ITC REVERSAL UNDER RULE 37: RECENT CHANGES

[Padmanathan Kollengode]

Introduction:

Amongst the recent slew of amendment that are effective from 01-07-2022 under the GST, one of the major amendments is in rule 37 of CGST Rules. Rule 37 is the machinery provision to second proviso to section 16 of the CGST Act, which reads 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.

A plain reading of the proviso would indicate that where a recipient does not pay the amount towards the value of supply along with tax payable thereon to the supplier within a period of 180 days, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability.

Before the amendment to Rule 37 effective from 01-07-2022, the recipient was required to 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 180 days from the date of the issue of the invoice. Further, such amount furnished had to be added to the output tax liability for the month in which the details are furnished.

The registered person was also liable to pay interest at 18% under section 50(1) for the period starting from the date of availing ITC till the date when the amount added to the output tax liability is actually paid.

Section 38 read with Rule 60 provided for furnishing of details of outward supply in Form GSTR-2. However Form GSTR-2 was not operational in the GSTN Portal since it was extended vide Notification No. 30/2017 CT dated 11.9.2017 and Notification No. 54/2017 CT dated 30.10.2017.

The Finance Act, 2022 substituted Section 38 with effect from 01^st October 2022. Consecutively, Rule 37 was also amended vide Notification No. 19/2022-CT dated 28.09.2022 as under:

Comparative analysis of Rule 37:

Pre-amendment	Post-amendment
(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	(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) 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.	(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) 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.	[omitted]

Consequences of amendment:

Before the amendment to rule 37, it was explicitly provided that the amount of input tax to be furnished in Form GSTR-2 and added to output tax liability was proportionate to value of supply and input tax credit remaining unpaid. However, after the amendment, it is not clear whether the recipient has to pay the entire amount of input tax credit availed by him or only proportionate credit in Form GSTR-3B, if only a part of value of supply remains unpaid.

After the amendment to Rule 37, where the amount towards the value of supply and tax payable thereon is not paid within 180 days, the input tax credit availed has to be paid through Form GSTR-3B. Sub-rule (2) of Rule 37 provides that where subsequently payment is made towards the value of such supply along with tax thereon, the registered person shall be entitled to re-avail the input tax credit referred to in sub-rule (1) of Rule 37. A question which arises here is whether a registered person shall be entitled to re-avail the input tax credit if the payment of input tax credit availed was made through Form DRC-03 instead of Form GSTR-3B.

Conclusion:

After the amendment to Rule 37 with effect from 01-07-2022, there are lot of ambiguities still lurking, which requires ironing out by way of suitable clarifications from the Government.

Discussions to this article

[Aditya Gondiker]

Hi Padmanathan,

Further to your observation on the omission of reversal of credit in proportion to non-payment of consideration, it is pertinent to note that the amended Rule 37 has also omitted sub-rule (3) which existed earlier which provided that the interest is to be paid from the date of availment of credit till the date of payment.

However, on removal of the said sub-rule will the department now be entitled to recover interest from the date of invoice till the date of reversal made in Form GSTR 3B though the said credit might be availed much later then the invoice date?

Would be interested to know your thoughts on this.

[Padmanathan Kollengode]

Aditya sir,

With respect to the omission of "proportionate", the provision has been amended vide Notification No. 26/2022- central tax dated 26/12/2022 and this anomaly has been resolved.

With regard to your observation, which is very important and valid, it would be highly unfair to collect interest from the date of invoice even though the credit is availed later. This goes against the basic understanding that interest is only compensatory in nature as held by Supreme Court in various Judgements including Prathiba Processors. The validity of the levy of interest from the date on invoice rather than from date of avavilment has to be challenged before the Court.

Thank you for highlighting this!