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Reversal of ITC in Case of Non-Payment of Consideration

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Basic Condition – ITC must be reversed if payment not made within 180 days

  • If a registered person (buyer) has taken ITC on purchases (goods or services),
    but fails to pay the supplier:

    • The value of the supply (i.e., invoice amount), plus the GST thereon,
    • within 180 days from the date of invoice,

then the buyer has to reverse (give back) the ITC proportionately.

  • The details of such non-payment must be furnished in FORM GSTR-2 (though practically, ITC reversals are now reported in GSTR-3B, since GSTR-2 is not in use).

Example

A Ltd. buys goods worth ₹1,00,000 + GST @18% = ₹18,000 from B Ltd. on 1st Jan 2025.

A Ltd. claims ITC of ₹18,000 in Jan 2025 return.

But A Ltd. does not pay B Ltd. the invoice value + GST within 180 days (i.e., by 30th June 2025).

Result: A Ltd. must reverse ₹18,000 ITC in July 2025 return.

Partial Payment Case:

If A Ltd. paid only ₹50,000 + GST ₹9,000 (50%) to B Ltd. within 180 days,

Then ITC reversal will also be 50% i.e., ₹9,000.

  • Balance ITC of ₹9,000 can still be kept.

 

Supplies without consideration (Schedule I)

  • Certain supplies are treated as “supplies” even though there is no consideration (payment), e.g.:
    • Stock transfers between branches in different States,
    • Supplies to related persons without consideration,
    • Import of services from related parties.

For these cases, even though there is no payment, the law deems payment to be made.
Hence, ITC will not be reversed for such supplies.

Example

Head Office in Delhi sends goods worth ₹5,00,000 to its branch in Mumbai (different GST registration).

This is a supply under Schedule I, even though no payment is made.

ITC reversal condition of 180 days does not apply here.

Amounts added to value under Section 15(2)(b)

  • Section 15(2)(b) says that expenses incurred by the recipient on behalf of the supplier are added to the value of supply.
  • Even if the recipient does not separately pay this added amount, it will be deemed as paid for ITC reversal purposes.

Example

A Ltd. imports goods through B Ltd. and pays customs duty on behalf of B Ltd.

That duty becomes part of the value of supply under Section 15(2)(b).

Even though A Ltd. didn’t pay it directly to B Ltd., it is deemed as “paid.”

  • Hence, no ITC reversal is required.

ITC Reversal becomes Output Tax Liability

  • The amount of ITC reversed (from sub-rule 1) must be added to Output Tax Liability (OTL) of the month in which such details are furnished.

Example

Continuing Example 1,

A Ltd. must reverse ₹18,000 ITC in July 2025.

In GSTR-3B for July 2025, ₹18,000 will be shown as extra output tax liability.

Interest Liability

  • On the ITC wrongly availed and used, interest has to be paid.
  • Rate: As notified under Section 50(1) (currently 18% per annum).
  • Period: From the date of availing ITC till the date of reversal/payment.

Example

ITC of ₹18,000 was claimed in Jan 2025.

Reversal happens in July 2025.

Interest @18% is payable on ₹18,000 for 6 months (Jan–June).

Interest = ₹18,000 × 18% × 6/12 = ₹1,620.

So, A Ltd. pays:

  • Output tax liability = ₹18,000
  • Interest = ₹1,620

Re-Availing ITC once Payment Made

  • Good news: Once the buyer actually pays the supplier (even after 180 days),
    • He can reclaim the ITC earlier reversed.
  • And here, the time limit of Section 16(4) (September of next FY or Annual Return filing, whichever earlier) does not apply.
  • That means, ITC can be reclaimed anytime after payment is made.

Example

A Ltd. reversed ITC of ₹18,000 in July 2025 due to non-payment.

Finally, A Ltd. pays the supplier in March 2026.

A Ltd. can re-claim ITC of ₹18,000 in March 2026 return,
even though the general time limit of Section 16(4) (Sept 2026) may have expired.

This is a special relaxation under Rule 37(4).

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