input credit

[ashwin jivanlal]

Section 16 of CGST Act Povides Claims of Input Tax Credit,

sub section c of section 2 of section 16 put restriction on receiver of good/services on the basis of of credit reflected in 2B, receiver can claim credit only if supplier has filed form R1 and it is reflected in 2B.

sub section (d) of section 2 of section 16 provides that if receiver has not made the payments to supplier whithin 180 days from date of bill the receiver needs to reverse the input credit and liable to pay along with interest,

MY QUERY;

if supplier has paid tax and filed his form F1 showing the tax paid by him but receiver did not pay to supplier in 180 days , as per sub section c of 2 of 16 receiver can claim input credit but as per sub section(d) of 2 of section 16 receiver has not made payments to supplier in 180 days he has to reverce the credit and to pay with interest..

goverment has received gst payments in time the sufferer is supplier why gst is to be paid twice on same transaction double with interest? one supplier has paid in time and on reversal receiver will pay with interest. pl. answer.

[KASTURI SETHI]

The clause of 180 days is a sword on the receiver/buyer to pay the whole amount of the invoice to the supplier before the expiry of 180 days. It is in the interest of the supplier. The supplier's payment should not be held. It is also not the intention of Govt. to charge tax twice.

[Amit Agrawal]

I agree with Shri Kastruri Sethi Ji!

Concept of ease of doing business works only holistically - from point of supplier as well as buyer & overall trade practices etc. - and not from point of view of only one / singular element of entire trade / business.

Anyway, second proviso of Section 16 (2) (d) comes into play only when there is failure to pay even after passing of 179 days from date of invoice & not otherwise. If there is no 'failure' to pay, recipient continues enjoying ITC from day one (i.e. when he become eligible to avail such ITC) even though supplier had paid such taxes long back w.r.f date of invoice.

And, these are policy decisions taken by Govt. of the day and same is one of conditions put to vail ITC. In my view, challenge to such provisions on unconstitutionality grounds, will not succeed.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

* please read - in above post as" ...............when there is failure to pay even after passing of 180 days from date of invoice ......'

[Shilpi Jain]

However, one good thing is that once payment is made to the supplier credit can be taken without any time limit. So here govt. does not get unjustly enriched. Though, yes, interest is an additional cost for taxpayer and benefit for Govt.

[Alkesh Jani]

Dear All,

I find myself irresistible to express my view in this healthy discussion.

In agreement to views expressed by our experts, legally, when there is no consideration, it is not a supply, and also it cannot be termed for business or furtherance of business. Therefore consideration element is must for the purpose of supply. However, considering various market trends of the sectors, such a s garment industry , credit terms are approximately, 3 to 5 months, automotive parts, the credit period may be of 6 to 7 months etc. therefore law maker in their craftsmanship has given grace period of 180 days.

Regards, Input tax credit, it is to be earned, so if consideration is not given to supplier, it cannot be said it is earned. Although, it is not a supply, credit is allowed to be taken by the recipient and period of 180 days limit is set, if not paid to the supplier, reversal is must and interest is to be paid because, credit is availed without consideration.

Experts are requested to correct me if I am wrong.

Thanks

[KASTURI SETHI]

Sh.Alkesh Jani Ji,

You have echoed my views in toto. Late-cut !!

[Amit Agrawal]

'Failure to pay' comes into picture only when recipient was liable to pay to the supplier within 180 days from date of invoice. If payment-terms of the contract is for lengthier period - say 8 months - from date of invoice, there is no 'Failure to pay' to the supplier at the end of 180 days from date of invoice and second proviso u/s 16 (2) (d) will not come into picture immediately at the end of 180 days from date of invoice.

In such a case, second proviso u/s 16 (2) (d) will come into picture only after non-payment of consideration even after the lengthier period agreed (i.e. 8 months, in the example taken) as commercially agreed between supplier and recipient.

Similarly, as per general trade practice followed for 'Equipment / Machinery / Large system - supply and installation contracts' etc., some amount - say 10% of entire consideration - is payable by the recipient only after long period - say 1 to 3 years from date of installation & successful trial run - as per commercial terms agreed between supplier and recipient. Even in such case/s, there is no failure to pay for such balance consideration (10% in given example) at the end of 180 days from date of invoice and second proviso u/s 16 (2) (d) will not come into picture immediately at the end of 180 days from date of invoice for such balance consideration so remanding unpaid.

