Circular 211/5/2024-GST Clarifies the ITC Time Limit for RCM Supplies from Unregistered Persons

Key Takeaways:

1. The financial year of invoice issuance by the recipient determines the ITC time limit for RCM supplies from unregistered persons.

2. Recipients must issue invoices for RCM supplies from unregistered suppliers as per Section 31(3)(f) of the CGST Act.

3. Delayed invoice issuance and tax payment will incur interest and potential penalties.

4. The clarification aligns the treatment of these supplies with the general ITC availment rules under Section 16(4) of the CGST Act.

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Detailed Narrative:

Understanding the New Clarification on ITC Time Limits

The GST landscape can be complex, especially when it comes to reverse charge mechanism (RCM) and input tax credit (ITC). This circular aims to clear up a particularly tricky area: the time limit for claiming ITC on supplies received from unregistered persons under RCM.

Let's break it down:

1. The Issue at Hand:

Imagine you're a registered business in India, and you receive services from an unregistered overseas entity. You're supposed to pay GST on this under RCM, but maybe you didn't realize it at the time. Later, you figure it out (or the tax authorities point it out), and you want to pay the tax and claim ITC. But when is the deadline for claiming this ITC?

2. The Confusion:

Some tax officers were saying, "The deadline is based on when you received the service." But businesses were arguing, "No, it should be based on when we issue the invoice and pay the tax." This disagreement was causing disputes and potential litigation.

3. The Clarification:

The circular settles this debate. Here's what it says:

- The relevant financial year for the ITC time limit is the year in which you (the recipient) issue the invoice under Section 31(3)(f) of the CGST Act.

- This is subject to you actually paying the tax and meeting other ITC conditions under Sections 16 and 17 of the CGST Act .

4. The Reasoning:

The circular explains this decision by connecting a few dots in the GST law:

- You can only claim ITC if you have a proper invoice or similar document (Section 16(2)(a)).

- For RCM supplies from unregistered persons, you (the recipient) have to issue the invoice yourself (Section 31(3)(f)).

- Therefore, the "invoice" mentioned in Section 16(4) for these cases is the one you issue, not one you receive.

5. Important Points to Remember:

- If you delay issuing the invoice and paying the tax, you'll have to pay interest on the delayed tax payment .

- You might also face penalties under Section 122 of the CGST Act for delayed invoice issuance.

- The normal ITC rules still apply – you need to pay the tax and meet other conditions to claim the credit.

6. Practical Implication:

This clarification gives you more time to claim ITC in these scenarios. Instead of the deadline being linked to when you received the service (which could be in the past), it's now linked to when you issue the invoice and pay the tax.

This circular is a win for businesses dealing with these types of transactions, providing clarity and potentially reducing disputes with tax authorities.

FAQs:

Q1: Does this circular apply to all RCM supplies?

A1: No, it specifically addresses RCM supplies received from unregistered persons where the recipient is required to issue the invoice.

Q2: Do I still need to pay interest if I delay issuing the invoice and paying tax?

A2: Yes, you will be required to pay interest on the delayed tax payment, even though you can still claim ITC based on the invoice issuance date.

Q3: Is there a time limit for issuing the invoice for these RCM supplies?

A3: While the circular doesn't specify a time limit, it mentions potential penalties under Section 122 for delayed invoice issuance. It's best to issue invoices and pay tax promptly to avoid interest and penalties.

Q4: How does this affect the annual return filing process?

A4: The ITC claim must still be made before the earlier of November 30th following the end of the financial year to which the invoice pertains or the filing of the annual return, as per Section 16(4) of the CGST Act.

Key Precedents:

1. Central Goods and Services Tax Act, 2017 (CGST Act)

2. Central Goods and Services Tax Rules, 2017 (CGST Rules)

3. Section 16(2)(a), 16(4), 31(3)(f), 122 of CGST Act

4. Rule 36(1)(b) of CGST Rules

5. Finance Act, 2022 (for the amendment to Section 16(4) of CGST Act)

Circular No. 211/5/2024-GST

F. No. CBIC-20001/4/2024-GST

Government of India

Ministry of Finance

Department of Revenue

Central Board of Indirect Taxes and Customs

GST Policy Wing

North Block, New Delhi

Dated the 26th June, 2024

To,

The Principal Chief Commissioners/ Chief Commissioners/ Principal Commissioners/Commissioners of Central Tax (All)

The Principal Directors General/ Directors General (All)

Madam/Sir,

Subject: Clarification on time limit under Section 16(4) of CGST Act, 2017 in respect of RCM supplies received from unregistered persons – reg.

