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Why did proposal to remove liability to pay interest in case recipient fails to pay to supplier within a period of 180 days was not incorporated in CGST Amendment Act, 2018

It has been widely discussed why proposal to remove liability to pay interest in case recipient fails to pay to supplier within a period of 180 days from the date of issue of invoice did not form par t of the CGST Amendment Act, 2018 although it was part of draft proposal released by GST Council in the month of July 2018. Lets discuss the reason and who seems to gain from this exclusion:

 

a) Draft proposal to amend CGST Law released by GST Council in July 2018-Second Proviso to Section 16(2) of CGST Act, 2017

 

The draft proposal proposed to remove liability to pay interest in case where the recipient has been made liable to pay an amount equal to the ITC availed in case he fails to pay to the supplier of goods or services or both the amount towards the value of supply along with tax payable thereon within a period of 180 days from the date of issue of invoice by the supplier.

It was provided in the proposal that since upon payment of the due amount to the supplier, the recipient shall be eligible to avail ITC of the said amount, it is believed that liability to pay interest is too onerous and should be removed.

 

b) Agenda Note on the proposals for amendment in the Central Goods and Services Tax Act, 2017-29th GST Council Meeting

 

The Agenda note contained the proposal to not carry out the said the proposed amendment in the second proviso to section 16(2) of the Central Goods and Services Tax Act, 2017 on following reasons:

“It has been observed that the original formulation of second proviso to section 16(2) of the Central Goods and Services Tax Act, 2017 is more beneficial to the MSME and deletion of the phrase “along with interest thereon” would reduce the incentive for timely payment to suppliers, especially to MSMEs. Union Cabinet, while considering the amendments has also noted this concern. “

 

c) Who is the real beneficiary from the Provision-MSME or Exchequer

 

The provision might be seen as a pro supplier friendly concept but its actual impact can be assessed as follows:

Case Study-1:-A has supplied services to B for Rs 100 and has charged tax of Rs 10. B does not pay A any amount due to some disputes between them. B however further supplies services to C for Rs 150 and collects tax of Rs 15.

In a Normal scenario, entire tax collection from the transaction would have been Rs 15. However since B has not paid any amount to A, therefore he would not be entitled for any credit of the tax paid and he would again deposit entire amount of Rs 15 charged from C. Therefore, government would get revenue of Rs 25 as against Rs 15 on account of non-payment value of services supplied alongwith tax by B to A and that too on account of their own disputes.

 

Case Study-2:-Consider reverse scenario, when B has paid the entire amount to A and A does not deposit the tax. The government here denies credit to B as A has not deposited. In such case, the government becomes non committal saying “tax collected by A has not been deposited by A and therefore we would not allow credit to B until A deposits the tax”. They further provide that as it was a matter between A and B which they should resolve, they the government would not stand as guarantor for B. This stand, considering the reverse scenario, questions the role of the government in this kind of unjust enrichment.

The government seems to be indulging itself in unjust enrichment. If the intention of the government is fair then it should collect the tax amount from B and remit the same to A. Holding on to the amount would be unjust enrichment. It’s just that A has deposited the tax and B claims it irrespective of fact whether he pays any amount to A or not. For, there might be “N” number of reasons, why B would not pay to A.

 

Conclusion: It was in the beneficial interest of MSME that the said proposed amendment was not carried out by the GST Council. But the real question is who gains from the said Amendment-

 

Is it the MSME or the Government with additional Tax and Interest in the garb of the benefit to MSME.

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