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The journey of the Goods and Services Tax (GST) has always been a delicate balancing act between administrative safeguards and the promise of seamless credit flow. As GST approaches the end of the decade, several provisions drafted with protective intent have begun to show signs of friction. Among these, the 180-day payment rule for ITC reversal stands out as a condition that appears simple on paper but has grown into a structural concern for businesses across sectors.
The Gujarat High Court’s recent decision to examine this provision afresh in Priya Blue Industries Pvt. Ltd. vs. Union of India (SCA No. 14829 of 2022) has therefore arrived at a critical moment. The case is not merely about the validity of a compliance requirement; rather, it raises a deeper question central to the design of GST: should the timing of commercial payments affect a recipient’s right to claim input tax credit?
Under Section 16(2) of the CGST Act, a recipient is required to reverse ITC if the value of the supply and tax is not paid within 180 days from the invoice date. Rule 37 operationalises this reversal and permits re-availment of the credit upon final payment. Though the provision was intended as a measure to curb fraudulent credit in non-genuine transactions, it played out differently across industries. Genuine businesses, operating on long credit cycles or dealing with supply-chain complexities, were forced to reverse ITC, often with interest, despite the supplier having already paid GST to the Government. As a result, a measure intended to deter evasion has, in practice, imposed a financial cost on legitimate commercial delays despite no revenue risk to the exchequer.
This is where the disconnect truly lies. GST liability arises at the time of supply and not at the time of payment. The system is designed as a tax on consumption, collected on value addition. Whether or not the buyer pays the supplier within180 days does not change the tax’s incidence, timeline, or destination. The government has already received its tax. The real question, then, is whether ITC reversal, along with interest, can be justified merely on account of commercial payment delays?
To appreciate the depth of the debate, it is important to revisit the erstwhile CENVAT regime. The three-month payment condition under Rule 4(7) applied only to services and was frequently interpreted by courts in a manner that protected genuine transactions. Credit was treated as a structural element of the indirect tax chain, not a conditional concession.
Yet, in GST, the same idea was expanded and hardened. It now applies to both goods and services and to routine industries and long-gestation sectors alike. What was once a narrow, targeted clause has become a blanket obligation that often bears little relation to economic realities. The result is a continuous cycle of invoice ageing, reversals, interest computations, and re-availment, turning an anti-abuse measure into a persistent compliance and working-capital challenge.
The Priya Blue Industries case puts several foundational questions under the judicial lens:
Supreme Court jurisprudence under both CENVAT and GST affirms that ITC is nota concession but a component of the value-added tax structure. If so, can a commercial condition override a constitutional tax principle?
The 180-day condition places genuine payment delays on the same legal foot in gas non-genuine or sham transactions. Principles of proportionality demand that anti-evasion measures be narrowly targeted and not universally imposed.
Global VAT frameworks hinge on the existence of a valid taxable supply, not on when payment is received. India remains a rare jurisdiction where credit entitlement is tied to payment timing, an approach arguably inconsistent with the neutrality principle.
Through the imposition of a rigid 180-day statutory timeline against the commercially negotiated credit periods, a number of structural frictions apparently come into play:
In many industries, especially capital-intensive sectors, EPC contracts, infrastructure, exports, and manufacturing (having long-cycle), the negotiated credit period routinely exceeds the statutory cap of 180 days, in alignment with project milestones, cash-flow sequencing, or industry practice. This statutory cap effectively reduces the commercial arrangements, compelling parties to fit their contract terms within a tax-triggered timeline. This raises concerns about whether the provision disproportionately restricts contractual freedom, an element intrinsically linked to the constitutional right to carry on business.
The provision places the consequences of delayed payment squarely on the recipient, irrespective of the reason for the delay, whether commercial negotiation, performance disputes, supplier delays, or funding cycles. Even where the recipient has legitimately received the goods or services and has onward supplied them, a delay in paying the supplier can trigger reversal of the vested ITC. This shifts financial risk and working-capital burden in a manner that disrupts the natural allocation of obligations within the supply chain.
The supplier’s GST obligation arises upon supply and is independent of whether and when payment is received. Conditioning the recipient’s ITC on the timing of payment when the supplier’s tax liability is independent of that timing creates a conceptual disconnect. This disconnect compromises the neutrality of GST and introduces an element of arbitrariness into the credit framework, as the existence of a valid taxable supply does not correlate with the timing of consideration.
Although the statute allows credit to be re-availed once payment is ultimately made, the interim reversal, combined with exposure to interest, creates financial uncertainty, particularly for contracts with inherently longer payment cycles. The absence of a specific statutory timeline for re-availment (beyond the general restriction under Section 16(4)) offers conceptual flexibility but still leaves businesses vulnerable to repeated reversals and reconciliations. Businesses must undertake continuous ageing analysis of vendor invoices, monitor the 180-daytrigger, execute reversals, compute interest, and thereafter re-avail the credit. For large organisations with extensive vendor ecosystems, this introduces substantial compliance costs and operational complexity. The misalignment between statutory timelines and prevailing commercial practices amplifies this burden, converting a safeguard provision into an ongoing administrative challenge.
The Gujarat High Court’s review of the 180-day reversal rule presents a rare opportunity to recalibrate a provision that has long operated in tension with GST’s philosophy. The question is not whether revenue must be protected, but whether commercial payment timelines are an appropriate basis for restricting or deferring a taxpayer’s right to credit.
A more proportionate framework, one that distinguishes between genuine transactions and sham arrangements, could restore balance and realign GST with global best practices. As the case progresses, the outcome will likely shape the next phase of GST evolution, reaffirming credit as a structural right, reinforcing contractual autonomy, and ensuring that compliance keeps pace with complex, real-world commercial practices.
Shilpa Verma, Associate Director, Grant Thornton Bharat, has also contributed to this article.
This article first appeared in the CNBCTV-18 on 4 December 2025.