Hereto, Second proviso u/s 16 (2) (d) (for such balance consideration) will come into picture only after non-payment of such balance consideration even after the lengthier period agreed (i.e. 1 to 3 years from date of installation & successful trial run, as per example taken) between supplier and recipient.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Alkesh Jani]

Shri Kasturiji Sir, & Shri Amitji,

Thanks a lot Kasturiji Sir,

Shri Amitji, your views are surely acceptable and also debatable, but views expressed were for the query raised without any circumstances stated.

With Regards

[Amit Agrawal]

Dear Shri Ashwin Jivanlal Ji,

My views in post at serial number 2 above, were for the query raised without any circumstances attached.

W.r.t. my views in post at serial number 7 above, same were in continuation of discussion & in context of views subsequently shared by my learned colleagues. For example: Non-payment of consideration cannot be equated to non-existence of consideration, in my humble view.

Despite some interpretation & application issues about second proviso u/s 16 (2) (d) which may be there (as generally being the case for majority provisions of law), I think that we all (i.e. people who has responded to your query, till date) agree that said condition (i.e. by way of second proviso u/s 16 (2) (d)) - by itself - is valid & tenable under law.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[KASTURI SETHI]

Regarding the period of 180 days, I am of the view that no agreement can be executed between the supplier and the buyer in violation of Section 16 of CGST Act.

[Amit Agrawal]

In my most respectful submission, Section 16 does not bar any supplier & recipient to enter into a contract of supply between them where mutually agreed terms of payment are beyond 180 days from date of invoice.

I also feel that there is marked difference between '.... where a recipient fails to pay to the supplier ..... ' (the wordings used in second provisio u/s 16 (2) (d)) and '....... where a recipient does not pay to the supplier ......' (the wordings which are not used in second provisio u/s 16 (2) (d)). And both type of these wordings cannot be read as equal / same, in my view.

And, in my humble view, subsequent non-payment of consideration cannot negate the fact the fact that supply indeed took place (with due consideration) earlier.

My various posts earlier here are with this understanding of mine of relevant legal position/s.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Alkesh Jani]

Shri Amitji,

Your views are really appreciable as they are backed by force of law, let me first clarify my reply at Reply No.08 above, where surely acceptable means, it should be acceptable by law, and debatable means, when any doubts are raised it can be cleared by way of debate.

To gain knowledge, few questions arises for the views expressed at reply No.7 and are as under:-

1. can a contract be unlawful, or any clause is made, so as it may defeat the provisions of any law for time being in force?

2. can a contract be made where one party is unable to comply with any provisions of law time being in force?

3. As per GST Provision, if consideration is not paid within the limit set can be termed as “failure to pay”?

4. interpretation of a proviso can be done independently?

Thanks in advance

With Regards

[Amit Agrawal]

Dear Shri Alkesh Jani Ji,

First, please be clarify that I missed the fact that Post No. 8 was from you. I somehow thought the same is from original querist (as I had expounded my thought-process in post at serial No. 7). And hence, my reply at serial No. 9 was actually addressed to him. My apologies to you and Shri Ashwin Jivanlal Ji, the original querist for this misunderstanding!

Now, please let me try to answer questions raised by you, to the best of my understanding of law in the context of subject discussion & my earlier posts.(I find that some of your questions are open-ended and cannot be answered - at-least by me - without context behind those questions raised).

1. can a contract be unlawful, or any clause is made, so as it may defeat the provisions of any law for time being in force?

My views: Section 16 - or for that matter, any provisions of GST law - does not bar any supplier & recipient to enter into a contract of supply between them where mutually agreed terms of payment are beyond 180 days from date of invoice. Having such mutually agreed terms of payment does not defeat subject proviso under discussion here.

2. can a contract be made where one party is unable to comply with any provisions of law time being in force?

My views: I have not understood the question in the context of discussion about second proviso u/s 16 (2) (d).

3. As per GST Provision, if consideration is not paid within the limit set can be termed as “failure to pay”?

My views: There is no time limit set for payment of consideration under GST law and hence, there can not be “failure to pay” as per GST Provision/s.

4. interpretation of a proviso can be done independently?

My views: I have not understood the question in the context of discussion about second proviso u/s 16 (2) (d) read with main provisions of Section 16 (2) or Section 16 (1) for that matter.

