Reversal of GST credit on delayed payments

Companies which have postponed vendor payments due to a liquidity crunch brought on by the Covid-19 crisis will have to face further working capital woes due to credit reversal with interest under the goods and services tax framework, in case they don’t clear the dues within 180 days of the date of invoice.

Second & third proviso to Section 16(2), of the Central Goods & Services Tax (CGST) Act, 2017 provides for reversal and reavailment of ITC on account of non-payment. Same is reproduced below for ready reference:

 

Second Proviso to Section 16(2) :- “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.”

These cash-strapped companies will have to either make payments within 180 days or reverse the tax credit they have availed of. They will also have to pay interest at 18% to the government from the date the credit was taken.

In many cases, say people in the know, companies have issued cheques and even shown this as payment completed in their books of accounts, so that they could avail of GST credit.

However, as the 180-day deadline comes near, many of these companies facing a liquidity squeeze are realising that they may not be able to make the payments.
As per the current regulations, if the vendors don’t pay GST, companies cannot avail of credit.
 

Our Comments : While this provision may be a blessing in disguise for vendors as it indirectly encourages timely payment of consideration to vendors, it has opened up a can of problems for businesses during this pandemic. The larger worry for businesses has been on possible interest implications with delayed payment of consideration, including it applying for the retrospective period (from the date of availing of the credit) when such a pandemic and cash crunch was not even anticipated by businesses.

There is actually an anomaly and arbitrariness which may be tested in courts in case the problem is not resolved.

  Report