IMBROGLIO OF 'SAME MONTH' UNDER RCM

 I am writing this article in the interest of those assessees who are availing  ITC unlawfully and also utilising the same unlawfully   under Reverse Charge Mechanism.  The issue worth discussion is whether a registered person who is required to discharge  GST liability as receiver of service or goods or both under RCM can avail ITC and set off liability in the same month. Here ‘same month’ stands for tax paid and availed as ITC and utilised in the same month on the basis of self-invoice duly evidenced by challan for  tax deposit. In other words, if tax is paid in cash in July, 19 on  the basis of self raised invoice under  RCM and can  that credit  be utilised in July, 19 itself for discharging tax liability for the month of  June, 19, especially, in the event of having NIL balance or inadequate balance of credit in their Electronic Ledger Account as on 30.6.19.

First of all, it is necessary to  go through relevant Sections of CGST Act, 2017 and Rules of CGST Rules, 2017.

 SECTION 16. Eligibility and conditions for taking input tax credit. - (1) Every registered person shall, subject to such conditions and restrictions as may be prescribed and in the manner specified in section 49, be entitled to take credit of input tax charged on any supply of goods or services or both to him which are used or intended to be used in the course or furtherance of his business and the said amount shall be credited to the electronic credit ledger of such person.

A perusal of above reveals that ITC, inter alia,  must be utilised in the course or furtherance of business. It is subject to Section 17 (5) of CGST Act. There is no confusion or doubt  about it.

SECTION 31. Tax invoice.- (1) A registered person supplying taxable goods shall, before or at the time of, -

(a) removal of goods for supply to the recipient, where the supply involves movement of goods; or

(b) delivery of goods or making available thereof to the recipient, in any other case,

issue a tax invoice showing the description, quantity and value of goods, the tax charged thereon and such other particulars as may be prescribed :

(2)   ---------------------------------------------------

3) Notwithstanding anything contained in sub-sections (1) and (2) -

(a)      --------------------------------------------------------------

(b)      ---------------------------------------------------------

(c)      --------------------------------------------------------

(d)        -----------------------------------------------------------------

(e)      ------------------------------------------------------------------------------

(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

(g) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of section 9 shall issue a payment voucher at the time of making payment to the supplier.

RULE 36. Documentary requirements and conditions for claiming input tax credit. -

(1) The input tax credit shall be availed by a registered person, including the Input Service Distributor, on the basis of any of the following documents, namely, -

(a)    an invoice issued by the supplier of goods or services or both in accordance with the provisions of section 31;

(b)    an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31, subject to the payment of tax;

(c)    a debit note issued by a supplier in accordance with the provisions of section 34;

(d)    a bill of entry or any similar document prescribed under the Customs Act, 1962 or rules made thereunder for the assessment of integrated tax on imports;

(e)    an Input Service Distributor invoice or Input Service Distributor credit note or any document issued by an Input Service Distributor in accordance with the provisions of sub-rule (1) of rule 54.

From a perusal of above, it is amply clear that self-invoice and  challan for  payment of tax in cash   are integrated. Self-invoice is invalid or  incomplete without payment of tax in cash through Electronic Cash Ledger. De facto  both  self-invoice and challan  are prescribed documents under Section 31(3)(f) of CGST Act, 2017 read with Rule 36(1) (b) of CGST Rules, 2017.

        Now the most crucial question  arises when to avail and utilize credit  under RCM i.e.  what is statutorily correct date and month for availing and utilizing ITC under RCM. Can the registered person under RCM  discharge tax liability for the previous month (June,19)  in the current month (July, 19) out of ITC earned/accrued from the goods or services or both received in same month i.e. July, 19 on the basis of  payment of tax in cash  against self-invoice issued in July, 19 itself ?

