Time-Limit of ITC under RCM: A Dousing Flame Reignited

Introduction

The Central Goods and Services Tax Act, 2017 (CGST Act) vide Section 16(4)¹ stipulates 30th November of the subsequent financial year as the outer time-limit for availing input tax credit (ITC) traceable to the invoices of preceding financial year. Besides, the conspicuous clarity this particular provision effuses it has been a subject-matter of multifarious interpretations and resultant legal disputes. Notably, in case of reverse charge mechanism (RCM) supplies the controversy embroiling this aspect is whether the time-limit starts ticking-off from the date of the invoice or from the date of payment of tax under RCM.

This aspect has also been a matter of judicial scrutiny with outcomes yet to be pronounced. The GST Council too noting the gravity of the issue has endeavoured to shine some light on this issue by means of a Circular No. 211/5/2024-GST dated 26-6-2024².

In light of these multitude developments this write up aims to dispassionately analyse the relevant legal provisions in order to ascertain the precise point at which the clock of time-limit goes off.

Charging section

Prior to undertaking the analysis of relevant provision, it is pertinent to revisit the charging section i.e. Section 9(3) of the CGST Act³ which further the levy of GST under RCM.

9.(3) The Government may, on the recommendations of the Council, by notification, specify categories of supply of goods or services or both, the tax on which shall be paid on reverse charge basis by the recipient of such goods or services or both and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to the supply of such goods or services or both.

(emphasis supplied)

This provision of the CGST Act in addition to mandating the payment tax by the recipient also intends to transpose the role of the supplier onto the recipient. In effect, this provision translocates the legal obligations of the supplier onto the recipient. Resultantly the recipient is obligated to perform the twin roles of both supplier and the recipient concomitantly. Therefore, the cardinal sequitur in the context of RCM that emanates from this provision is that the obligation of self-invoicing also stems from Section 9(3) of the CGST Act in addition to Section 31.⁴

Section 16(4)

As stated earlier Section 16(4) limits the claim of ITC attributable to an invoice to 30th November of subsequent financial year. Consequentially, it is quintessential to understand what does the term “invoice” mean in GST law. Section 2(66) of the CGST Act⁵ defines the term invoice to mean an “invoice referred to in Section 31”. This cross-referencing in the definition makes it imperative to analyse the relevant provisions of Section 31 that could have a bearing on RCM supplies.

Section 31(3)(f) of the CGST Act which governs the invoicing provisions of RCM supplies reads as under:

31.(3)(f) a registered person who is liable to pay tax under sub-section (3) or sub-section (4) of Section 9 shall issue an invoice in respect of goods or services or both received by him from the supplier who is not registered on the date of receipt of goods or services or both;

(emphasis supplied)

This provision in addition to reiterating the requirement of self-invoicing also stipulates for issuance of the invoice on the date of receipt of goods and/or services. Thus, in the context of RCM supplies an invoice for the purposes of Section 16(4) would mean the invoice issued on the date of receipt of supplies. To illustrate, let us suppose a registered person has received goods which are exigible to GST RCM on 16-12-2024. In accordance with Section 31(3)(f) the taxpayer is obligated to issue an invoice dated 16-12-2024.

Nub of the issue

With this framework of reference now let us delve into the nub of the issue which could be articulated better by means of an illustration. Let us suppose, a taxpayer has received inward supplies exigible to GST under RCM on 16-12-2018 and has also paid the consideration on same day. Let us further suppose the taxpayer has discharged the corresponding tax liability and issued tax invoice on 16-12-2024 i.e. after a period of 6 years. Two divergent interpretations concerning the claim of ITC which are in vogue for this hypothetical scenario are as under:

(i) One school of thought contends that since the corresponding tax liability has been discharged in 2024 the time-limit for availment of ITC ends on 30-11-2025.

(ii) Whereas, the other school of thought contends that since the inward supplies are received in the Financial Year 2018-2019 the time-limit for availment of ITC ceases on 30-11-2019.⁶

Let us now undertake a careful factual and legal inquiry to understand when does the time-limit for availment of ITC actually ceases.

As stated earlier, in accordance with Section 2(66) in the context of RCM supplies a document could be termed as an invoice only when it is issued in accordance with the criteria laid down in Section 31(3)(f). Thus, in the current scenario for a document to attain the character of an invoice inter alia it should have been issued within the time-frame stipulated under Section 31(3)(f) i.e. on the date of receipt of supplies 16-12-2018.

Consequently, it could be contended that a belated invoice could not be termed as an invoice under Section 2(66) as it does not meet the principal criteria of time-limit stipulated under Section 31(3)(f). Thus, in the current scenario the invoice issued on 16-12-2024 is not an invoice as per Section 2(66) because it failed in adhering to the time-limits delineated under Section 31(3)(f). Therefore, it is reasonable to deduce that since the belated invoice is not an invoice in accordance with Section 2(66) ascertainment of the time-limit basis this invoice would be erroneous.

This proposition at first might sound extraneous as it seeks to preclude the taxpayer from claiming the omnipotent ITC for a mere delay in issuance of an invoice. Therefore, in order to reinforce this far-flung proposition we draw your attention to the pragmatic aspects accompanying these provisions.

