[Opinion] Decoding amendments to provisos to Section 16(2) of the CGST Act

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  • 2 Min Read
  • By Taxmann
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  • Last Updated on 15 February, 2023

Section 16(2) amendments

The Goods and Services Tax law provides for safeguard to the supplier by denying the benefit of ITC to the recipient where he fails to pay consideration within 180 days. However, the ramifications of the provision has been haunting genuine recipients since the inception of GST law.

The Finance Bill, 2023 proposes to amend second proviso to Section 16(2) of the CGST Act to provide that where recipient fails to pay to the supplier, amount towards value of supply along with tax payable within 180 days from issue of invoice by the supplier, an amount equal to ITC availed by recipient shall be paid by him along with interest payable under Section 50 in such manner as may be prescribed.

Hence, where the recipient has an obligation to pay and does not make the payment within 180 days from the date of invoice, he shall be required to pay or reverse the amount of value not paid and proportionate ITC along with interest.

The existing provision states that the aforesaid amount equal to ITC availed by recipient shall be added to his output tax liability along with interest thereon.

According to the Memorandum explaining the provisions in the Finance Bill, 2023, the said amendment has been brought in order to align the said sub-sections with the return filing system provided in the said Act. However, it is imperative to note that the words ‘shall be added to his output tax liability’ have been substituted.

A. Pay or reverse the amount of value and proportionate ITC

  • For understanding the purpose of the aforesaid change, the changes to the corresponding Rule 37 of the CGST Rules are to be noted. The said rule before its substitution w.e.f. 01.10.2022, stated that ITC on account of delay in payment was to be added to the output tax liability of recipient for the month in which the amount of value not paid and proportionate ITC is furnished in GSTR-2. The same was substituted and now states that the recipient shall ‘pay or reverse’ such proportionate ITC while furnishing GSTR-3B.
  • Meaning thereby, it was only after the above amendment that Rule 37 clearly specified that ITC on account of delay in payment was to be reversed/paid in GSTR-3B.
  • However, even in light of the same, existing provision was not amended to the said effect to incorporate an enabling clause stating that the recipient shall ‘pay or reverse’ the said ITC.
  • Also, Table 4 of the GSTR-3B was amended to provide for reporting of reversal of ITC in case of failure to make payment to supplier within 180 days from date of invoice under Table 4(B)(2) of GSTR-3B.

The unamended provision was requiring the amount to be added to output tax liability instead of payment/reversal. The proposed amendment has aligned the provision with the format of return to provide for reversal.

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