India: Non-payment of vendor invoices – A GST Conundrum

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published on 15 November 2022 | Reading time approx. 4 minutes


We have recently celebrated the 5 years of introduction and implementation of Goods and Services Tax (GST) in India. The GST ecosystem is designed to ensure smooth auto­mated compliances and filing process covering inter alia electronic records, e-filing, online payment, submission of forms, letters, etc. However, on the other hand, there are teething issues especially on account machinery issues/loose drafting of the legal provisions which is resulting in unwarranted litigation between the taxpayer and the tax administrators.


One of the major issues which is repeatedly being noticed pertains to payment of GST liability along with appli­cable interest on account non-payment of vendor invoices within a period of 180 days from the date of invoice. This article is intending to highlight various issues which are arising on account of interpretation of second pro­viso to Section 16(2) of the CGST Act, 2017 and Rule 37 of Central Goods and Services Tax Rules, 2017 which is amended from time to time.
  

Reversal of Credit/Payment of Output Liability?

The payment of GST to the vendors is available as Input Tax Credit (ITC) to the purchaser of goods or services subject to conditions prescribed under the CGST Act, 2017. Further the supplier of goods or services would add the said GST in its output liability and report the same in Form GSTR-1 on periodical basis.

One of the conditions prescribed under the CGST Act, 2017 compels the purchaser to settle the invoice of the vendor within 180 days from the date of issue of invoice (irrespective of reason for such non-payment) and in case it fails then ITC availed by the purchaser is required to be added to the output liability.
 
In this regard, it is logically unclear as to why such ITC availed by the purchaser is required to be reported as output liability by the purchaser in its periodical tax declarations filed under GST Regulations. Further, when such proviso was drafted, it was intended that such reporting can be done in Form GSTR-2 which was never introduced and implemented.
 
It is also pertinent to note that there is no “supply” which is effected by the purchaser, by non-payment of ven­dor invoices. Hence, reporting of such liability as output tax liability will result in payment of output tax liability without effecting a “supply” which is contrary to the basic levy under Section 9 of the CGST Act, 2017.
 
Hence, presently there is no mechanism to report such liability in the tax declarations which are enabled for filing to the tax payer. Consequently, this question is indeed required to be clarified by Government with a sui­table amendment/clarification or the courts would have interpret provisions in line with legal provisions and implementation mechanism.

Provisions of Rule 37 of CGST Rules

As explained above, the output liability (reversal of ITC) for non-payment of vendor invoices was expected to be reported by the taxpayer in Form GSTR-2 which was never implemented. However, Rule 37 of the CGST Rules which was defining the mechanism for payment liability and interest thereon continued to refer to Form GSTR-2/GSTR 3 for reporting of liability. Further, as this was expected to be added to the output liability, the recovery of interest was proposed as per the rate of interest notified for non-payment/short payment of tax.

However, in the absence of the procedures for reporting of the said liability and its payment, the taxpayer may even argue that the levy of tax itself fails for a period prior to 1 October 2022 as the machinery provisions for recovery is not prescribed (please note that an amendment is introduced w.e.f. 1 October 2022).

Having said above, for the past period, it is observed that the revenue authorities are proposing to demand in­terest from the date of invoice till the date of payment if the invoices are paid after 180 days from the date of invoice which has no backing in law as neither second proviso to Section 16(2) nor Rule 37 prescribes the date from where interest needs to be calculated. The prescribed provisions in law states that the liability shall be paid along with applicable interest “in the month following the period of one hundred and eighty days from the date of the issue of the invoice“.

Practical Difficulties

It is pertinent to note that the invoices can remain outstanding for payment to vendors on account of various rea­sons such as late submission of invoice, quality issues, price negotiations, legal disputes etc. However, such practical difficulties are completely overlooked by the authorities while raising demand of differential interest liabilities.

Hence, a taxpayer does not have clarity whether the interest liability shall be computed from the date of in­voice, date of availing ITC (as prior to such date no ITC was availed) or from 181st day from the date of invoice.

Conclusion

In the present case, there is lot of ambiguity in the GST Regulations even after amendment in CGST Rules, 2017 which are notified from 1 October 2022 with respect of manner of which liability to be discharged, relevant de­tails of table in which such liability to be reported, manner of calculation of interest, etc.

As explained above, the authorities are recovering interest from the taxpayer from the date of invoice till the date of payment of invoice even without giving any importance to the fact as to whether the taxpayer had suf­ficient ITC during the relevant period or not.

Therefore, considering the ambiguity surrounding the nature of tax liability, manner of reporting of liability and manner of calculation of interest, etc. the industrial associations may make suitable representations before GST Council/CBIC and seek for suitable clarifications in this regard. Further, if the taxpayers are already facing such issues during the audit conducted by the revenue authorities, they may also commercial decide to contest such interest liability.
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