Applicability of ITC reversal as per S.16(2)

[Pradeep Singhi]

We are providing works contract services to the government. After getting the contract/tender from government, we sub-contract the work to the sub-contractor. All the terms and conditions agreed upon with the sub-contractor are same as agreed with government.

We have the following queries with regards to the same:

1. Whether ITC reversal is applicable as per S.16(2) (provision of 180 days), if we withhold the money of our sub-contractor which are in the nature of security deposit and which are paid back to the sub-contractor as and when government release our security deposit ?

2. Whether ITC reversal is applicable as per S.16(2) (provision of 180 days), if we deduct the money of our sub-contractor which are in the nature of charges (testing charges, cement mix charges, etc.) ?

Notes:

1. Sub-contractor pays the GST on Total Taxable value (including the charges deducted by us)

2. Above mentioned deduction of charges and deposits are as per the terms and conditions of the contract.

[KASTURI SETHI]

1. Whether ITC reversal is applicable as per S.16(2) (provision of 180 days), if we withhold the money of our sub-contractor which are in the nature of security deposit and which are paid back to the sub contractor as and when government release our security deposit ?

Reply :No reversal is required. Security deposit is not sale proceeds. It is not the amount to be considered towards the value of supply. In case the security is forfeited, then it will be different scenario for the purpose of leviability of GST. At present this is not the situation.

2. Whether ITC reversal is applicable as per S.16(2) (provision of 180 days), if we deduct the money of our sub-contractor which are in the nature of charges (testing charges, cement mix charges, etc.) ?

Reply : Such charges should form the part of transaction value for the purpose of payment of GST by the supplier. The sub-contractor has independent legal entity. See Section 15 (2) of CGST Act in this context.

Terms and conditions of an agreement cannot be set out in violation of letter and spirit of GST Acts.

[Sadanand Bulbule]

Dear querist

Sh. Sethi Sir has meaningfully deciphered the provisions relating to Section 16[2] and reversal of ITC [on security deposit in whatever name it is called] under Section 16[2][d]]. However there are exceptions to the condition placed under Section 16[2][d] depending upon the mutually agreed terms of duration of payments on record prior to the supply.

Trade payable is the "consideration" towards the supply of goods or services or both. Interestingly security deposits/loans are outside the domain of "consideration". In my opinion, the GST Act cannot impose the condition as regards to the duration of payment of "consideration" within 180 days only. There is absolute freedom for the vendors and the recipients to choose the duration of payment of consideration depending upon the nature of unusual and long term business relations. Section 16[2][d] applies to the cases of trade payable prevailing in the normal of course of transactions which do not enjoy insulation of such exceptional terms.

Experts are welcome to the forum with their expressions.

[KASTURI SETHI]

Sh.Sadanand Bulbule Ji,

Sir, The issue of 180 days was in the news. There is every possibility that the ''sword'' of 180 may be lifted in the Budget tomorrow. However, in support of your above views, here is a case law :-

2022 (12) TMI 653 - DELHI HIGH COURT - SUNNY JAIN Versus UNION OF INDIA

[Sadanand Bulbule]

Dear Sh. Sethi Sirji

Thank you so much for your quick pouring of abundant relevant material on the subject under discussion. Let the wish of the business come true as far as much sought relief under Section 16[2][d] is concerned in the upcoming Union Budget 2024-25 to be presented on 01/02/2024.

[Amit Agrawal]

I 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.

Though the queries raised above are not very clear at-least to my mind, attention in invited to very lengthy discussion we had on TMI under Issue-ID: 118298 bearing subject-line as 'input credit'.

'Failure to pay' comes into picture only when recipient was liable to pay to the supplier within 180 days from date of invoice. Where payment-terms of the subject sub-contract work is for lengthier period - say within 15 days from the date when payment is received by principal contractor from its client i.e. Government, there is no 'Failure to pay' to the supplier at the end of 180 days from date of invoice when payment get actually made after say, one year from date of invoice but within agreed period of payment-terms (i.e. 15 days from the date when payment is received by principal contractor from its client i.e. Government).

