Reversal of ITC in case of non-payment of consideration within 180 days

In a recent notification, the Central Board of Indirect Taxes and Customs (CBIC) has announced that Input Tax Credit (ITC) will be reversed if the payment for the goods or services received is not made within 180 days of the date of the invoice. This new rule will come into effect from 1st October 2022 and will have a significant impact on businesses in India.

What is Input Tax Credit?

Input Tax Credit (ITC) is the tax that a business owner can claim back on the tax paid while purchasing inputs (goods or services) for their business. It is a way to reduce the tax liability of the business, and it helps to eliminate the cascading effect of taxes. The ITC can be claimed by the business when they file their GST returns.

Reversal of ITC in case of non-payment of consideration

The recent notification from CBIC states that if the payment for the goods or services received is not made within 180 days of the date of the invoice, the ITC claimed by the business will be reversed. This means that the business will have to pay the tax amount that was previously claimed as ITC along with interest. The interest will be calculated from the date when the ITC was claimed to the date when it is reversed.

Impact on businesses

The new rule will have a significant impact on businesses in India, especially Small and Medium Enterprises (SMEs) and startups. Many SMEs and startups face cash flow issues, and it is not uncommon for them to delay payments to their suppliers. With the new rule, businesses will have to be more cautious about their payment schedules to avoid the reversal of ITC.

The reversal of ITC will also increase the compliance burden on businesses. They will have to keep track of their payment schedules and ensure that they make the payment within the stipulated time. This will require additional resources and time, which can be challenging for small businesses.

Another issue that businesses may face is the dispute regarding the payment of consideration. If there is a dispute between the business and the supplier regarding the payment of consideration, the ITC will be reversed, even if the dispute is not resolved within 180 days. This can lead to unnecessary litigation between the parties and can further increase the compliance burden on businesses.

Conclusion

The reversal of ITC in case of non-payment of consideration within 180 days will have a significant impact on businesses in India. It is important for businesses to be aware of the new rule and ensure that they make the payment within the stipulated time. They will also have to be more cautious while dealing with their suppliers and ensure that there are no disputes regarding the payment of consideration. The new rule will increase the compliance burden on businesses, especially SMEs and startups, and they will have to allocate additional resources and time to comply with the new rule.