Second & Third Proviso to Section 16(2) of the CGST Act 2017 provide that:
“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.“
This implies that if the recipient FAILS to make payment to the supplier within 180 days, he shall be liable to reverse the Input Tax Credit claimed by him on that invoice along with interest & can only reclaim it once he has made the payment of this invoice.
If an invoice is paid in part within 180 days & remaining part of the invoice remains unpaid beyond 180 days, proportionate ITC relating to the part of the invoice unpaid needs to be reversed by the recipient.
Thus, a regular creditors ageing needs to be undertaken by the taxpayer to ensure the provisions of this rule are correctly followed.
However one very pertinent issue still remains with respect to this proviso & that is “What constitutes failure to pay?”. Will it be deemed to be a failure even if the payment terms agreed between the vendor & the recipient are beyond 180 days?
Allahabad High Court in the case of Badri Prasad v. District Judge, Gonda [1983 All LJ 41 at 42] held that the parties can be said to have ‘failed to pay‘ only if it can be said that they neglected to do something which they were expected to do, or they left some possible or expected action unperformed. Further, several High Courts have analyzed the meaning of failure in various cases-
| ♦ | “Failure means that there is an omission on the part of the person to do something which it is possible for him to do” – held by High Court of Karnataka in the case of Thattessara Subbaraya v. Chinne Gowda & Ors.[AIR 1972 Kant 213] | |
| ♦ | “The word ‘failure’ means non-fulfillment of an obligation imposed“- held by High Court of Calcutta in the case of Royal Calcutta Turf Club Vs. Wealth Tax Officer[1985] 22 Taxman 438 (Calcutta) | |
| ♦ | “Failure means not doing something that one is expected to do“- held by High Court of Kerala in the case of Kavungal Kooppakkattu Zeenath v. Mundakkattu Sulfiker Ali [LQ 2007 HC 7225] |
Thus, on interpretation of the above, it can be implied that this proviso will apply only when there is any omission or failure to perform an obligation & thus when the payment terms agreed with the vendor are not infringed, this proviso should not apply,
However due caution needs to be exercised while applying this interpretation in the absence of a clear directive from the GST department.