The Harsh 180-Day ITC Reversal Rule Under GST — A Compliance Nightmare for Businesses

 

The Harsh 180-Day ITC Reversal Rule Under GST — A Compliance Nightmare for Businesses

One of the most controversial provisions under the Goods and Services Tax (GST) regime is Section 16(2) of the CGST Act, 2017 read with Rule 37 of the CGST Rules, 2017, which mandates reversal of input tax credit if payment to the supplier is not made within 180 days from the date of invoice.

📜 The Legal Provision

Under Section 16(2), a registered person is entitled to claim ITC only if:

1. They possess a valid tax invoice or prescribed document,

2. They have received the goods or services,

3. The tax charged has been actually paid to the government, and

4. They have paid the supplier the value of supply along with the tax within 180 days from the date of invoice.

If this 180-day payment condition is not met:

• The ITC already claimed must be added back to the output tax liability in the month immediately following the expiry of 180 days, with applicable interest.

• Once payment is made to the supplier, the ITC can be reclaimed.

This rule applies to both goods and services, but excludes supplies where reverse charge is applicable.

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⚖️ Practical Hardships

While the intention is to curb fake transactions and ensure supplier payments, in practice, this provision has created serious hardships:

1. Genuine Commercial Delays

Businesses often have payment terms exceeding 180 days due to industry practices (e.g., infrastructure, export, large manufacturing). The law does not distinguish between genuine delays and defaults, resulting in temporary cash flow blockages.

2. Double Financial Burden

When ITC is reversed:

• The buyer pays the tax again as output liability.

• Interest is payable from the date of original ITC claim until reversal — even though the tax was originally paid by the supplier to the government.

3. Complexity in Tracking Invoices

For medium and large enterprises with thousands of invoices monthly, tracking each invoice’s 180-day period is a logistical nightmare, often requiring expensive ERP modifications and dedicated compliance teams.

4. Vendor Disputes and Litigation

Sometimes payments are withheld due to disputes over quality, quantity, or service delivery. The law still forces ITC reversal, punishing the buyer even though the fault lies with the supplier.

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🏛 CBIC Clarifications

CBIC has issued circulars (e.g., Circular No. 137/07/2020-GST and later updates) explaining that:

• The reversal under 180 days is not a permanent loss; ITC can be reclaimed once payment is made.

• Interest is still payable on the reversed amount for the intervening period.

• Partial payments trigger proportionate reversal.

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🔍 Example

Invoice Date: 01-Jan-2025
ITC Availed: ₹1,00,000 in Jan 2025 GSTR-3B
Payment to Supplier: Not made till 29-Jun-2025 (180 days lapse on 30-Jun-2025)

In July 2025 GSTR-3B:

• Reverse ITC of ₹1,00,000

• Pay interest (say 18%) from 01-Jan-2025 to 30-Jun-2025 (~₹9,000)

• Reclaim ITC in the month when payment is made (e.g., Sep 2025)

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💡 Suggestions for Reform

Given the disproportionate compliance burden, the following reforms could make the law fairer:

1. Extend the 180-day period to at least 365 days for B2B supplies.

2. Exempt genuine disputes from reversal requirements.

3. Remove interest liability where supplier has already discharged tax.

4. Allow netting-off arrangements in case of mutual supplies between parties.

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📌 Conclusion

While the 180-day ITC reversal rule aims to enforce timely payments and reduce tax evasion, it often penalizes genuine businesses, locks working capital, and creates unnecessary compliance challenges. Until the law is amended, businesses must tighten vendor payment processes, improve invoice tracking systems, and maintain strict ITC reconciliation to avoid the harsh financial consequences of this provision.

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