AAR holds credit of IGST paid on import of goods not required to be reversed on non-payment to foreign supplier within 180 days

 This Tax Alert summarizes a recent advance ruling ^[1] issued by the Authority for Advance Ruling, Gujarat (AAR) on applicability of second proviso to Section 16(2) of Central Goods and Services Tax Act, 2017 (CGST Act) in case of import of goods.

The said provision requires the recipient to reverse input tax credit (ITC) if they fail to pay value of supply along with tax to the supplier within 180 days from the date of invoice.

The key observations of AAR are:

• The second proviso to Section 16(2) excludes supplies on which tax is payable under reverse charge mechanism (RCM). It reveals the intention of the Government to not dis-entitle the recipients from availing ITC in cases where the tax is paid by the recipient.
• The invoice referred to in the second proviso is the invoice or tax invoice, as defined under Section 2(66) of the CGST Act, which can be issued only by a registered person, unlike a commercial invoice, which is issued by a foreign supplier.
• The appropriate document for availing ITC in respect of imported goods is the bill of entry in terms of Rule 36(1)(d) of the CGST Rules and not the commercial invoice issued by the foreign supplier.
• The minutes of the GST Council meetings suggest that second proviso to Section 16(2) is an anti-evasion measure. Since Integrated Goods and Services Tax (IGST) has already been paid, denying ITC solely on the grounds of non-payment of the value of goods to the supplier cannot, by any reasonable interpretation, be considered an anti-evasion measure.
• IGST, having already been paid by the applicant, gives rise to a situation almost akin to a transaction wherein the recipient pays the tax under RCM. Not allowing ITC due to non-payment of value of supply to the foreign supplier when IGST already stands paid, would amount to treating equals as unequal and thereby, would violate Article 14 of the Constitution of India.
• The Reserve Bank of India has, vide Master Circular No. 09/2011-12 dated 01 July 2011 on External Commercial Borrowings & Trade credit, permitted AD Banks to approve trade credit for imports with maturity up to 1 year from the date of shipment.

AAR ruled that the second proviso to Section 16 would not apply in respect of import of goods and hence, the recipient is not required to reverse ITC due to non-payment of consideration to the foreign vendor within 180 days.

Comments:

The ruling seems to settle a long pending dispute, in favour of taxpayers, considering the intent of the Government behind inserting the provisions under the tax laws.