Section 16(2) of the CGST Act, 2017 outlines the fundamental conditions that a registered person must meet to be eligible for ITC. All of the conditions listed above must be met. As a result, the Second Proviso to Section 16(2), read in conjunction with Rule 37 of the CGST Rules, describes the significance of this provision, which relates to GST invoice payment 

Suppose the registered person fails to pay the supplier the value of the goods and/or services and the tax within 180 days of the invoice date. In that case, any credits obtained by the registered person will be added to his output liability for the month in which the 180-day period expired, plus applicable interest. The details of such supplies and the corresponding credits must be included in return for the month immediately following such 180 days.  

Interest at 18% must be paid from the date the credit is granted until it is added to and paid with the output tax liability. However, once the payment has been made to the supplier, the recipient will be able to re-acquire the credit without any time constraints. A proportionate credit will be granted if a partial payment has been made.  

Please keep in mind that this condition of paying the value of the supply plus tax within 180 days DOES NOT APPLY TO SUPPLIES ON WHICH TAX IS PAYABLE REVERSAL CHARGE 

For Example:  

You are a businessman who ordered a machine from a vendor on 1st June, and the vendor issued an invoice on the same day. You withheld payment because of some issues or problems with the machinery until the vendor arrived and fixed the problems. The situation is now that the issues are not impossible, and the vendor’s approach is also positive. You are certain that the machinery will be repaired, and that the payment will be released immediately after that, so you take the ITC of such an Invoice believing that the payment is certain.  

The vendor keeps delaying the repair, and finally, repairs are completed in January. The consequences of such a situation would be as follows.  

  1. 180 days from the invoice date will be completed on 27th November, 2nd proviso to section 16(2) will be violated.  
  2. In December, reverse the credit claimed in return.  
  3. From 1st June to 27th November, pay 18% interest on the taxable value specified in the invoice (the date when the credit was added back to the output tax liability)  
  4. Once paid in January, the transaction is validated, and the credit on such an invoice can be used in the month of payment, i.e., January. 

The Finsights Insights  

  • This proviso is put in place to keep the payment chain of invoices and tax amounts intact.  
  • Credit is provided as a relief against earlier payment on inputs. Still, if the buyer/recipient has not paid, such relief is not valid for such a buyer to enjoy.  
  • The proviso also intends to protect the vendors from non-payments as the reversal of ITC will compel the buyer to pay the invoice amount. 

 When it comes to Input Tax Credit and its proper implementation, every detail counts. Consider that you have thousands of entries and several departments looking over different things or that you are a professional with no idea about accounting entries that have substance over form, as in the example above. The person in charge is bound to make mistakes in reconciling such transactions and, as a result, take up incorrect ITC.  

Finsights GST Reconciliation Software offers a platform that automates the reconciliation of ITC data with GSTR-2A/2B. Its accurate retrieval, processing, and arrangement of ITC data make the entire ITC reconciliation process easy and simple. The platform’s main selling point is the specific labeling of each entry based on its status, such as  

This provides an exact indication of which action should be taken, which supplier should be informed about the problematic entries, and which supplier should be followed up. When using Finsights GSTR 2A/2B Reconciliation Software, users can contact and follow up with the required supplier directly from the platform through Mail and Bulk Mail features.