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GST: Everything to Know about consequences of failure to Pay the Supplier with in 180 days

There is always dispute regarding calculation methodology regarding reversal of ITC/payment of GST along with interest payable thereon in case Recipient of Goods/Services fails to pay the Supplier with in 180 days.



In this article, we have done comprehensive analysis of the provisions regarding this including many practical case scenarios. Issues covered in the article:


Legal Provisions (including history of amendments)


Second Proviso to Section 16(2) prescribes that:

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 paid by him along with interest payable under Section 50) in such manner as may be prescribed :


Provided also that the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon.

Earlier up to 30.09.2023, instead of words in bracket, it was written : (added to his output tax liability, along with interest thereon)


Key Points of the Provision

1. This clause is not related to payment of GST by the Supplier to the Government but by the Recipient of Goods/Service to his supplier .


2. Recipient needs to pay not only GST amount to his supplier but the value of supply also along with GST thereon.


3. Recipient of Goods/Services needs to pay with in 180 days from date on Invoice not from day of availment of ITC against that Invoice. For instance against an invoice dated 01.04.2023, he avails ITC in the return for the month of August, 2023, in this case also he needs to pay to supplier with in 180 days from 01.04.2023.


4. In case, he fails to pay with in 180 days, he needs to Pay or reverse the ITC equivalent to the amount of ITC availed against such supply along with interest payable under Section-50 (Rule:37) (interest calculation is discussed in next section).


5. In case, he has short-paid the amount with in 180 days, he needs to pay/reverse the proportionate ITC availed. For instance, Invoice Amount is Rs. 118 (100+18) and he paid only Rs. 50 till 180 days. He needs to reverse ITC equivalent to Rs.7.63 (18/118*50) .


6. In case, ITC is not availed against such Invoice, as logical also he need not reverse ITC against such invoice.

Further, in case like Banks which has option to avail only 50% ITC against such invoice, in our opinion they need to reverse ITC equivalent to 50% only. For instance, in above case, Bank needs to reverse ITC equivalent to Rs.3.82 (Rs. 7.63*0.50)


Before amendment, it was written that it shall be added to his output tax liability through GSTR-2 (Rule 37 read with second proviso to Section 16(2)). However, GSTR-2 did not come in force so practical way to implement the law was to reverse ITC only as Section-16 is also about the ITC. (Though it was challenged by many taxpayer on the ground that when GSTR-2 was not made applicable, the provision itself can not be made applicable to the taxpayer).


Exception to the Provision

There are three exceptions to the clause:


  • Not applicable to RCM: In case where recipient needs to pay GST under RCM, he is not required to comply with the provision of payment to supplier with in 180 days.

  • Schedule-I Supply: In case of supplies without consideration as per schedule-I, deemed value as considered for GST purpose will be considered as paid for this provision. i.e. Provision of 180 days will not be applicable to schedule-I supplies.

  • Value added as per clause 15(2)(b): i.e. any amount that the supplier is liable to pay in relation to such supply but which has been incurred by the recipient of the supply and not included in the price actually paid or payable for the goods or services or both. Though this amount is added in to Value of supply for GST purpose, however as the same has been incurred by recipient himself, there is no question of payment of such amount to supplier by the Recipient.


Calculation Methodology for interest (including history of amendments)


There is change in Rules with regard to calculation of interest w.e.f. 01.10.2022


Up to 30.09.2022


Up to 30.09.2022, interest calculation was prescribed in Rule 37(3) which has been omitted w.e.f 01.10.2022.


Rule 37(3) provides that


The registered person shall be liable to pay interest at the rate notified under sub-section (1) of section 50 for the period starting from the date of availing credit on such supplies till the date when the amount added to the output tax liability, as mentioned in sub-rule (2), is paid.


Here three key points to be noted i.e.

a. Rate to be taken from Section 50 i.e. 18%. Here interest was not required to be calculated under Section 50.

b. Period for calculation of interest is mentioned in the Rule it self i.e. from the date of availing credit on such supplies till reversal of such ITC.


Here, interest needs to be paid even if such ITC is not utilised as method of calculation of interest itself has been prescribed in the Rule.


w.e.f. 01.10.2022


After omission of Rule 37(3), interest calculation has been prescribed in Rule 37(1) itself which prescribes that :


.....shall pay or reverse an amount equal to the input tax credit availed in respect of such supply proportionate to the amount not paid to the supplier along with interest payable thereon under section 50....


Here, after amendment interest is to be calculated under Section 50 i.e. only from the date of utilisation of credit against such supplies till date of reversal.


For complete details about interest calculation & methodology for calculation of extent of utilisation as per Section 50 read with Rule 88B with the help of illustrations, please read at : Everything to Know about Interest Calculation as per Section 50.


Now question comes, how this cutoff will be applicable whether on the invoices issues after 01.10.2022 or for invoices for which 180 days are happening after 180 days.


In our opinion, since ITC reversal happens after failure to pay with in 180 days, so amended provisions should be applicable even for invoices which were issued before 01.10.2022 but 180 days is happening after 01.10.2022.


