Come midnight of 30th June, 2017, with the hitting of the gong, India will have its tryst begin with GST. The GST implementation and digging deeper into the provisions seemingly will go hand-in-hand. This article intends to discuss small proviso to the input credit availability provision in the Central GST Act (CGST Act) and its implications on trade financing. The nuances are worth the consideration and mulling.
Conditions for claiming input credit — GST
Section 16 of the CGST Act lays down conditions, restrictions and eligibility for claiming input credit in case of supply of goods or services or both. The section states that a registered person shall be able to claim input credit on taxable supply in course of furtherance of its business provided such supply is supported by a tax invoice, there is receipt of goods or services or both and all instalments pertaining to the supply have been received in full, among other conditions prescribed.
This means that only a registered person can claim input credit on supply in course of business.
The second proviso to Section 16 of the CGST Act states –
“Provided further that where a recipient fails to pay to the supplier of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, the amount towards the value of supply along with tax payable thereon within a period of one hundred and eighty days from the date of issue of invoice by the supplier, an amount equal to the input tax credit availed by the recipient shall be added to his output tax liability, along with interest thereon, in such manner as may be prescribed”
The proviso seems to indicate that if the recipient of a supply fails to pay the consideration towards the supply, to the supplier within 180 days from the date of issue of tax invoice, the input credit will be denied.
For instance A buys goods from Z, a lot of 500 laptops on credit basis. Z raises the tax invoice duly and the laptops are delivered. If within 180 days of raising of invoice A does not pay for the supply of goods, the input credit would be denied.
Concern with the proviso
What is worthy to pay attention in the proviso reproduced above, is that the recipient has to pay to the supplier within prescribed period. The payment is to be made within 180 days of the issuance of the tax invoice and not within the time frame agreed between the parties. Does this mean that, if the parties agree for a credit term of 12 months, the proviso above shall disregard the same and require the recipient to pay within 180 days? Very often the supplier may agree to provide credit for more than 6 months. Is the provision of credit fatal to the condition of payment therefore?
The proviso stresses on receipt of consideration from the recipient. While the rationale of the proviso is not coming clear but the objective should have been to ensure that the supplier receives the consideration within the prescribed time.
In case of credit sales, payment may be made in various ways. Many a times, suppliers would get the bills discounted with banks and financial institutions for upfront payment. Factoring, bill discounting, reverse factoring, loan against receivables, deferred payment schemes, supply chain financing are several modes of financing of receivables due to the supplier. Setting of a payment obligation against a receivable is also a payment, whether or not the money comes from the recipient.
In cases, of reverse factoring particularly, where the recipient is made aware of such financing facility availed by the supplier, the recipient may debit the supplier and credits the liability to make payment to the factor (similar would be the case in case of bill discounting entity). In such circumstance, the condition prescribed in proviso to Section 16 should be taken to be satisfied.
Sometimes it may be such that a third party (say an NBFC) has given credit for acquisition of goods. In a financial arrangement between the buyer and the financier, the supplier is getting paid on the first day itself, therefore, the rule of payment within 6 month for availing ITC will not operate here. Replacing an obligation to pay with the loan is a mode of settlement of payment.
Hence, if within 6 months, the supplier has credited the account of the recipient (even though by replacing it with a loan transaction), the condition of payment is discharged.
Since the condition of non-payment is likely to be checked from the perspective of the recipient. The question is whether the proviso will have an effect on such practices where effectively or literally the money may or may not come from the recipient within the prescribed time.
GST laws are not framed on deciding how much credit a party to the transaction will enjoy that has been validly and contractually agreed between the parties mutually. The terms of payments and credit facilities offered in business have been age old way of doing business and have no bearing on the input credit allow-ability or dis-allowability. Something that has fallen due but not paid can cause concerns over input credit being claimed without payment of consideration. The question of ITC reversal will arise only where the buyer has not paid to the supplier and the buyer has claimed input credit. This can be understood in the context of Doctrine of Unjust Enrichment.
Therefore, the provisions of GST could not have been designed to force stop on financials products or credit facilities on trade.
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