ITC under CGST Act - Where is need for linking of payments to suppliers?

The second proviso to Sec. 16(2) of CGST Act and Rule 2 of the draft Input Tax Credit Rules ,linking availability of input tax credit in respect of input supplies to payment, within the stipulated period ,of the value of the supply along with the tax payable thereon to the supplier of the input goods or service , has been adopted from the 2nd proviso to Rule 4(7) of the Cenvat Credit Rules, 2004, which is applicable only to ‘input service’ and which provides that in case the payment for the value of the input service and the service tax payable thereon, as indicated in the invoice/bill/challan, on the basis of which credit has been taken by an assessee, is not made by him to the service provider within three months from the date of the invoice/bill/challan, the assessee shall pay an amount equal to the cenvat credit availed on such input service. Only the credit of the service tax which was paid by the assessee as service recipient on reverse charge basis is not subject to this condition. This provision of Rule 4(7) of the Cenvat Credit Rules, 2004 dates back to the period prior to 01/04/2011 when liability to pay service tax arose only on receipt of payment by the service provider; but strangely, the same has been retained even during the period w.e.f. 01/04/2011, when in terms of the Point of Taxation Rules, 2011, liability to pay the service tax is no longer linked only to the date of receipt of payment, but can be from the date of issue of invoice also,if the issue of invoice precedes the payment. While Rule 4(7) of the Cenvat Credit Rules, 2004, was applicable only to input service, the analogous provisions in GST– Sec 16(2) of the CGST Act and Rule 2 of I T C Rules are applicable not only to the supply of services, but also to the supply of goods .
The availability of input tax credit in respect of any input goods or input services received by a GST assessee for use in relation to his business can be linked only to the actual payment of tax on those inputs , not to the payment by the assessee of the amount towards the value of the inputs along with tax payable thereon to the input supplier. The only purpose which I can think of for these strange provisions of CGST Act and draft I T C Rules (which are very much like the provisions of the 2nd proviso to Sec. 75(1) of the Customs Act ,1962 linking availability of duty drawback in respect of the goods exported to the receipt from the foreign buyer within the time limit stipulated under Foreign Exchange Management Act, 1999 of the payment for the goods exported ) would be to make the issue of bogus invoices without supply of any goods or services difficult. But there are other ways of dealing with the problem of bogus invoices. Insisting on payment to the supplier of the value of the goods and / or services supplied along with the tax payable thereon for permitting input tax credit to the recipient in respect of those goods and / or services, besides the question of how the payment to the supplier would be ascertained, would cause harassment to a large number of bona fide assessees like the cases mentioned in the Article, where as a trade practice, in the construction or erection, installation & commissioning contracts, some amount, mostly 5% of the overall contract value, is retained as a ‘retention money’ to ensure successful completion of the contract as per the contract terms and specifications and which is paid to the contractor later on after successful completion of the contract - very often after one year from the date of the invoice. In the CGST Act , there is no explicit provision that if the payment is made by a GST assessee in respect of some input supplies after 180 days, he will become entitled to refund of the input tax credit and interest on it paid earlier, as the way the third proviso to Sec 16(2) is worded , it can not be interpreted to cover such cases of delayed payments. Therefore, once the payment by a GST assessee to his input supplier in respect of some input supplies is delayed beyond 180 days, he will lose the input tax credit even if he makes the payment after 180 days and even if his input supplier had paid full tax in respect of the supplies without receiving the payment. Since the CGST Act has already been passed, deleting the 2nd and 3rd proviso to Sec 16(2) would require an amendment to this Act which may take time. But since the draft I T C Rules are yet to be notified , at least the Rules should be modified to moderate these harsh provisions of Sec 16(2) by making a provision in the Rules to provide for restoration of the input tax credit and refund of interest in the cases where the payment to the supplier has been made after 180 days.

Rakesh Kumar
Member , CESTAT (Retd)

TIOL Complimentary 22/04/2017