Navigating Input Tax Credit Reversal Under GST Rule 37
Rule 37 of the GST Act outlines the conditions for reversing Input Tax Credit (ITC) if payment to a supplier for goods or services, along with associated taxes, is not completed within 180 days of the invoice date. Recent amendments have clarified how ITC reversal should be calculated proportionally and introduced Rule 37A, requiring buyers to reverse ITC if suppliers fail to deposit taxes by a specified date. This regulation is crucial for ensuring compliance and maintaining financial discipline within the GST framework, though some aspects regarding interest calculation still require clarification.
Under Section 16(2) of the CGST Act, 2017, registered taxpayers are eligible to claim an Input Tax Credit (ITC) for goods or services acquired from a supplier. A key requirement for this claim is that payment for these goods or services, including the applicable tax, must be made within 180 days of the invoice's issuance. Should this payment not occur within the stipulated 180-day period, the claimed ITC becomes subject to reversal as per Rule 37 of GST. This article will explore the specifics and implications of GST Rule 37.
What is Rule 37 of GST?
As per Notification No. 26/2022—Central Tax, issued on December 26, 2022, GST Rule 37 specifies that if a registered taxpayer utilizes ITC for goods or services but fails to make payment, including the tax, within 180 days from the invoice date, the ITC claim must be reversed. This reversal is to be reported in the GSTR-3B return submitted after the 180-day period expires. However, this stipulation does not apply to supplies where GST is payable under a reverse charge mechanism.
Taxpayers are also subject to interest charges on the claimed ITC as per Section 50 of the CGST Act, 2017. Rule 88B(3) of the CGST rules clarifies that interest on ITC is only applicable once the credit has been utilized. Consequently, interest on incorrectly claimed ITC is calculated from the date the ITC was availed until the date of its reversal, as per Sections 50 and 88.
If the taxpayer later settles the payment for the supply of goods or services and the corresponding taxes to the supplier, the initially reversed ITC can be re-claimed. This re-availment of ITC is not constrained by any time limit, differing from previous provisions where payment within 180 days was mandatory under Section 16(4). ITC can now be re-claimed whenever the tax payment is finalized.
Furthermore, an amendment introduced Rule 37A, derived from Section 16(2)(c) of the CGST Act, 2017. This rule mandates that buyers must reverse ITC claims for taxes not deposited by their suppliers by September 30 following the year the ITC was claimed, using the GSTR-3B form to be filed by November 30. It also outlines the process for reinstating ITC once the supplier has paid the taxes.
How Has Rule 37 of GST Changed Since the Latest Notification?
Since its initial introduction, GST Rule 37 has undergone modifications. The 48th GST Council meeting recently enacted changes, formalized through Notification No. 26/2022, which took effect retrospectively from October 1, 2022. These revisions include:
- Rule 37(1) now mandates that ITC reversal should be proportionate to the outstanding invoice and tax amount. This clarification addressed ambiguity stemming from Notification No. 19/2022-CT (R) regarding whether the reversal applied to the full or only the unpaid amount.
- A new Rule 37A has been incorporated into the CGST Act, 2017, based on Section 16(2)(c). This rule stipulates that buyers must reverse ITC claims if their suppliers have not deposited the taxes by September 30 of the following year, with the reversal reported in the GSTR-3B form by November 30. This reversed ITC can be subsequently re-claimed once the supplier remits the necessary taxes.
Before Notification No. 26/2022, Rule 37 was also amended by Notification No. 19/2022-CT(R), which replaced sub-rules 1 and 2 and removed sub-rule 3, effective October 1, 2022. The table below illustrates the key differences between the provisions before and after these amendments:
| Description | Before October 1, 2022 | From October 1, 2022 |
|---|---|---|
| Interest Rate Chargeable | Interest was charged at 18% under Section 50(1) of the act. | The current amendment solely references Section 50 of the CGST Act, 2017, leaving the exact interest rate (18% under 50(1) or 24% under 50(3)) ambiguous. |
| Details Furnished | Taxpayers were required to provide supply details, including the unpaid amount and the proportionate ITC claimed for reversal. | The amendment does not specify the furnishing of these details. |
| Tax Liability | Reversed ITC claims were previously added back to the taxpayer's output tax liability. | The recent amendment states that the registered taxpayer only needs to subtract the reversed ITC claim from the total eligible ITC amount. |
| Form | ITC reversal details were to be reported in Form GSTR-2 in the month following the 180-day expiry from the invoice date. | ITC reversal is now reported in the GSTR-3B form submitted after the 180-day expiry from the invoice's issue date. |
Why is Rule 37 Important in GST?
Not all supplies qualify for ITC claims under GST; it is exclusively available for goods and services used to advance a business, not for personal consumption. These claims are also contingent on various conditions, including a 180-day payment deadline from the invoice date. Therefore, Rule 37 establishes the framework for reversing ITC that has already been claimed on supplies if payment is not completed within this 180-day period. Buyers are mandated to declare ITC reversals in Table 4B of the GSTR-3B form. Additionally, under the recently introduced Rule 37A, buyers must reverse ITC if their suppliers do not deposit the associated taxes punctually. Prior to Notification No. 26/2022, buyers were unable to re-claim reversed ITC resulting from supplier non-payment. However, current recommendations now permit buyers to re-avail ITC, thereby mitigating potential ITC losses.
Treatment of Rule 37 in GST Returns
According to the CGST Act 2017, suppliers of goods or services are required to upload invoices monthly or quarterly through GSTR-1 on the GST portal. Registered buyers can access these invoices via their GSTR-2B form to claim ITC. If the consideration value and associated taxes are not paid within 180 days of the invoice date, the ITC must be reversed and declared in Table 4B of form GSTR-3B, which the taxpayer is responsible for populating.
Additionally, the aggregate amount of ITC reversed during the year is reported by the buyer in Table 7A of the GSTR-9 form. Although much of this data is pre-filled from GSTR-3B submissions, buyers retain the option to make adjustments. Ultimately, taxpayers are required to reconcile the ITC claimed and reported in GSTR-9 with their audited financial statements by submitting the GSTR-9C form. Within GSTR-9C, taxpayers must detail the segregation of ineligible and eligible ITCs, accounting for all reversals.
Treatment of Rule 37 in Books of Accounts
As stipulated by the 48th GST Council, buyers must identify and reverse ITC in direct proportion to the outstanding invoice amount. For example, if an invoice totals Rs. 1,00,000 but only Rs. 40,000 remains unpaid, then ITC corresponding to Rs. 40,000 will be reversed in the accounting records.
Furthermore, any interest paid on the reversed ITC claim, as declared in the GST return, must also be recorded as an entry.
How to Treat Rule 37 of GST with Examples
Consider these practical illustrations of applying GST Rule 37:
Case Study 1:
On July 1, 2022, DEF company, a registered buyer, acquired goods valued at Rs. 50,000 from JKL company. DEF was entitled to claim ITC on the GST paid for these goods, assuming an 18% GST rate, totaling Rs. 9,000. However, DEF failed to pay the Rs. 50,000 invoice to JKL by the December 31, 2022, deadline. Consequently, the Rs. 9,000 ITC claim must be reversed. Furthermore, DEF is obligated to pay interest on this reversal. If interest is charged at 18% annually, calculated from the invoice date until the final payment date (presuming payment on the 181st day), the interest would amount to Rs. 798.90 (calculated as Rs. 9,000 * 18% * 180/365).
Case Study 2:
QWE company purchased goods worth Rs. 6,50,000 from CVB company. QWE also agreed to cover Rs. 50,000 of CVB's expenses, leading QWE to pay only Rs. 6,00,000 to CVB, plus 18% GST. In this scenario, even though QWE paid a reduced amount of Rs. 6,00,000, it is still eligible to claim ITC on the full consideration value of Rs. 6,50,000.
Conclusion
While the 48th GST Council introduced various recommendations concerning GST Rule 37, certain ambiguities persist. The precise method for calculating interest on reversed ITC claims still requires clarification. Moreover, the implementation of Rule 37A could potentially increase the compliance obligations for purchasers of goods and services.
About the Author
Annapoorna
Assistant Manager - Content
Annapoorna champions the idea that “Learning never exhausts the mind.” As an aspiring Chartered Accountant and a dedicated content writer with over four years of experience, she specializes in clarifying complex concepts within Indian GST, Income Tax, and the broader Indian financial landscape. She enjoys developing content for tax professionals, as well as large and small businesses. In her leisure time, she practices Shāstriya Sangeetha and plays the violin.