date of filing the return (FORM GSTR-3B) when the ITC amount will be reflected on a provisional basis in the electronic credit ledger.

Can we re-avail the ITC once reversed?

Yes, ITC once reversed by the registered person due to non payment of consideration within 180 days can be re-availed. Proviso to Section 16(2) permits the registered person to re-avail the ITC reversed when the registered person makes payment of consideration on a later date after 180 days. 

Do we need to reverse ITC in respect of non payment of consideration relating to supplies received which are falling under reverse charge mechanism?

No, you are not required to reverse ITC already taken in respect of supplies received under reverse charge mechanism. Section 16 of the CGST Act clearly excludes such supplies which are under RCM from the applicability of ITC reversal provision on account of non payment of consideration within 180 days of the date of issue of invoice.

Will ITC be reversed where the recipient of goods or services has made payment of consideration to the supplier by way of book adjustment?

Payment of consideration to a supplier of goods or services can be made even by way of book entries or book adjustment. Therefore, the claim of ITC can not be denied on the mere ground that the consideration has not been paid to the supplier actually either in cash or banking mode rather by way of book adjustment. This view has been accepted in Senco Gold Limited, [2019] 105 Taxmann.com 143 (AAR- West Bengal). This view is also in agreement with Board Circular No. 122/3/2010- ST dated 30/04/2010 issued in the context of reversal under CENVAT Credit RUle, 2004 in pre-GST regime.

Even issue of credit note means payment received by the supplier. In Shiva Electricals v. CST (2007) 7 STR 35 = 3 STT 105 (CESTAT) it was held that issue of credit notes also amounts to payment to recipient- relying on Mohd. Ekram Khan c. CTO 2004 (6) SCC 1083 (SC), where it is held that issue of credit note to the client is also a form of payment- view also upheld in CST v. Shiva Analyticals (2009) 21 STT 328 (Karn. HC).

What are the exceptions to the rule of ITC reversal where the consideration is not paid within 180 days?

As per the proviso to Rule-37(1), in cases where GST is payable without consideration as specified in Schedule-I of CGST Act, the amount shall be deemed to have been paid. Schedule-I of CGST Act, 2017 specifies transactions made without consideration on which GST is payable. In the case of such specified transactions, no ITC reversal is required as no consideration shall be paid in respect of such transactions and the amount of consideration shall be deemed to have been paid.

Similarly, in respect of any amount that the supplier is liable to pay in relation to any 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 as per clause (b) of section 15(2), no ITC reversal is required.