I also wish to draw attention of wordings used for proviso under Rule 4 (7) of Cenvat Credit Rules, 2004 which reads as follows:

"Provided further that in case the payment of the value of input service and the service tax paid or payable as indicated in the invoice, bill or, as the case may be, challan referred to in rule 9 is not made within three months of the date of the invoice, bill or, as the case may be, challan, the manufacturer or the service provider who has taken credit on such input service, shall pay an amount equal to the CENVAT credit availed on such input service, except an amount equal to the CENVAT credit of the tax that is paid by the manufacturer or the service provider as recipient of service, and in case the said payment is made, the manufacturer or output service provider, as the case may be, shall be entitled to take the credit of the amount equivalent to the CENVAT credit paid earlier subject to the other provisions of these rules:"

This further support, to my mind, that there is marked difference between '.... where a recipient fails to pay to the supplier ..... ' (the wordings used in second proviso u/s 16 (2) (d)) and '....... where a recipient does not pay to the supplier ......' (the wordings which are not used in second proviso u/s 16 (2) (d)). And both type of these wordings cannot be read as equal / same.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Alkesh Jani]

Shri Amitji,

I am impressed with your reply and please accept my thanks for that. Just few more query and I will conclude the discussion from my end.

1. If the contract period is more than 180 days, will it have overriding effect to the subject proviso?

2. Will this contract effects, the time of supply?

3. What procedure is to be followed for availing the ITC, and when to reverse or not to reverse, with illustration, if possible.

4. Please explain the word “within” 180 days, in the said proviso

After your reply this will be worth desktop saving discussion.

Thanks once again.

[KASTURI SETHI]

Dear Sh.Alkesh Jani Ji,

I am influenced/moved with your insightful questions.

[Amit Agrawal]

Dear Shri Alkesh Jani Ji,

This can be endless discussion, specially when we are having altogether different orientation to interpret the issue under consideration. But, let me try to answer your queries to to the best of my understanding of law in the context of subject discussion & my earlier posts.

1. If the contract period is more than 180 days, will it have overriding effect to the subject proviso?

My views: NO, such contract is not overriding effect of subject proviso. It is just that said proviso will not come into play, till such payment-deadline (at mutually agreed between parties) end. Till that moment, there will be no failure of recipient to pay.

2. Will this contract effects, the time of supply?

My views: Time of supply needs to be determined u/s 12, 13 or 14 of the CGST Act, 2017. Broadly speaking, if due date of payment of consideration (as agreed between parties) is the basis / one of the factor relevant for determination of time of supply, then, such mutually agreed payment terms will come into play. This question cannot be answered without knowing any specific context of facts and its relevance (if any) to the various situations covered u/s 12, 13 or 14 for determination of time of supply.

3. What procedure is to be followed for availing the ITC, and when to reverse or not to reverse, with illustration, if possible.

My views: Please refer to my views & illustrations given in post no. 7 above. My suggestions about reversal to be done after 8 months / 1 to 3 years in given examples, is the result of effort of harmonious reading of said proviso with actual on ground commercial realities of our world so to ensure that commercial terms does not override / negate said proviso in any way.

4. Please explain the word “within” 180 days, in the said proviso

My views: Before one reaches the word “within” 180 days of subject proviso under discussion, there has to be "failure to pay" first by the recipient to the supplier. If there is no grievance of the supplier about any delay in receipt of payment (i.e. due to mutually agreed payment terms), said proviso will not come into effect. Again, as agreed by everyone earlier, this is not a revenue-generating proviso by the Govt. This proviso is to ensure that there is no inordinate delay of payment by the recipient to the supplier, while the recipient continues to enjoy ITC (against taxes paid long back by the supplier to the Govt on the billing basis). Once supplier is not an aggrieved party despite the fact that recipient has not made payment within 180 days from date of invoice (in other words, if recipient does not fail to pay to the supplier), subject proviso does not come into picture (i.e. till the time where recipient actually fails to pay to the supplier.).

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Amit Agrawal]

In the context of the ongoing discussion, Circular No. 122/03/2010 - ST dated the 30th April 2010 (bearing F. No. 137/71/2009 - CX.4) is relevant to my mind (even though it deals with period wherein Cenvat Credit of service tax was available to the recipient only when he pays value of services and service tax to the supplier)

Relevant portion is reproduced below for ready reference:

3. As per sub-rule (7) of Rule 4 of the CENVAT Credit Rules, 2004,

"Credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or as the case may be, challan referred to in Rule 9".

