Whether ITC needs to be reversed after 180 days for non payment to Suppliers?

Whether ITC needs to be reversed after 180 days for non payment to Suppliers?

Ans. As per the second proviso to section 16(2), where a recipient fails to pay to the supplier of goods/services (other than in reverse charge cases), the amount towards the value of supply along with tax payable thereon, within 180 days from the date of  issue of invoice by the supplier, an amount equal to the ITC availed by the recipient is required to be added to his output tax liability, along with interest thereon, in such manner as prescribed. The third proviso to section 16(2) provides that the recipient shall be entitled to avail of such credit on payment made by him to the supplier of the amount towards the value of supply of goods/services along with tax payable thereon.

Further, as per rule 37(4), the time limit under section 16(4) shall not apply for re-availing the ITC availed in accordance with the provisions, that had been reversed earlier.

In the aforesaid section as well as the rule, the words used are “fails to pay to the supplier.” A view, therefore, is sometimes taken that the requirement of paying back / reversal of ITC is applicable only where there is failure on the part of recipient to pay as per the terms, consequently delaying the same beyond 180 days and not where the payment term is itself beyond 180 days as in that case no “failure” to pay the supplier can be attributed to the recipient. However, there is no ruling /authority/ guidance available to support such a view of distinguishing cases based on payment terms.

Therefore, provisions under the second proviso to section 16(2) are required to be treated as applicable in cases where payment has been made to the vendor beyond 180 days as per the relaxed payment terms and ITC will have to be paid back/ reversed, together with interest, after 180 days.

Incidentally, whereas the reversal of ITC due to non-payment to supplier within 180 days would also entail interest cost @18% p.a., there is also time limit for availing ITC, as provided under section 16(4) which cannot be lost sight of particularly in cases of long credit period, extending beyond 180 days.

In such cases, with a view to avoid interest @ 18% p.a. and also the risk of missing on the time line to avail ITC, it may be advisable to avail ITC when all other conditions are fulfilled but to pay back / reverse the same immediately (as payment will not be made within 180 days) and re-avail the credit on actual payment, for which there is no time limit as per rule 37(4) referred to earlier. Such a course of action would also be cash flow neutral.