Representations have been received from trade and industry seeking clarity on the applicability of time limit specified under section 16(4) of Central Goods & Services Tax Act, 2017 (hereinafter referred to as the “CGST Act”) for the purpose of availment of input tax credit (ITC)by the recipient on the tax paid by him under reverse charge mechanism (RCM) in respect of supplies received from unregistered persons. It has been represented that in some cases, where tax is payable on reverse charge basis by the recipient, such as, where an activity is performed by the overseas related person for the entity located in India and no consideration is involved, such an activity may not be considered as supply of services by the concerned recipient in India and accordingly, no invoice is issued as well as no tax is paid by the said recipient under RCM in respect of the same. However, later on, either on their own on the basis of some clarification issued by the department or on the basis of some court judgement or on being pointed out by the tax authorities during scrutiny or audit or otherwise, the said recipient issues the invoice and pays the tax under RCM, along with interest, and claims input tax credit on such tax paid.

1.2 It has been represented that some of the field formations are taking the view that in such cases, the relevant year of the invoice for the purpose of section 16(4) of CGST Act is the year in which the said supply was received and accordingly, the time limit for availment of ITC under section 16(4) of CGST Act is only upto the September/ November of the following financial year, i.e. the financial year following the financial year in which the said services was received. On the other hand, industry has represented that as the invoice in respect of such supplies received from unregistered supplier, where tax has to be paid by the recipient on RCM basis, is to be issued by the recipient as per section 31(3)(f) of CGST Act, the relevant year of invoice for the purpose of section 16(4) of CGST Act is the financial year in which such invoice has been issued and accordingly, ITC should be available on the said invoice under section 16(4) of CGST Act till the September/ November of the financial year following the financial year in which such invoice has been issued. Request has been made to issue clarification in the matter to avoid litigation.

2. The matter has been examined. In order to ensure uniformity in the implementation of the provisions of the law across the field formations, the Board, in exercise of its powers conferred under section 168(1) of the CGST Act, hereby clarifies the issue as follows.

2.1 As per section 16(2)(a) of CGST Act, no registered person shall be entitled to the credit of any input tax in respect of any supply of goods or services or both to him unless he is in possession of a tax invoice or debit note issued by a supplier registered under this Act, or such other tax paying documents as may be prescribed.

2.2 Rule 36(1)(b) of Central Goods and Services Tax Rules, 2017 (hereinafter referred to as the CGST Rules) prescribes that input tax credit shall be availed by a registered person inter alia on the basis of an invoice issued in accordance with the provisions of clause (f) of sub-section (3) of section 31 of CGST Act, subject to the payment of tax.

2.3 Further, clause (f) of sub-section (3) of section 31 of CGST Act provides that 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. Accordingly, where the supplier is unregistered and recipient is registered, and the recipient is liable to pay tax on the said supply on RCM basis, the recipient is required to issue invoice as per section 31(3)(f) of CGST Act and pay the tax in cash on the same under RCM.

2.4 Section 16(4) of CGST Act, as amended vide the Finance Act, 2022, deals with time limit to avail ITC, and is reproduced below-

“A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the thirtieth day of November following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

Section 16(4)of CGST Act, before the said amendment vide the Finance Act, 2022, provided as follows:

“A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

2.5 It can be seen that section 16(4) of CGST Act links the time limit for ITC availment with the financial year to which the invoice or debit note pertains. As discussed in Para 2.3 above, in case of supplies where the supplier is unregistered and recipient is registered and the tax has to be paid by the recipient on RCM basis, the recipient is required to issue invoice in terms of the provisions of section 31(3)(f) of CGST Act and pay the tax on the same in cash under RCM. Further, as discussed in Para 2.1 above, ITC cannot be availed by a registered person in respect of any supply of goods or services or both received by him, as per the provisions of section 16(2)(a) of CGST Act, unless he is in possession of a tax invoice or debit note or such other tax paying documents as may be prescribed.

2.6 A combined reading of the above provisions leads to a conclusion that as ITC can be availed by the recipient only on the basis of invoice or debit note or other duty paying document, and as in case of RCM supplies received by the recipient from unregistered supplier, invoice has to be issued by the recipient himself, the relevant financial year, to which invoice pertains, for the purpose of time limit for availment of ITC under section 16(4) of CGST Act in such cases shall be the financial year of issuance of such invoice only. In cases, where the recipient issues the said 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.

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 (RCM) and where invoice is to be issued by the recipient of the supplies in accordance with section 31(3)(f) of 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 CGST Act will be the financial year in which the invoice has been issued by the recipient under section 31(3)(f) of CGST Act, subject to payment of tax on the said supply by the recipient and fulfilment of other conditions and restrictions of section 16 and 17 of 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 CGST Act.

3. It is requested that suitable trade notices may be issued to publicize the contents of this Circular.

4. Difficulty, if any, in implementation of this Circular may please be brought to the notice of the Board. Hindi version would follow.

(Sanjay Mangal)

Principal Commissioner (GST)