Introduction:
Availement of Input Tax Credit (ITC) has always been a contentious issue. Taxpayers would like to avail most of the ITC whereas the department more often than not would like to challenge the availment of ITC. This tug of war often results in never-ending litigation. Further, the situation is very critical for reverse charge liability and availment of ITC thereon. Taxpayers might have missed/delayed payment of reverse charge liability and are caught with the issue of eligibility of ITC on the delayed payment of Reverse Charge liability.
Before we deep dive into the issue of eligibility for such ITC let us first run through relevant legal provisions of the CGST/Relevant State GST Act (hereinafter referred to as “Act”) and CGST/Relevant State GST Rules (hereinafter to as “Rules”)
Relevant Legal Provisions:
Presently, Section 16(4) of the Act stipulates the deadline for claiming ITC on an invoice or debit note for a financial year as the 30th day of November following the end of the financial year to which such invoice or debit note pertains or the actual date of furnishing the relevant annual return, whichever is earlier.
Section 16(2)(a) of the Act further provides that no registered person shall be entitled to ITC in respect of any supply of goods or services or both to him unless he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax-paying documents.
Further Rule 36(1)(b) of the Rules prescribes that ITC shall be availed by a registered person in respect of taxes paid under RCM on the basis of an invoice issued in accordance with the provisions of section 31(3) (f) of the Act, subject to the payment of tax.
In addition, section 31(3)(f) of the Act provides that a registered person, who is liable to pay tax under section 9(3) or 9(4) of the Act, shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both. (called “self invoice”)
It is highlighted that unless all four conditions are satisfied taxpayer is not legally eligible to avail ITC.
Legal dilemma faced by taxpayers before issuance of Circular No. 211:
Taxpayers grappled with the issue of the time limit under section 16(4) of the Act to avail ITC on delayed payment of reverse charge liability. There were 2 (two) different views prevalent on this issue
- Department’s view: Authorities were holding on to the view that the date of actual availment of services is relevant in determining the time limit under section 16(4) of the Act.
- Taxpayer’s view: Taxpayers were vehemently arguing that Section 16(4) of CGST Act links the time limit for ITC availment with the financial year to which the invoice or debit note pertains and therefore taxpayer. Therefore, unless all the four conditions mentioned above are fulfilled, the question of time barring of ITC under Section 16(4) does not arise.
Precursor to CBIC Circular – Legal dispute hovering around Section 16 (4):
Further during the Covid-19 period, many taxpayers could not honour their GST compliance, and therefore their ITC and/or ITC of their recipients were challenged by invoking Section 16(4) of the Act. The pleas of taxpayers to ease the rigors of Section 16(4) during Covid-19 were not given due consideration. Many taxpayers therefore have challenged the Constitutional validity of Section 16(4) of the Act. Many High Courts have upheld the constitutional validity of section 16(4) of the Act. Presently issue of constitutional validity of Section 16(4) is sub judice before the Hon’ble Supreme Court in the matter of Shanti Motors v. Union of India & Ors. [SLP(C) Dy. No.4695/2024 dated February 09, 2024].
Meanwhile effective 1st October 2022, Section 16(4) of the Act was amended, and the time limit of availing ITC has been extended to the 30th day of November of the next financial year (instead of 30th day of September of the next financial year). The Hon’ble High Court of Kerala in the case of M. Trade Links v. Union of India [2024] 163 taxmann.com 218 (Kerala) held that the said amendment in Section 16(4) being procedural in nature has to be given retrospective effect and therefore concluded that even for the past years time limit for Section 16(4) stands at 30th November of Next financial year. This judgment was a shot in the arm for taxpayers.
Further in the past Government has offered an olive branch to the suppliers to file their overdue GSTR-1 (either without late fees or nominal late fees) but no corresponding extension was granted to the recipient for availment of ITC.
All the above factors were discussed at 53rd GST Council meeting and led to the issuance of the CBIC Circular.
Clarification issued by CBIC:
As per Clarification provided by Circular No.211/5/2024-GST dated 26th June 2024,
- in cases of supplies received from unregistered suppliers, where tax has to be paid by the recipient under Reverse Charge and
- where an invoice is to be issued by the recipient of the supplies in accordance with section 31(3)(f) of the Act
the relevant financial year for calculation of the time limit for availment of ITC under section 16(4) of the Act will be the financial year in which the invoice has been issued by the recipient under section 31(3) (f) of the Act, subject to payment of tax on the said supply by the recipient and fulfilment of other conditions and restrictions.
Practical example:
Let us consider a hypothetical case as under:
- Inward Supplies subject to reverse charge were received in the month of May 2021
- Reverse Charge liability has not been paid for varied reasons
- Taxpayer has now paid Reverse charge liability on 30th June 2024
- Self-invoice in terms of Section 31(3)(f) of the Act has also been issued on 30th June 2024
Question to ponder whether, on payment belated RCM liability on 30th June 2024, the taxpayer is eligible to avail ITC on reverse charge.
Beneficial effect of the Circular:
Relying on the above CBIC Circular, the taxpayer in the above example can very much avail ITC on delayed payment of Reverse Charge liability up to 30th November 2025. However, please take note there will be interest consequences for delay in payment of liability in terms of Section 50(1) of the Act. In addition, the department may try to invoke penal action under the provisions of Section 122 of the Act for failure to issue invoices in accordance with the provisions of this Act and taxpayer should be ready to defend penalty show cause notice.
Conclusion:
With this clarification, CBIC has brought parity in GST provisions pertaining to ITC on delayed payment of Reverse Charge liability with that of Service Tax/CENVAT provisions. This clarification is likely to reduce the woes of many taxpayers who have defaulted in payment of RCM liability in the past. The Circular also emphasizes the need for the issuance of self-invoice to comply with Section 16(2) (a of the Act, a compliance generally overlooked by many taxpayers.
Considering ambiguity in the law and the fact that Reverse Charge liability is generally tax neutral, reference to the penal provision of Section 122 of the Act in the above circular is likely to cause further litigation. One can only pray that what CBIC gives with one hand, does not take away with another.
Disclaimer:
The views expressed herein are strictly personal to the author and should not be construed as advice/ legal opinion. The contents of this article are based on the interpretation of the facts, relevant legislation, rules, notifications, circulars, judgments/rulings, etc. on the date of publishing of this article. One should not act upon the information in this article without obtaining specific professional advice. Author of this blog is not responsible or liable for any loss or damage caused to anyone due to any interpretation, error, omission pertaining to this article. Further, the said article is only for information and guidance purposes and should not be construed as any kind of advertisement or solicitation of work.