A doubt raised is as to whether the receiver of input service can take credit only after the full value that is indicated in the invoice, bill or challan raised by the service provider, and also the service tax payable thereon, has been paid. It has been represented that in many cases, after the invoice is issued by the service provider, the service receiver does not make the full payment of the invoiced amount on account of discount agreed upon after issuance of invoice; or deducts certain amount due to unsatisfactory service; or withholds some amount as security to be held during contract period. Due to these reasons the value paid may not tally with the amount indicated in the invoice, bill or challan. In such cases the department has raised objections to the taking of credit as it does not meet the requirement of the said sub-rule (7).

.............

(b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly.

[Amit Agrawal]

Kindly also note the ruling of tribunal in case of M/S. HINDUSTAN ZINC LTD. VERSUS C.C.E., UDAIPUR, as reported in 2017 (9) TMI 1639 - CESTAT DELHI , relevant portions of which are reproduced below:

"The appellant is aggrieved by order dated 14.09.2015 of Commissioner of Central Excise, Udaipur. The appellants are engaged in the manufacture of Zinc & lead concentrate liable to Central Excise Duty. They were also availing credit on various inputs and input services in terms of Cenvat Credit Rules, 2004. The appellants availed credit of service tax paid on input services. The dispute in the present appeal is that the appellants did not pay the full consideration for such service as per the invoice. In other words, a part of the amount showing in the invoice has been retained by the appellant in terms of contract towards performance guarantee. Applying the provisions of Rule 4 (7) of Cenvat Credit Rules,2004, the Revenue initiated the proceedings to disallow the Service Tax credit attributable to such consideration not paid to the service provider. The original authority upheld the disallowance of credit of ₹ 1,21,73,487/-. He also imposed the penalty of ₹ 12,00,000/- under Rule 15 (1) of CCE, 2004.

.........................

5. The facts of the case are not in dispute. We note that the original authority after referring to the above mentioned circular of the Board distinguished the same and disallowed the credit of service tax attributable to consideration not paid by the appellant. We note, in the present case, the appellants retained a portion of the consideration towards service rendered by the service provider in terms of contract towards performance guarantee. We note, the Board’s clarification is applicable to the facts of the present case. Identical set of facts came up for decision before the Tribunal in many cases. In appellant’s own case the matter has been decided holding that no reversal of credit under Rule 14 can be ordered in such situation. The reference can be made to the following decision:-

........................ "

[Amit Agrawal]

It is worth noting that above-quoted Board circular & case-law (& I can quote many more case-laws on similar footings) does not deal with wordings of proviso having wordings as 'fails to pay' but deals with rule / proviso as plain & simple as 'payment not made'.

Still, commercial realities have been given due importance & priority while interpreting then-prevalent rule / proviso (i.e. under Cenvat Credit rules, 2004) restricting / disallowing any credit to the recipient on account of non-payment of consideration.

Now, under GST, we got specific words in such proviso (i.e. '.... where a recipient fails to pay to the supplier ......'). And, one cannot at-least read & interpret present provision as bad or worse (from point of view of the recipient who has availed ITC) as what was prevalent under erstwhile regime of excise / service tax.

In my view, using these specific words (i.e. '.... where a recipient fails to pay to the supplier ...'), current provision under GST (as under discussion here) gives 'commercial understanding between parties' is given due importance as well as explicit priority while restricting / disallowing any credit to the recipient on account of non-payment of consideration.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion. And I fully respect contrary views.

[Amit Agrawal]

Summarizing my various posts above, including past history as explained earlier, my views are as under:

Once supplier is not an aggrieved party on account of mutually agreed payment-terms despite the fact that recipient has not made payment within 180 days from date of invoice (in other words, as recipient does not fail to pay to the supplier within 180 days from date of invoice), subject proviso does not come into picture (i.e. till the time where recipient actually fails to pay to the supplier.).

AI Summary

Input tax credit reversal: failure to pay supplier within the statutory period triggers reversal and interest, subject to payment terms. Section 16(2) proviso conditions continuance of input tax credit on payment to the supplier within a statutory period and mandates reversal plus interest where the recipient fails to pay. Contributors debate whether a supplier's prior tax payment or an agreed longer payment term prevents immediate reversal, arguing that the proviso operates upon an actual failure to pay (i.e., supplier grievance) rather than mere non payment at the statutory cut off; pre GST Cenvat circulars and cases are invoked to support a commercial context interpretation, and practical consequences including reclaiming ITC after payment and the applicability of interest are examined.