For the sake of an argument let us suppose the time-limit for the claim of ITC under Section 16(4) indeed commences from the latter date i.e. 16-12-2024 in the scenario illustrated above. The ramifications that could follow on account this postulation are as follows:

(1) Interpretation of this nature would negate the very purpose of Section 31(3)(f), which stipulates the time-limit for issuing invoice, as in this case the principal contention is that the taxpayer is at liberty to issue the tax invoice according at his ease and belated issuance of invoice do not take away the claim of ITC. This contradicts a well-established and settled principle of legal jurisprudence which dictates that “every word and phrase of fiscal statues will carry a weight and therefore should be given effect” whereas if this interpretation is acceded to it would render the entire section ineffective let alone phrase or word.

(2) Secondly and perhaps most importantly on a pragmatic plane, it would legitimise and potentially encourage the taxpayer to defer the payment of taxes. To elaborate, consider the earlier example where the tax liability arising on 16-12-2018 has been deferred wilfully or otherwise to 16-12-2024. Assuming, GST Act through the combined effect of Sections 16(4), 2(66) and 31(3)(f) indeed enables the claim of ITC in Financial Year 2024-2025 and thereafter, what is the incentive for taxpayer to discharge tax in FY 2018-2019.

On contrary if the window for claiming ITC closes by 30-11-2019, it would impel the taxpayer to discharge the payment of tax early within the stipulated time-frame.

Thus, when viewed in light of these pragmatic considerations the proposition stated above could be rational and reasonable. Further, it also brings forth a fact that legislature being wary of these consequences has consciously delinked the claim of ITC from date of payment of tax and married it with date of self-invoicing.

Procedural infractions vis-à-vis substantive benefit

Indian legal jurisprudence has consistently held that, procedural infractions would not subvert the substantive benefits accorded to the taxpayer. Given that the above proposition intends to repudiate the substantive benefit of ITC it is essential to analyse whether this doctrine could be of any rescue.

Before analysing this aspect, it is prudent to acknowledge that identifying what constitutes procedural is inherently subjective and varies from case to case. With this caveat in mind let us proceed further. The activities involved in RCM transactions could be broadly trifurcated into three separate areas, viz. (1) self-invoicing; (2) payment of tax; and (3) claim of ITC.

Among these three elements, at best, the activity of self-invoicing could be deemed procedural in nature. Accordingly, even if (a big if) this doctrine secures the claim of ITC, for it the other two activities should have occurred within the stipulated time-frame. In the illustration cited supra, supposing the taxpayer has both discharged the tax liability and has claimed the ITC within the stipulated time-frame but failed in adhering the time-limits of self-invoicing, such a lapse could be categorised as a procedural negligence thereby permitting the claim of ITC. However, in our assessment failure in payment of tax or claiming ITC may not be regarded as procedural.

Interest, penalty and consequent immunity

The CGST Act vide Sections 50⁷ and 122⁸ envisages the levy of interest and penalty respectively. This raises the crucial question of whether these payments will annul the non-compliance and consequently reinstate the taxpayer’s right to claim ITC.

The underlying intent of the legislature in levying interest is primarily to compensate the time value of money or the opportunity cost on account of delay in payment of tax. Likewise, as observed by the Indian judiciary on umpteen occasions the objective behind the levy of penalty is to foster abidance of the law. Thus, these punitive measures seek to discourage the taxpayers from non-compliance rather than absolving the consequences of non-compliance. Hence, in the detriment of the taxpayers none of these payments could salvage the claim of ITC.

Circular No. 211/5/2024-GST

As mentioned in the opening paragraphs, the Central Board of Indirect Taxes and Customs (CBIC) following GST Council’s decision has endeavoured to clarify the ambiguities in this respect. However, circulars being delegated legislation cannot transgress the provisions of the parent Act. This Circular too confining to the vertices of GST law has restated the legal position by emphasising the necessity of self-invoicing in accordance with Section 31(3)(f) of the CGST Act.

The operative extracts of the Circular i.e. Para 2.7 read as follows:

2.7 Accordingly, it is clarified that in cases of supplies received from unregistered suppliers, where tax has to be paid by the recipient under reverse charge mechanism and where invoice is to be issued by the recipient of the supplies in accordance with Section 31(3)(f) of the CGST Act, the relevant financial year for calculation of time-limit for availment of input tax credit under the provisions of Section 16(4) of the CGST Act will be the financial year in which the invoice has been issued by the recipient under Section 31(3)(f) of the CGST Act, subject to payment of tax on the said supply by the recipient and fulfilment of other conditions and restrictions of Sections 16 and 17⁹ of the CGST Act. In case, the recipient issues the invoice after the time of supply of the said supply and pays tax accordingly, he will be required to pay interest on such delayed payment of tax. Further, in cases of such delayed issuance of invoice by the recipient, he may also be liable to penal action under the provisions of Section 122 of the CGST Act.

Conclusion

In summary we assert that the role of fiscal statues is not only to levy the taxes but it should also enact provisions which serve as a deterrent for tax evasions by plugging the loopholes in timely manner. Thus, we are of the considered view that failure in self-invoicing as per the time-limit stipulated in Section 31(3)(f) could result in denial of credit. Therefore, it is vital for the taxpayers to diligently monitor and identify the transactions which are exigible to GST under RCM and issue invoice in accordance with the legislative prescriptions.

Having said the above, it is also significant to acknowledge the bona fide grievances of the taxpayers particularly in light of the fact that for certain transactions the levy is being dictated by the judiciary at eleventh hour i.e. after the time-limit for availment of ITC has elapsed. However, it is the legislature rather than executive Government which has the adequate arsenal to iron out the exigencies of the taxpayer. Since the budget of the current dispensation is slated to roll out in near time, we hope it provides adequate redressal to the grieving taxpayers.