Rule 37 of CGST/SGST Rules: ITC Reversal on Non-Payment Within 180 Days

As per Section 16(2) of the CGST Act, 2017, a registered taxpayer can claim an input tax credit (ITC) on the goods and/or services received from the supplier. This is subject to the condition that the taxpayer has paid for the goods and/or services and the tax payable on them within 180 days of the issue of the invoice. However, in case of non-payment within 180 days, the ITC claim will be reversed per Rule 37 of GST.

So, what is Rule 37 of GST, and what are its provisions? Let’s understand.

What is Rule 37 of GST?

As per the Notification No. 26/2022—Central Tax, dated 26^th December 2022, Rule 37 of GST is as follows:

To simplify, if a registered taxpayer has availed ITC on the supply of goods and/or services but has yet to pay for the supply along with tax payable on it within 180 days of the issue of the invoice, the ITC claim will be reversed. This ITC reversal shall be made in the GSTR-3B return filed after the expiry of 180 days of the invoice’s issue date. However, this provision does not apply to supplies on which GST is payable on a reverse charge basis. 

Furthermore, the taxpayer will be liable to pay interest on the ITC claimed under Section 50 of the CGST Act, 2017. But the method for calculating interest payable on ITC reversal has been covered under Rule 88 of the CGST rules. Rule 88B (3) states that interest on ITC would be payable only after ITC has already been utilised. 

Therefore, as per Section 50 and Rule 88, interest on the wrongly availed ITC shall be computed for the period starting from the date of availing of the ITC and ending on the date of its reversal.

Additionally, suppose the taxpayer subsequently makes the payment for the supply of goods and/or services and the tax payable on them to the supplier. In that case, he can reclaim the ITC that was initially reversed.

Moreover, the re-availing of ITC is not subject to any time limit. Thus, unlike the earlier provision where taxpayers had to mandatorily make tax payments within 180 days of the invoice’s issue (per Section 16(4), ITC can be reclaimed whenever the tax is finally paid.

Finally, the amendment also introduced a new rule 37A based on Section 16(2)(c) of the CGST Act, 2017. As per Rule 37A, a buyer will have to reverse the ITC claims on taxes not deposited by their supplier by September 30th, following the year in which this ITC was claimed via the GSTR-3B form. This ITC reversal needs to be filed by November 30th, which follows the end of this financial year. It also states the mechanism for reinstating ITC when the supplier finally pays the taxes.

How Has Rule 37 of GST Changed Since the Latest Notification?

Rule 37 of GST has changed since the introduction of the GST regime.

The 48th GST Council meeting recently amended it, and these changes were notified via Notification No. 26/2022 and have gone into effect retrospectively from October 1st 2022. 

These changes are enumerated below.

• As per Rule 37(1), the ITC will be reversed only in proportion to the unpaid invoice and tax payable amount. This was in response to Notification No. 19/2022-CT (R), which needed to be clarified about whether ITC had to be reversed on the full amount or only on the unpaid amount.
• It has added a new rule 37A to the CGST Act, 2017, based on its Section 16(2)(c). Accordingly, buyers must reverse the ITC claims on taxes not deposited by their supplier by September 30th of the following year via the GSTR-3B form filed by November 30th. However, this ITC can be reclaimed when the supplier pays the requisite taxes.

Before Notification No. 26/2022, Rule 37 of GST was also amended through Notification No. 19/2022-CT(R). This amendment had substituted subrules 1 and 2 to Rule 37 and omitted subrule 3. These changes had also gone into effect on October 1st 2022.

We tabulate the pre- and post-amendments provisions below.

Why is Rule 37 Important in GST? 

GST taxpayers can only claim ITC on some of their supplies. More specifically, ITC can only be claimed on goods and services supplied for the furtherance of business and not for personal use. These claims are further subjected to several conditions, including the time limit of 180 days from the invoice’s issue.

