In normal parlance, there are cases where the service recipient retains a certain portion of payments to be made to the service provider. The amount so retained is paid to the service provider only after the provision of service is complete. This update seeks to take an insight into various provisions for ascertaining whether the credit will be allowed of the GST portion pertaining to the said retention money.
Before Point of Taxation Rules, 2011 were introduced, service tax was payable on receipt basis. Therefore, cenvat credit of the service tax paid was allowed upon partial payment along with service tax, on the basis of invoice raised. After Point of Taxation Rules, 2011, point of taxation was shifted to date of invoice or date of receipt of payment, whichever is earlier. Thus, CENVAT credit was allowed on accrual basis.
Rule 4(7) of the CENVAT Credit Rules, 2004 was amended with effect from 01.09.2014 providing that Credit of Service tax is to be taken on receipt of invoice, however if no payment of supplier invoice is made within 3 months, then such CENVAT Credit was to be reversed and was allowed subsequently after the payment was made.
Thus, under existing laws credit was to be reversed if not paid within 3 months and credit could be re-availed on subsequent payment.
Under GST regime, there are ample confusions regarding the admissibility of credit on the retention money. One school of thoughts is of opinion that the entire credit will be disallowed even if some amount of bill is not paid while other school of thoughts claim that only proportionate credit will be disallowed as pertaining to the amount not paid. While there are some experts who are of the view that the entire credit will be allowed even if some part of the bill is not paid to the supplier.
In this regard, the admissibility of ITC is determined by section 16 of CGST Act, 2017. Second proviso to section 16(2) reads as follows:-
“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 added to his output tax liability, along with interest thereon, in such manner as may be prescribed:”
The language of this proviso uses the words “amount towards value of supply alongwith tax payable”. This indicates that the amount can be any portion of value of supply (as it does not says that the entire bill should not be paid) and tax payable thereon. As such, it can be inferred that the ITC alongwith interest shall be required to be reversed only to the portion of bill not paid to the supplier.
There is one view that the entire credit will be allowed even if some portion of bill is retained as the amount of GST is totally paid and the supplier has also paid the GST to the government exchequer when the invoice was raised. However, if this view is considered, the very basic purpose of this proviso will be defeated as the GST will be paid in every case. It is worthwhile to mention here that the return cannot be filed unless the tax is paid. Therefore, if this contention is accepted, there was no need of drafting this proviso at all.
Therefore, in our view, the interpretation that only the proportionate credit should be reversed seems justified; all the other interpretations does not commensurate with the intention of the law makers.
The content of this GST update is for educational purpose only and not intended for solicitation.
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You really simplified how the GST regime will affect admissibility credit and retention money. Your knowledge can really help small business owners keep up with taxation updates, especially those whom undergo partnership taxation. I definitely feel a lot more informed and educated. Thank you for sharing your interpretations of the law.
The language clearly mention the word ” fails to pay”. In case of retention money, the receiver of goods or service or both doesn’t fails to pay but didn’t pay as per and in line with contract or agreement. If the retention money is payable after three year as per contract, one can not say that receiver filed to pay but the same is payable only at the end of third year. Other is value alongwith tax payable. When it is not yet payable to supplier, it can not become payable. Third the credit to receiver is available to receiver on payment of tax to govt. by supplier, hence govt. tax cycle end there. Govt. can only ensure the interest of revenue but can not decide the business terms of tax payers.
Full credit should be available even if the retention money is not paid within 6 month if contract permit.
Please correct, if it is wrong.