Constructive Payments to Vendors

[Ramesh Pokar]

Dear Experts

ABC pvt ltd. has been awarded a works contract by M/s XYZ Ltd. wherein they have an understanding that XYZ will directly make payments to vendors (Steel 7 cement) on behalf of and on request of ABC.

Vendors will issue bills to ABC only, however, payments will be made by XYZ to vendors on submission of bill-wise requests from ABC

Query:

Is this an indirect payment considered as payment to vendors (Constructive payments) and a 180-day reversal as per the second proviso of section 16 (2) will not attract? Assuming all such payments have been made before 180 days.

Is there any possibility that the GST department can dispute such indirect payment and ask to reverse ITC?

Thanks

[VENU K]

Section 15. Value of taxable supply

(1) The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

(2) The value of supply shall include–––

(a) .................

(b) 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;

So the addition to supply is as per Sec 15 (b)

Now Rule 37 which talks about Reversal of input tax credit in case of non-payment of consideration has the following proviso in sub rule 1

Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.

Second proviso to Sub section (2) of Sec 16 is as below

Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be 7[paid by him along with interest payable under section 50] in such manner as may be prescribed:

Now the answer to the question: Is there any possibility that the GST department can dispute such indirect payment and ask to reverse ITC?

Absolutely No possibility as the provisions are very explicit

[Shilpi Jain]

Payment to the vendor within 180 days is critical. whether by XYZ or ABC does not matter. 

However, when payment is made to XYZ, is the entry passed in books of ABC as if payment is made to the vendor? Then it becomes difficult for the department to identify non-payment.

[Padmanathan KV]

I agree with views of experts.

Assuming section 15(2)(b) is not attracted (i.e., the value of materials is also included in the Works Contract value), then the payment to Vendor by XYZ ltd would be settlement by way of book entry/adjustment in books of ABC Pvt ltd. This is also treated as valid payment for Second proviso to section 16(2).

One may refer to WB AAR in Senco Gold Limited - 2019 (5) TMI 701 - AUTHORITY FOR ADVANCE RULING, WEST BENGAL and CBEC circular 334/1/2008-TRU dtd. 29-02-2008 in the context of ST also.

[Vijay kumar]

As per Rule 37(1) of the CGSTR'17, the liability of 180 days is on the registered person who has availed the ITC. In the instant case, the billing is done by supplier to ABC and is ITC is availed by ABC Ltd accordingly since invoice is in their name and is received by them.  Hence, despite the fact that payment is done by XYZ Ltd, there is no escape from the condition of 180 days  as per Sn.16(2). Accordingly, the indirect payment method does not absolve ABC Limited from the said condition. 

37. Reversal of input tax credit in the case of non-payment of consideration.-

²[(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply ⁴[,whether wholly or partly,] along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall pay ⁵[or reverse] an amount equal to the input tax credit availed in respect of such supply ⁶[,proportionate to the amount not paid to the supplier,] along with interest payable thereon under section 50, while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:

[DS Pal]

Dear Experts,

Whether TDS deducted as per income tax law and credit of the same have also been given to the vendor in Form 26AS by filing TDS returns, will be considered as payment to vendor for compliance under GST for 180 days?

AI Summary

Constructive payments to vendors may satisfy GST payment condition and prevent ITC reversal if recorded as paid by the recipient. Whether third-party payments to suppliers on behalf of a registered recipient amount to constructive payments for GST purposes, invoking the 180-day input tax credit reversal under the second proviso to section 16(2). Contributors explain that where invoices are in the recipient's name and payment is recorded in the recipient's books or characterised as amounts the supplier was liable to receive but paid by another, the payment condition is treated as satisfied under section 15(2)(b) and Rule 37(1); absent such treatment, reversal may be required and open to departmental challenge.