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THE INSIGHT

Non-payment of consideration within 180 days and ITC reversal in GST
By K V Srinivasamurthy, Sr. Consultant – Indirect Taxes, PKF Sridhar & Santhanam LLP, CA, Chennai
Jul 06, 2020

RECENTLY there was a news in the Media that the 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 do not clear the dues within 180 days of the date of invoice.

The above issue is addressed as below:

Section 16(2) of CGST Act, 2017, reads as follows:

•  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.

A plain reading of the provisions indicates as below:

•  Input tax credit reversal along with interest in the event of non-payment of consideration along with the tax payable thereon to the vendor within 180 days from the issue of the invoice.

•  Once the consideration along with the tax payable is paid to the vendor, the customer shall be entitled to re-avail the credit.

Form the above, it appears that the intention of the legislature was to ensure that the payment to the vendors are made in time and have considered that a period of 180 days would be reasonable period within which the payment ought to have been made and in default of the same, the input tax credit is to be reversed. It appears that this provision was especially made to ensure timely payment to MSME vendors.

Analysis:

The intention of the legislature appears to be fair keeping in mind the non-receipt of consideration along with the tax paid by the vendors especially with regard to MSME vendors, wherein t he MSMED Act, 2006 specifies 45 day credit  period  for the recipient of any goods or services to  pay  to the  MSME  supplier.

However, the legislature has specified a time limit of 180 days within which the payment needs to paid and in the event of default, input tax credit shall be reversed. This shall be applicable to all vendors including MSME vendors. Thus, the legislature appears to have a given a reasonable time period within which the payment ought to made. The object behind the provision appears to be a pressure tactic applied on the Customers to ensure timely payment to the vendors.

But it has failed to take into consideration the various factors governing the commercial activities in a business.

In a business environment, the entire transactions are carried out based on mutual understanding, which is the base for smooth running of the business.

Various terms and conditions are prescribed relating to supply of goods or services or both. These are mutually agreed between the parties to the contract and are specified as a clause in the purchase orders raised on the vendors. These are commercial parlances involved in a business. In other words, these are commercial matters.

There may be terms and condition as to the credit period for payment of consideration in certain cases wherein it may exceed the period of 180 days. For examples, there may be certain consideration which may be retained by the customer, especially in construction to ensure that the  contractor properly completes the activities required of him under the  contract and also in certain big industries as it relates to the performance of the machinery purchased.

The above terms and conditions are genuine and are private arrangements between the parties to the contract.

As such there cannot be any blanket embargo being imposed by way of provision to under Section 16(2) which calls for reversal of input tax credit in the event of non-payment of consideration within 180 days.

Sub clause (g) of Article 19(1) confers a general and vast right available to all persons to do any particular type of business of their choice. When the restriction to avail credit is in contrast to the generally accepted commercial practices being followed in the business, this would amount to violation of Article 19(1)(g) of the Indian Constitution, so long as this does not confer the right to do anything considered illegal in eyes of law.

The above factors do not appear to have been considered by the legislature while framing this enactment. Though the intention of the legislature appears to be fair, it has not addressed the genuine difficulties that would be faced by the taxpayers who carry on their business in accordance with the established commercial practices wherein it provides for payment of consideration beyond a period of 180 days which are mutually agreed upon by the parties to the contract and are declared as a specific clause in the purchase orders. In other words, these facts appeared to have missed the sight of the legislature while enacting such provisions in Section 16(2) of the CGST Act, 2017. Thus, the logic behind the introduction of this provision is quite amusing especially when the entire provision revolves around the consideration being paid as per the terms and conditions between the parties to the contract in accordance with the established commercial practices.

Had the legislature considered and kept in mind, the above facts and made the provisions in Section 16(2) with certain exclusion clauses it would have been fairer and would have benefited the genuine customers who carry on trade according the established commercial practices. Further it would not have been against the mandate of Article 19(1)(g) of the Indian Constitution.

