Query on Rule 37 of CGST Rules and ITC Reversal, Goods and Services Tax - GST

[RAHUL MODI]

A taxpayer has been issued an order under Section 74 of the CGST Act, 2017, alleging wrongful availment of Input Tax Credit (ITC) due to non-payment to suppliers within 180 days as per Rule 37 of the CGST Rules, 2017.

The department has demanded reversal of ITC, along with interest and penalty, despite the following key facts:

1. ITC was initially availed as per Section 16(2) of the CGST Act, which allows ITC on invoice receipt even before payment to the supplier.
2. The payment to suppliers was made after 180 days but before the completion of the audit.
3. As per the third proviso to Section 16(2), ITC becomes eligible again upon payment to the supplier, meaning that this is merely a timing issue rather than a case of ineligible ITC.
4. ITC was not utilized at any point before payment to suppliers. The electronic credit ledger records substantiate that the ITC remained unutilized, demonstrating that this was a revenue-neutral transaction.
5. The department has imposed interest and penalty arbitrarily, despite there being no loss of revenue to the government.

Queries for Expert Opinion:

1. Is ITC reversal still required when payment has been made before the completion of the audit, considering the third proviso to Section 16(2)?
2. Does the timing difference in ITC availment warrant an interest liability, especially when ITC was never utilized?
3. Can this be considered a procedural lapse rather than a substantive violation, given that ITC is eventually eligible upon payment?
4. What judicial precedents or CBIC clarifications support the stance that ITC reversal is not required if payment is made later but before adjudication?
5. Would imposing a penalty in such a case align with the principles of natural justice, given that there was no intention to evade tax?

Looking forward to insights and expert opinions on this matter, especially with references to relevant rulings or GST Council clarifications.

Posts / Replies

[Sadanand Bulbule]

Your query is answered by CBIC Circular No.170/02/2022-GST dated 06/07/2022.

For academic purpose,refer Madras HC judgement vide 2025 (2) TMI 504 as regards to the necessity of payment of consideration to the supplier within 180 days from the date of invoice to avail ITC.

[RAHUL MODI]

Thank you for your response. We agree that CBIC Circular No. 170/02/2022-GST dated 06/07/2022 supports our stand on ITC reversal under Rule 37. However, the department has issued an order under Section 74, treating this as a case of intent to evade tax rather than a timing issue

[Sadanand Bulbule]

Issue of notice under Section 74 for such issue is absurd and unsustainable in the absence of “ intent to evade tax”. 

[Sadanand Bulbule]

In a way, the benefit of ITC under Section 16 is dynamic in nature and never absolute. So the recipient taxpayer has to be very careful and cautious.