Section 16(2) of the Central Goods and Services Tax Act, 2017 (CGST Act, 2017) starting with a non-obstante clause overriding anything contained in the said Section 16 provides that no registered person shall be entitled to any input tax credit (‘ITC’) unless the stipulated conditions are specified. The said conditions relate to the possession of the valid document, furnishing of the details of the said document by the vendor, actual receipt of the goods or services or both, the actual payment of tax to the Government and filing of the return.

We are concerned here with the condition stipulated in clause (c) of sub-section (2) of Section 16 of the CGST Act, 2017 which provides that:

“(c) subject to the provisions of *Section 41 **[xxx], the tax charged in respect of such supply has been actually paid to the government either in cash or through utilisation of input tax credit admissible in respect of the said supply.”

• * Section 41 has been substituted by Finance Act, 2022 and notified w.e.f. 01.10.2022 vide vide Notification No. 18/2022–Central Tax dated 28th September, 2022. Section 41 of the CGST Act, 2017 allows taking ITC in electronic credit ledger on self-assessment basis.
• ** words “or section 43A” omitted by Finance Act, 2022. The words were ‘Section 43A of CGST Act which ITC on basis of invoice uploaded by the supplier. These words were inserted vide CGST (Amendment) Act, 2018, but never notified and never made effective and now has been omitted vide Finance Act, 2022 and w.e.f. 01.10.2022 vide Notification No. 18/2022–Central Tax dated 28th September, 2022, whole section 43A has been omitted.

As per section 16(2)(c) of the CGST Act, 2017, the recipient of goods and services can avail ITC only if suppler has deposited the tax with Government either in cash or through utilisation of ITC. This is subject to Section 41 of the CGST Act, 2017 which provides that the registered person can take ITC on self-assessment basis, which will be credited to his electronic credit ledger. If the suppler has not paid the tax, the recipient is required to reverse ITC and pay interest.

Presently there is no mechanism by which the recipient of goods or services would know or verify whether supplier has deposited tax with the Government. Thus, recipient is proposed to be penalised for no fault of his.

Reversal of ITC if payment not made to supplier within 180 days w.e.f. 01.10.2022

Where a recipient fails to pay to the suppler of goods or services or both the amount towards value of supply along with tax within 180 days from the date of issue of invoice, an amount equal to ITC availed by the recipient shall be added to his output tax liability, along with interest thereon. The second and the third proviso to the said Section 16(2) further provides as under: “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 added to his output tax liability, along with interest thereon, in such manner as may be prescribed : Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.”

In view of the above, the recipient can take ITC only if tax has been actually paid by supplier. Then, why Government is concerned about payment of invoice amount to supplier? It seems that the intention is to avoid bogus transfer of ITC e.g. if a person has excess ITC, he can pass on this credit to others

The aforesaid second proviso, therefore, seeks to provide that an amount equal to ITC availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed (Provided in Rule 37) where the given recipient fails to pay to the supplier the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of the invoice. The third proviso further provides that the recipient shall be entitled to avail the credit (that has been added to the output tax by virtue of the second proviso) on payment made by him of the amount towards the value of supply along with tax payable thereon.

Rule 37 of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules, 2017’) contains the mechanism to effectuate the aforesaid provisions. Now w.e.f. 01.10.2022 vide Notification No. 19/2022-Central Tax dated 28.09.2022 the said Rule 37 has been amended. In exercise of the powers conferred by section 164 of the Central Goods and Services Tax Act, 2017, the Central Government, on the recommendations of the Council, has, vide Notification No. 19/2022-Central Tax dated 28.09.2022, made the “Central Goods and Services Tax (Second Amendment) Rules, 2022 further to amend the Central Goods and Services Tax Rules, 2017 and these rules shall come into force with effect from the 1st Day of October, 2022.

The amendment in Rule 37 prescribed by Central Goods and Services Tax (Second Amendment) Rules, 2022 are as under:

In rule 37 of the said rules,– (a) for sub-rules (1) and (2), the following sub-rules shall be substituted, namely:

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 along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay an amount equal to the input tax credit availed in respect of such supply 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:
   • Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16
   • 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
2. Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).
3. (b) sub-rule (3) shall be omitted;”

Before the amendment vide Notification No. 19/2022-Central Tax dated 28.09.2022 the provisions of Rule 37 of the CGST Rules, 2017 read as under:

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

1. A registered person, who has availed of input tax credit on any inward supply of goods or services or both, but fails to pay to the supplier thereof, the value of such supply along with the tax payable thereon, within the time limit specified in the second proviso to sub-section (2) of section 16, shall furnish the details of such supply, the amount of value not paid and the amount of input tax credit availed of proportionate to such amount not paid to the supplier in FORM GSTR- 2 for the month immediately following the period of one hundred and eighty days from the date of the issue of the invoice:Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16.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.
2. 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.
3. 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.
4. The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.”

After the amendment vide Notification No. 19/2022-Central Tax dated 28.09.2022 the provisions of Rule 37 of the CGST Rules, 2017 read as under:

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

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 along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16, shall pay an amount equal to the input tax credit availed in respect of such supply 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: Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16: 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.
2. (2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).
3. omitted
4. The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.”

Prior to 01.10.2022, i.e. old Rule 37(1) r/w 37(2) of the CGST Rules, 2017 provided for furnishing the details of failure in making the payment within 180 days in FORM GSTR 2 and the said amount was to be added to the output tax liability in the said period. Hence the said Rule provide for the addition of the amount to the output tax liability but that was to happen only after the taxpayer furnished the details in FORM GSTR 2. Now, w.e.f. 01.10.2022, the amount in question is required to be reversed in FORM GSTR 3B as per the amended Rule 37 of the CGST Act, 2017 and the furnishing of FORM GSTR 2 has been abandoned.

Before the aforesaid amendment i.e. prior to 01.10.2022, Old Rule 37of the CGST Act, 2017 was provide that only an amount proportionate to the invoice value that remains unpaid after the period of 180 days is required to be added. Whereas, the amended Rule 37(1) misses the word ‘proportionate’. Now, whether the entire ITC is required to be reversed even if only a proportionate amount remains unpaid at the end of 180 days?

Further, old Rule 37(3) was specifically providing that the interest on the amount that will be added to the output tax liability shall be determined u/s 50(1) of the CGST Act, 2017 for the period starting from the date of availing credit till the date when the amount added to the output tax liability. The amended Rule 37 omitted the entire sub-rule (3) of Rule 37, but provides under sub-rule (1), that the interest shall be payable u/s 50 while furnishing the return in FORM GSTR-3B.

Re-availing the credit after payment to supplier:
It is to be noted that the credit of ITC reversed under Rule 37 (1) of the CGST Rules, 2017 (i.e. reversal of ITC in case of non-payment of consideration within 180 days) can be taken after payment to the supplier of goods or services or both. As per Rule 37(4) of the CGST Rules, 2022, the time limit specified in section 16(4) of the CGST Act, 2017 will not apply to such re-credit. However, the validity of such Rule 37(4) is required to be tested because Section 16(4) of the CGST Act, 2017 provides maximum time period to avail credit and rules cannot override main provisions i.e. sections.