        To seek correct answer to this question, it is necessary to go through  the definitions of ‘Time of supply of goods’ and ‘Time of supply of services’ provided  under Sections  12 and 13 of CGST Act, 2017 respectively which are extracted as follows :-

SECTION 12. Time of supply of goods. - (1) The liability to pay tax on goods shall arise at the time of supply, as determined in accordance with the provisions of this section

(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earliest of the following dates, namely :-

(a) the date of the receipt of goods; or

(b) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(c) the date immediately following thirty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier :

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b) or clause (c), the time of supply shall be the date of entry in the books of account of the recipient of supply.

(4) In case of supply of vouchers by a supplier, the time of supply shall be -

(a) the date of issue of voucher, if the supply is identifiable at that point; or

(b) the date of redemption of voucher, in all other cases. 

SECTION 13. Time of supply of services. -(1) The liability to pay tax on services shall arise at the time of supply, as determined in accordance with the provisions of this section.

(3) In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be the earlier of the following dates, namely :-

(a) the date of payment as entered in the books of account of the recipient or the date on which the payment is debited in his bank account, whichever is earlier; or

(b) the date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier :

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be the date of entry in the books of account of the recipient of supply :

    In view of above, time of supply in respect of goods  under RCM will be the date of actual receipt of goods or date of payment made to the supplier or 30 days after the date of issue of invoice etc. Now suppose if the goods are received in July, 19 and tax is paid in July, 19 or thereafter as per time of supply of goods, ITC so earned cannot be utilised  in July, 19 for  discharging tax liability meant for the previous month (June, 19) because of having nil or insufficient balance of credit in Electronic Ledger as on 30.6.2019. In other words, such credit can  be used for discharging tax liability arisen  during  July, 19 and thereafter.

         Similarly, time of supply in respect of services under RCM will be the date of payment made or  after 60 days from the date of invoice by the supplier. Now if the services are received in July,19 and tax  liability  will arise in July,19  or thereafter and tax will be paid in cash after raising self invoice. . Challan for deposit of tax into Electronic Cash Ledger makes the  service  recipient  eligible for taking ITC on the strength of self-invoice.  Thus ITC under RCM is admissible from the date of challan and not  from retrospective date of previous month. Thus  ITC so earned cannot be utilised  in July, 19 for  discharging tax liability meant for the previous month (June, 19) because of having nil or insufficient balance of credit in Electronic  Credit Ledger as on 30.6.2019.

          From the above scenario of RCM, three situations  emerge:

1. When tax liability arises
2. When  tax is to be paid or has been paid;
3. When ITC is to be availed and utilised for discharging tax liability.

     In view of the legal position explained above, if any assessee who has ‘NIL’ balance or insufficient balance in its Electronic Credit  Ledger  as on 30.6.19 and debits tax from ITC accrued in July, 19 itself,  it will be termed as ‘over drafting’ and the defaulter has to pay interest for the default  period. Such off-setting liability does not conform to  the accounting principles also. In addition to recovery of interest and imposition of penalty,  such practice may  lead to or may be indicator of  mismatch of  ratio of Electronic Cash Ledger and Electronic Credit Ledger (earlier known as PLA and Cenvat Credit ratio). As per PLA-Cenvat ratio,  revenue  pertaining to the value addition portion must come from PLA (cash), if not covered up by  the quantum of export of goods and services plus credit of Capital Goods. The ratio has to be maintained.

         To cap it all, such mal-practice of setting off liability of tax pertaining to previous month ( e.g. June, 19)  from the ITC accrued  on account of receipt of goods and services in the current month (e.g. July, 19) must  be discontinued as it will lead to further investigation by the Department  into the reasons for mismatch of  Electronic Cash Ledger–Electronic Credit Ledger (Cash-ITC ratio). Reasons can be fatal indeed !

K.L.SETHI

Retd. Superintendent

Panchkula (Haryana)

Mob.98726 06628

I solemnly declare that above  views are my  original views and nothing has been copied from any article or book of any author.

K.L.SETHI