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

[Amit Agrawal]

I consistently hold similar views of Shri Sadanand Bulbule Ji to the effect that the GST Act does not impose the condition as regards to the duration of payment of "consideration" within 180 days only. There is absolute freedom for the vendors and the recipients to choose the duration of payment of consideration depending upon the nature of unusual and / or long term business relations etc. Second proviso u/s 16[2][d] applies to the cases of trade payable prevailing in the normal of course of transactions which do not enjoy insulation of such exceptional terms of contract.'.

And I duly elaborated my reasoning during very lengthy discussion we had on TMI under Issue-ID: 118298 bearing subject-line as 'input credit'.

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

[Amit Agrawal]

Please treat this as pure academic discussion:

For purpose of this post, lets assume that there is failure to pay consideration within 180 days and situation is hit under second proviso of Section 16(2).

Now, question is what are the adverse repercussions therefrom for the tax-payer who has availed & also, utilised such ITC?

A legal view that interest u/s 50 cannot be levied on subject situation under discussion here is as follows:

A. Second proviso to Section 16(2) requires 'an amount equal to the input tax credit availed by the recipient shall be paid by him along with interest payable under section 50, in such manner as may be prescribed' in a pre-defined situation.

B. Rule 37 requires tax-payer to pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50.

C. Prior to Substitution vide NOTIFICATION NO. 19/2022–Central Tax dated 28-09-2022, Rule 37(2) reads as follows:

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. Present Rule 37 does not have any such clause.

D. Prior to omission vide NOTIFICATION NO. 19/2022–Central Tax dated 28-09-2022 w.e.f. 01-10-2022, Rule 37(3) reads as follows:

"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."

Present Rule 37 does not have any such clause.

E. Section 50(1) deals with 'fails to pay the tax or any part thereof to the Government within the period prescribed' whereas present Rule 37(1) requires payment or reversal of an amount equal to the input tax credit availed etc. 'Payment or reversal of an amount equal to the input tax credit availed' cannot be equated with 'fails to pay the tax or any part thereof to the Government within the period prescribed' and hence, Section 50(1) does not apply to the situation under discussion here.

F. Section 50(3) deals with 'the input tax credit has been wrongly availed and utilised' whereas in situation under discussion here, ITC was correctly availed. Hence, Section 50(3) also does not apply to the situation under discussion here.

G. Second proviso to Section 16(2) does not make initial ITC taken as wrongly taken or wrongly utilised.

G1. In support, I quote relevant lines from Para 21 from above-quoted ruling by Shri Kasturi Sethi Ji (i.e. SUNNY JAIN Versus UNION OF INDIA - 2022 (12) TMI 653 - DELHI HIGH COURT, which reads as follows:

"21. It is, clearly, not the scheme of the CGST Act to restrain a person from availing the ITC till he has paid the supplier for such goods/services. A recipient of goods/services who receives goods and services on supplier’s credit is also entitled to avail the ITC. ..........................."

H. Furthermore, Rule 88B (i.e. Manner of calculating interest on delayed payment of tax) does not cover situation under discussion here. So, there is no method of calculating interest u/s 50(1) read with Section 50(2) OR u/s 50(3) is prescribed till date.

I. When Section 50 read with Rule 88B cannot be applied to levy interest in subject situation, the words used in present 'Second proviso to Section 16(2)' & present Rule 37 (i.e. interest payable under section 50) should be interpreted as 'interest payable i.e. NIL under section 50'.

J. Substitution u/r 37(2) and omission of Rule 37(3) - as explained in Para C & D above - further support this legal view that 'interest u/s 50 cannot be levied on subject situation under discussion here'.

L. Lastly, question which also needs to be considered is 'Whether can Section 73/74 be used to raise demand upon tax-payer just because tax-payer has done 'non-reversal OR non-payment of an amount' despite second proviso to Section 16(2) read with Rule 37'? I have my doubts even there (though this requires much more study and deliberation) as Section 73 / 74 deals with ITC wrongly availed or utilised and I see that subject issue under discussion here does not fall either under 'ITC wrongly availed' or 'ITC wrongly utilised'.

L1. For support, I again draw your attention to Para G1 above & relevant lines from Para 21 of said ruling of said Delhi HC ruling.

As said at the start, Please treat this as pure academic discussion & nothing more.

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

[Sadanand Bulbule]

Thank you so much Sri. Amit Sirji for your comprehensive response.

[Ganeshan Kalyani]

In my view, ITC need not be reversed in both the scenario.