Query on Rule 37 of CGST Rules and ITC Reversal

[RAHUL MODI]

A taxpayer has been issued an order under Section 74 of the CGST Act, 2017, alleging wrongful availment of Input Tax Credit (ITC) due to non-payment to suppliers within 180 days as per Rule 37 of the CGST Rules, 2017.

The department has demanded reversal of ITC, along with interest and penalty, despite the following key facts:

1. ITC was initially availed as per Section 16(2) of the CGST Act, which allows ITC on invoice receipt even before payment to the supplier.
2. The payment to suppliers was made after 180 days but before the completion of the audit.
3. As per the third proviso to Section 16(2), ITC becomes eligible again upon payment to the supplier, meaning that this is merely a timing issue rather than a case of ineligible ITC.
4. ITC was not utilized at any point before payment to suppliers. The electronic credit ledger records substantiate that the ITC remained unutilized, demonstrating that this was a revenue-neutral transaction.
5. The department has imposed interest and penalty arbitrarily, despite there being no loss of revenue to the government.

Queries for Expert Opinion:

1. Is ITC reversal still required when payment has been made before the completion of the audit, considering the third proviso to Section 16(2)?
2. Does the timing difference in ITC availment warrant an interest liability, especially when ITC was never utilized?
3. Can this be considered a procedural lapse rather than a substantive violation, given that ITC is eventually eligible upon payment?
4. What judicial precedents or CBIC clarifications support the stance that ITC reversal is not required if payment is made later but before adjudication?
5. Would imposing a penalty in such a case align with the principles of natural justice, given that there was no intention to evade tax?

Looking forward to insights and expert opinions on this matter, especially with references to relevant rulings or GST Council clarifications.

AI Summary

Taxpayer Challenges ITC Reversal Under Section 74 CGST Act; Disputes Penalties, Interest as Revenue-Neutral Issue A taxpayer faced an order under Section 74 of the CGST Act, 2017, for allegedly wrongfully availing Input Tax Credit (ITC) due to non-payment to suppliers within 180 days, as required by Rule 37. The taxpayer argues that ITC was availed correctly under Section 16(2) and remained unutilized, making this a timing issue rather than a violation. The department's imposition of interest and penalties is contested as arbitrary, with the taxpayer seeking expert opinions on whether ITC reversal is necessary, the applicability of interest, and the appropriateness of penalties in this revenue-neutral situation. References to CBIC Circular No. 170/02/2022-GST and judicial precedents were discussed.