Thus, Rule 37 provides the provisions for the reversal of ITC already claimed on the supply, which hasn’t been paid for within 180 days. 

Buyers must report ITC reversal in Table 4B of the GSTR-3B form. Furthermore, buyers will need to reverse ITC if their suppliers fail to pay the taxes on time per newly introduced Rule 37A.

Before Notification No. 26/2022, buyers could not re-avail the reversed ITC due to non-payment of taxes by suppliers. However, after the latest recommendation, buyers can re-avail ITC, thus stemming any subsequent ITC loss. 

Treatment of Rule 37 in GST Returns

Per the CGST Act 2017, the supplier of goods and/or services must upload the invoices via GSTR-1 on the GST portal every month/quarter. The registered buyer can view these invoices via their GSTR-2B form and claim ITC.

However, in case of non-repayment of consideration value and taxes payable after 180 days of the invoice’s issue date, this ITC will have to be reversed and reported in Table 4B of form GSTR-3B. The GST taxpayer is required to self-populate Table 4B. 

Furthermore, the buyer will report the total amount of ITC reversed during the year in Table 7A of the GSTR-9 form. While most of the information is auto-populated based on GSTR-3B return filings, the buyer can make further changes.

Finally, taxpayers must reconcile the ITC availed and reported in GSTR-9 with their audited financial statements by filing the GSTR-9C form. In GSTR-9C, taxpayers must state the breakup of ineligible and eligible ITCs after accounting for ITC reversals. 

Treatment of Rule 37 in Books of Accounts

Per the 48th GST council, buyers must identify and reverse only that amount of ITC, which is proportional to the unpaid invoice amount. For instance, if out of the total invoice value of Rs. 1,00,000, only Rs. 40,000 is unpaid. Then, ITC, in proportion to Rs. 40,000, will be reversed in the books of account. 

Additionally, an entry will be made for the interest paid on the ITC whose claim was reversed in the GST return filed. 

How to Treat Rule 37 of GST with Examples

Here are some examples of the treatment of Rule 37 of GST:

Example 1:

A registered buyer DEF company received goods worth Rs. 50,000 from a supplier, JKL company, on 1st July 2022. As a result, DEF can claim ITC on the GST paid on these goods. Let’s assume GST was charged at @18%, thus amounting to Rs. 9,000.

However, DEF should have paid the invoice amount of Rs. 50,000 to JKL by 31st December 2022. As a result, the ITC claim of Rs. 9000 will be reversed. Additionally, DEF is liable to pay interest on this reversal. 

Assuming interest continues to be levied at @18% and only for the period starting from the invoice issue to the date of final payment, interest will be Rs. 798.90. (Rs.9000*18%*180/365, supposing the final payment is made on the 181st day)

Example 2:

QWE company purchases goods worth Rs. 6,50,000 from CVB company. Further, QWE agrees to bear an expense of Rs. 50,000 on behalf of CVB. Thus, it finally pays only Rs. 6,00,000 to CVB and GST @18%.

In this case, despite only paying Rs. 6,00,000, QWE can claim ITC on the GST paid on the full consideration of Rs. 6,50,000.

Conclusion

Despite the 48th GST Council making several recommendations in regard to Rule 37 of GST, many lacunas remain. It remains to be seen how the interest on reversed ITC claims will be charged. Additionally, the introduction of Rule 37A may raise the burden of compliance on the buyers of goods and/or services.

FAQs on CGST/SGST Section 37

What is rule 37 in GST?

Rule 37 under GST Act prescribes the conditions for the reversal of input tax credit (ITC) on goods and/or services if full payment is not made within 180 days of the invoice’s issue.

What is rule 37 of the GST annual return?

ITC claims reversed per rule 37 of the GST act are reported in GSTR-3B and GSTR-9.

Can ITC be reclaimed if it was reversed according to Rule 37 of GST?

Yes, ITC can be claimed again when the buyer pays the invoice in full. It is not subject to the time limit of 180 days, as opposed to the initial provision.