Navigating GST Show Cause Notices for ITC Reversal Due to Non-Payment Within 180 Days [Find Draft Reply Format Here]

Receiving a Goods and Services Tax (GST) Show Cause Notice (SCN) for the reversal of Input Tax Credit (ITC) under the Goods and Services Tax (GST) regime can be a daunting experience for businesses. Particularly when it pertains to non-payment to suppliers within 180 days, understanding the legal intricacies is crucial. Step by Step Guidance for Tax Audit & E-filing, Click Here Here, we examine the legal framework, interplay between Goods and Services Tax and Contract Laws and some legitimate arguments against reversal of Input Tax Credit. Legal Framework Governing ITC Reversal Central GST Act, 2017 and Rule 37 of Central GST Rules Section 16(2): Outlines the conditions for availing ITC, including the 180-day payment clause. Rule 37: Specifies the procedure for ITC reversal when payment is not made within the stipulated time. 180 Day Rule Under Section 16(2) of the Central Goods and Services Tax Act, 2017, a recipient must pay the supplier the value of the goods or services along with the tax amount within 180 days from the date of the invoice. Failure to do so mandates the reversal of the ITC claimed on such supplies, along with applicable interest. The Sale of Goods Act, 1930 - Section 4: Differentiates between a 'sale' and an 'agreement to sell'. - Contracts with extended payment terms may fall under 'agreement to sell', affecting the applicability of the 180-day rule. The Indian Contract Act, 1872 Section 2(d): Defines valid consideration in a contract and emphasises that payment terms mutually agreed upon form the basis of contractual obligations. Interplay Between GST and Contractual Laws GST laws are not standalone; they interact with existing contractual statutes. The Indian Contract Act, 1872 and the Sale of Goods Act, 1930 play a pivotal role in determining the nature of agreements and obligations between parties. Step by Step Guidance for Tax Audit & E-filing, Click Here Mutual Agreements: Contracts may legally stipulate payment terms extending beyond 180 days and the term "fails to pay" should be interpreted in the context of these agreements. Key Arguments Against ITC Reversal Extended Payment Terms Nature of Business - Industries like construction or works contracts often have long project durations, with payment terms extending beyond 180 days and Mutual Consent - Payment schedules are agreed upon by both supplier and recipient, forming valid contracts under the law. Interpretation of "Fails to Pay" Context of Obligation- The failure occurs only when a party does not fulfil a contractual obligation. Contractual vs. Statutory Obligation - If the contract allows payment after 180 days, the recipient hasn't "failed to pay" within the agreed terms. Practical Compliance Issues GSTR-2 Not Operational - Rule 37 requires disclosure in GSTR-2, which was never implemented. GSTR-2 is a monthly return that was to be filed by every registered GST taxpayer until its suspension in late 2017. Legal Maxim - Lex non cogit ad impossibilia — the law does not compel the impossible. Constitutional Rights Article 300A protects individuals from being deprived of their property (including ITC) without the authority of law. Doctrine of Impossibility: Legal obligations can't be enforced when compliance is impossible. in favour 1. M/s Canon India Pvt. Ltd. v. Commissioner of Customs: Emphasises that statutory procedures must be followed as prescribed. 2. CIT v. B.C. Srinivasa Shetty: Establishes that without machinery provisions, a charging provision fails. 3. State of MP v. Narmada Bachao Andolan: Discusses the doctrine of impossibility in legal obligations. GST Council Decisions In the 5th GST Council Meeting the 180-day rule was introduced primarily to prevent tax evasion and extended from services to goods upon discussion. The 28th GST Council Meeting suggested removing the liability to pay interest on ITC reversal due to non-payment within 180 days by recognizing the undue burden and practical difficulties faced by businesses. Practical Steps for Businesses - Ensure payment terms are explicitly defined. - Consider clauses that address GST compliance obligations. - Keep records of all agreements, communications, and invoices. - Document any mutual agreements on extended payment terms. - Consult with tax professionals or legal experts specialising in GST laws. - Prepare a well-founded response to any SCN received. Step by Step Guidance for Tax Audit & E-filing, Click Here Navigating the complexities of GST compliance, especially concerning ITC reversal due to non-payment within 180 days, requires a nuanced understanding of the law and its interpretations. Businesses must be proactive, well-informed, and prepared to defend their positions based on contractual agreements and legal provisions. Frequently Asked Questions (FAQs) Q1: What triggers the reversal of ITC under the 180-day rule? A: If a recipient fails to pay the supplier the value of the supply along with tax within 180 days from the invoice date, they must reverse the ITC claim on that supply. Q2: Can mutually agreed extended payment terms override the 180-day rule? A: While contracts may stipulate longer payment terms, GST provisions currently enforce the 180-day rule. However, legal interpretations suggest that "fails to pay" should consider contractual obligations. Q3: How does the non-operational status of GSTR-2 affect ITC reversal? A: Rule 37 requires disclosures in GSTR-2 for ITC reversal, but since GSTR-2 was never implemented, complying with this rule is practically impossible, invoking the legal maxim that the law does not compel the impossible. Q4: Has the GST Council proposed any relief regarding the 180-day rule? A: Yes, in the 28th GST Council Meeting, it was proposed to remove the liability to pay interest on ITC reversals due to non-payment within 180 days, acknowledging the burden on businesses. Q5: What legal doctrines support businesses against mandatory ITC reversal? A: Doctrines like Lex non cogit ad impossibilia (the law does not compel the impossible) and constitutional protections under Article 300A support businesses in challenging mandatory ITC reversals when compliance is unfeasible. To assist businesses in effectively responding to such SCNs, we've prepared a detailed draft reply that makes use of complex legal arguments, statutory interpretations, and other strategic defences. Subscribers can access the same by clicking the blue button below. Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates