Unpaid Invoices Under GST

Ever bought something and well, forgotten to pay for it? It happens to the best of us! But when it comes to taxes in the world of business it becomes a bit tricky. This article breaks down the impact of non-payment on two key taxes: Goods and Unpaid Invoices Under GST. To Avoid unexpected tax surprises you can refer to this article and get to know the important aspects related to unpaid payments.

Treatment from a Goods and Service Tax Perspective

First of all, under Section 16(2) of the CGST  Act 2017, The input tax credit can be claimed by a registered person for goods or services received from suppliers.

Furthermore, as per the second provision of Section 16, payment for goods and/or services as well as the tax component must be made within 180 days from the invoice date to be eligible for input tax credit, if payment is not received within 180 days under GST there will be consequences.

• It should be noted that this provision does not apply to reverse delimitation.
• It follows that the main purpose of the laws is to emphasize both taxation and compensation.
• If the collection of taxes were the only priority, the above section would not also provide for the payment of supply.

How to claim Input Tax Credit?

Hold onto your tax breaks! Under India’s GST, businesses can claim “tax benefits” (input tax credit) on purchases, but there’s a catch:

• Rule 37: Pay your bills within 180 days or lose the benefit. This ensures timely payments and keeps money flowing.
• Rule 37A: Even if you pay on time, you lose the benefit if your supplier doesn’t pay their Unpaid Invoices Under GST share. This encourages responsible business partnerships. Cash flow is king! Pay promptly and avoid trouble to keep those tax breaks and stay healthy. Therefore, it can be concluded that one of the prerequisites for enjoying input tax incentives is that payment for the supply has been made and the government has received its share of the tax. The reason for including such clauses can also be seen as due to full compliance and discouragement of doing business with non-compliant suppliers.

Rule 37 of the CGST Act 2017

Rule 37(1) of the erstwhile CGST Rules states that “A registered person who has claimed an input tax credit for the inward supply of goods and/or services but has not paid the amount of such supply to the supplier then ITC will get reversed. The taxpayer shall, within the time limit mentioned in the second proviso to sub-section (2) of Section 16, together with the tax payable, and the details of the supply, Notify the purchase tax credit amount according to the amount and invoice amount.

Used to get tax breaks in input tax credit even if you paid suppliers late? Not anymore! Now, pay within 180 days or lose the break and pay interest. This applies to all purchases, except those with special tax rules. It encourages timely payments and ensures the government gets its taxes.
Pay on time to avoid losing money and stay compliant!
However, the Rule was amended on December 26, 2022, and will be in effect from October 1, 2022. But the amendment happened and it states that the supplier fails to pay the due amount along with the specified time limit, and the registered person has taken ITC on those Inward Supplies, they must pay back the input tax credit availed for that supply along with interest when filing their GSTR-3B return for the following tax period after 180 days from the invoice date.

Amendment in Subrule (1) of Rule 37

Additionally, it is important to consider referencing, which states that purchasers who are registered Unpaid Invoices under GST must cancel their claims for input tax credits if the supplier fails to pay their taxes on time and report them in their GSTR-3B form. Based on the explanation provided for the rule, Rule 37A of the GST will not be applicable unless certain conditions are fulfilled.

• The buyer has claimed input tax credit on the invoice based on the information provided in GSTR-2B.
• The tax has not been paid by the supplier for the invoice/debit note. 
• The supplier did not provide the GSTR-3B form along with the necessary debit note or invoice. 

Regarding the timeline, if the supplier has submitted GSTR-3B on or before September 30, 2023, there is no need for reversal. Nevertheless, the regulation also offers relief to purchasers who were unable to obtain input tax credits because the supplier did not adhere to the rules. The input tax credit can still be claimed after the specified time limit if the supplier meets the requirements.

• The GSTR-3B for a specific period must be filed after September 30 of the year following the end of the Financial Year. 
• Instances of invoices or debit notes that were not included in the GSTR-3B filed after September 30th of the year following the Financial Year
• Taxes are paid for the invoice or debit note after the 30th of September in the year following the Financial Year.

So as conclusion, we can see that there are two separate conditions and two different rules. There are situations when buyer paid the consideration, but the seller is not complying.

Treatment from Income Tax Perspectives

The Income Tax takes the seller’s perspective unlike GST which focuses on the buyer’s perspective, the Income Tax Act takes the seller’s side when it comes to bad debts. If you incurred a loss due to unpaid bills (bad debt), you can deduct it from your taxable income (Section 36). However, there are a few conditions:

• Officially write off the debt: You must declare the debt as uncollectible in your financial records for the previous year.
• Previously earned income: The debt must have been part of your income in a prior year.
• No need to prove doubt: Thanks to a 1987 law change, you no longer need to demonstrate you didn’t expect to get paid back.
• Remember, further details and clarifications might be available in official circulars like the CBDT Circular No. 551, dated 23-01-1999.

Takeaway

In our exploration of the effects of non-payment of consideration under both Goods and Services Tax (GST) and Income Tax, it becomes evident that Income Tax, with its established framework, offers clearer guidelines compared to the evolving nature of Unpaid Invoices Under GST. While Income Tax laws provide precise treatment for such scenarios, GST regulations are still evolving. However, both tax regimes now offer concise provisions regarding non-payment of consideration.