February 23, 2023

Decoding Section 16(4) - ITC under GST


The Goods and Services Tax (GST) is a comprehensive indirect tax that was implemented in India on July 1, 2017. GST has replaced various indirect taxes levied by the Central and State governments, including VAT, Service Tax, and Excise Duty. Under GST, businesses can claim Input Tax Credit (ITC) for the taxes paid on their purchases, which can be set off against their GST liability.

Section 16(4) of the GST Act deals with situations where the recipient of goods or services fails to pay the supplier within a stipulated time. The provision restricts the recipient’s eligibility to claim ITC for the taxes paid on such supplies.

Understanding Section 16(4) of the GST Act

Section 16(4) of the GST Act states that if the recipient of goods or services fails to pay the supplier within 180 days from the date of issue of the invoice, the ITC claimed by the recipient will be added to his output tax liability along with interest. The supplier can claim the amount added to the output tax liability as his own ITC when the recipient makes the payment to him.

The provision applies to both the central and the state GST. It means that if a recipient fails to pay a supplier within 180 days, the recipient's ITC will be added to both CGST and SGST or IGST liability.

However, it is important to note that the provision does not apply to cases where the supplier has already initiated legal proceedings for recovery of the amount.

Significance of Section 16(4) of the GST Act

The provision of Section 16(4) aims to discourage errant recipients from delaying payments to their suppliers. It ensures that businesses pay their dues on time and encourages timely payments.

The provision also ensures that the government does not lose out on the tax revenue. By adding the ITC claimed by the recipient to his output tax liability, the government collects the tax revenue even if the supplier does not receive the payment from the recipient.

Impact of Section 16(4) of the GST Act on Businesses

Section 16(4) of the GST Act has implications for both the suppliers and the recipients of goods and services. For suppliers, it acts as a deterrent against delayed payments by recipients. For recipients, it incentivizes them to make timely payments to their suppliers.

Businesses should ensure that they pay their suppliers on time to avoid the consequences of Section 16(4). They should also keep track of the invoices issued by their suppliers and make sure that they pay within the stipulated period of 180 days.


Section 16(4) of the GST Act is an important provision that aims to ensure timely payments and collect the tax revenue. It is important for businesses to understand the provision and comply with it to avoid any legal or financial consequences. Businesses should also maintain proper records of their transactions and invoices to ensure compliance with the provisions of the GST Act.


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