Some Case Scenarios


In this section, we will discuss some practical case scenarios


1. When Recipient fails to pay with in 180 days but paid subsequently lets say One Year


Lets take illustration to understand the scenario better:

Invoice Date: 01.04.2023

Amount of Invoice Rs. 118 (100+18)

180 days : 30 September, 2023

Payment to Supplier: 31st March, 2024


It can be dealt by two ways by the Taxpayers:


a. Reverse ITC in GSTR-3B for October/September month along with interest as calculated under Section 50 till reversal of ITC. Then avail ITC in the GSTR-3B of Mrach-2024.


b. Neither reverse ITC nor avail ITC, in that case interest is required to be paid under section 50 till the date of GSTR-3B of March, 2024.

Many will question this practice on the ground that Taxpayer has to reverse ITC in this case also. However, considering Rule 37(4) which prescribes that there is no time line for re-availing ITC once payment is made by the Recipient. Therefore, it can safely be presumed that Taxpayer has reversed and re-availed the ITC in the GSTR-3B of March month. Accordingly, only interest is payable for delay in reversal i.e. from September 2023 to March, 2024.


2. Where Agreed Credit Terms are for more than 180 days like One Year 


There may be cases like in case of huge value contracts where agreed credit terms are for more than 180 days. Now question is whether in those cases ITC needs to be reversed or not.


Some argue that Second Proviso to Section 16(2) requires reversal of ITC where there is "failure to pay".. Since recipient did not make payment out of agreed terms so there is no failure.


However, if we read the language of Rule 37 which says ITC needs to be reversed an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier.


From this language it appears that in this case also, Recipient needs to reverse the ITC even if there is delay in payment out of agreed terms.


3. When Purchase is on installment payment system


In this case also as discussed above, he needs to reverse ITC proportionate to the amount not paid to the Supplier. Thereafter, he can re-avail ITC as when installment is paid.


Caution: Some will suggest that in order to protect from the interest cost, one should avail ITC as when installment is paid instead of first availing full credit then reverse after 180 days and then re-avail.

It appears to be logical, however, legally as per Section 16(4), one can avail ITC only till 30 November of next FY against an Invoice. (For instance for invoice dated 15 Feb, 2023, one can avail ITC only till 30 November, 2023).


As per our suggestion, in order to save your self from interest, please avail ITC & reverse ITC in the GSTR-3B of the same month when 180 days are over.

4. When Payment is not Invoice Specific but running payments


Law does not prescribe the methodology for this situation. However, logical methodology in this case will be FIFO.


However, some taxpayers may take a stand that they are not paying balance standing as on 30 June, 2017 and making regular payments against the Invoices raised during GST period.


Whether Secondary Discounts/Commercial Credit Notes can be considered as payment for 180 days Provision.


This issue has been discussed comprehensively in a separate article which can be read at: ITC Reversibility in case of Discounts


Argument for & against the Provision along with Legal Challenge.


Argument against the provision of 180 days


Many Taxpayers argue that payment terms is between Supplier and its customers, a Taxation law has nothing to do with these commercial terms. It is like Government is indirectly dictating the payment terms between the Supplier and its customers for which logically Govt.does not have any locus standi.


Argument in favour of Provision of 180 days

Legally Government always contends that ITC is in the nature of concession for which Govt. has every right to dictate the conditions for availing the ITC.


Other reasons which may favour provision of 180 days is like it will help smooth payment to MSME sector and it will also help to create audit trail (Bank-Trail of Payment) in GST system which will assist the Investigating agencies to verify genuineness of ITC.


We have tried to present comprehensive analysis on the issue.We request you to please share it among your circle for the benefits of all.


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Legal Language of Rule 37


[(1) A registered person, who has availed of input tax credit on any inward supply of goods or services or both, other than the supplies on which tax is payable on reverse charge basis, but fails to pay to the supplier thereof, the amount towards the value of such supply whether wholly or partly, along with the tax payable thereon, within the time limit specified in the second proviso to sub-section(2) of section 16 , shall pay or reverse an amount equal to the input tax credit availed in respect of such supply, proportionate to the amount not paid to the supplier, along with interest payable thereon under section 50 , while furnishing the return in FORM GSTR-3B for the tax period immediately following the period of one hundred and eighty days from the date of the issue of the invoice:


Provided that the value of supplies made without consideration as specified in Schedule I of the said Act shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16 :


Provided further that the value of supplies on account of any amount added in accordance with the provisions of clause (b) of sub-section (2) of section 15 shall be deemed to have been paid for the purposes of the second proviso to sub-section (2) of section 16 .


(2) Where the said registered person subsequently makes the payment of the amount towards the value of such supply along with tax payable thereon to the supplier thereof, he shall be entitled to re-avail the input tax credit referred to in sub-rule (1).]


(4)The time limit specified in sub-section (4) of section 16 shall not apply to a claim for re-availing of any credit, in accordance with the provisions of the Act or the provisions of this Chapter, that had been reversed earlier.



Disclaimer: We have taken due care to the best of our knowledge while explaining the provisions surrounding the issue purely for informational/academic purpose. It should not be considered as professional advice or consultancy to be relied upon. While due care has been taken by Fab Gyan in preparing this article, certain mistakes and omissions may creep in. The Fab Gyan or its Author does not accept any liability for any loss or damage of any kind arising out of any inaccurate or incomplete information in this document nor for any actions taken in reliance thereon.




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