Thus, the legislature should look into the above facts and introduce proper amendments to the provision to Section 16(2) with certain exclusion clause, which in turn will address the genuine difficulties that would be faced by the business community who pays the consideration beyond a period of 180 days according to the generally established commercial practices.

The provision is one sided:

The provision speaks only about the reversal of credit in the event of non-payment of consideration within 180 days.

The fact to be considered here is that the outward liability has been already remitted to the Revenue by the Vendor. In other words, the government receives its tax when time of supply is triggered irrespective of when consideration is actually paid, adequately protects the interest of revenue thus failing to justify the need for such provision.

But the provision does not make any mention of  reimbursing the tax to the supplier along with interest in case recipient reverses the ITC.

Before proceeding with the above, it is imperative to look into the following definitions:

•  Section 7(1) of the CGST Act, 2017 defines supply as below:

(a) all forms of supply of goods or services or both such as sale, transfer, barter, exchange, licence, rental, lease, or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business;

Thus, to treat a transaction to be a ‘Supply of goods or services' between unrelated parties, one of the condition is that there exists a consideration made or agreed to be made for such supply.

•  Levy and collection of GST: The levy and collection of GST shall be related to supply of goods or services.

Thus, in order to constitute a supply of goods or services or both, there shall be consideration paid for the said supplies. Otherwise, it fails the test as to be called as supply.

The entire transaction on non-payment of consideration within 180 days shall lose its characteristic of supply. In other words, it amounts to supply of goods or services or between unrelated parties, wherein no consideration is paid to vendors. Thus, it entirely defeats the definition of ‘supply of goods or services or both' since all the condition to consider a transaction as supply are not fulfilled.

Hence, the payment of GST by the Vendor by means of levy of GST on output services would become redundant and the amount in the hands of the revenue would not constitute as a tax being paid on outward supply.

In other words, this would constitute collection of tax without the authority of law. T here is a corresponding legal obligation on the part of the Government to refund the amount so collected because the collection in such cases would be without the authority of law. As per Article 265 of the Indian Constitution, no tax can be collected without any authority of law. In the event the collection of the amount was without authority of law, then it falls beyond the imprint of expression or expropriation under pretence of authority of law.

This payment would merely constitute a "Deposit" amount which was wrongly made. The amount so collected cannot be retained by the Revenue. This calls for reimbursing the tax to supplier along with interest in case recipient reverses the ITC.

But the provision to Section 16(2) of CGST Act, 2017 failed to consider the discussions as above and as such has not addressed the same.

Conclusion:

The Government should consider all the above facts and come out with a clarification in this regard. Failure on the part of Government to consider the above facts would result in the provision being termed as arbitrary, unjust and against the freedom of trade and commerce.

The GST regime promises seamless credit on goods and services across the entire supply chain. ITC is considered to be the lifeline of the GST regime. The intention of introduction of the Scheme of input tax credit in GST is to avoid the cascading effect (Tax on tax). GST works on tax credit method. In tax credit, the tax is levied on full supply price, but credit is given on receipt of the supply. Thus, effectively, tax is levied only on ‘Value added'.

The provision should not call for blanket reversal of input tax credit and it shall not apply to all taxpayers uniformly, wherein unequal taxpayers are treated equally.

Taking into consideration the above discussion, the proviso to Section 16(2) could be challenged in a Court of law as being arbitrary, unwarranted, unjust and against the mandate of Article 19(1)(g) of the Indian Constitution as long as it does not fall in line with the established commercial practices being followed by the business community.

To make necessary amendments in the provision to Section 16(2), which shall be beneficial both to the genuine vendors as well as genuine customers so the scheme of input tax credit introduced with the intention of eliminating cascading effect is achieved.

The trading community should make strong representation to the GST council in this matter through forums like ‘Chamber of Commerce' etc.

Since the issue is already a focus of attention as it has been highlighted in the media as well publication of various articles, it is high time, the government should turn its attention to this issue with an intention to address the genuine grievances of all the taxpayers uniformly to resolve the subject matter under discussion once for all. It is especially important during the Covid-19 pandemic.

[The views expressed are strictly personal.]