Rule 37: ITC reversal when you do not pay your supplier within 180 days
A payables ageing report is a GST liability report. Very few finance teams read it that way.
Under the second proviso to Section 16(2) read with Rule 37, where a recipient has availed credit but has not paid the supplier the value of the supply together with tax within one hundred and eighty days from the date of the invoice, the credit must be reversed. The reversal is made in the return for the period immediately following the expiry of the period, with interest, and the credit may be re availed when payment is made. Re availment is not subject to the Section 16(4) time limit.
What triggers the reversal
The trigger is non payment of the value of the supply along with the tax, within one hundred and eighty days of the invoice date. Part payment triggers proportionate reversal.
The rule does not apply to supplies on which tax is payable under reverse charge, and it does not apply to deemed supplies where consideration is not required, such as supplies between distinct persons made without consideration under Schedule I.
Retention money, disputed deductions, liquidated damages withheld and credit notes not yet issued are the usual causes of an unnoticed trigger. A debit or credit note that adjusts the value must be traced, because the reversal follows the value actually payable.
Interest, and the point departments get wrong
Interest is payable on the reversal for the period from the date of availment. Where a reversal was made late, the department computes interest from availment to reversal, and that is generally correct under Rule 88B for credit wrongly availed and utilised.
The argument worth making is on utilisation. Where the credit remained in the ledger and was not used to discharge output tax, the interest exposure should be computed accordingly.
There is no interest consequence on re availment. Credit re availed after payment does not carry interest, and a demand that charges interest on the re availed amount should be resisted.
The control that prevents the dispute
Run a payables ageing report at each month end filtered at one hundred and fifty days, so that a supply approaching the limit is visible before it crosses it.
Where a payment is withheld for a commercial reason, decide consciously whether to reverse and re avail, or to settle the payment. The reversal is not a penalty; it is a timing cost.
Where a dispute with a supplier will end in a reduced price, get the credit note issued rather than carrying an unpaid balance, because the credit note changes the value and removes the trigger.
What to do on Monday
Add a one hundred and fifty day flag to the payables ageing report and review it with the GST return, not with the audit.
Maintain a reversal and re availment register with dates, because the re availment is what the department disputes.
Where price is in dispute, obtain a credit note instead of carrying an unpaid balance past the limit.
Confirm balances with major suppliers annually, so that set offs relied on as payment are documented.
This page states the general position. A reader with a specific question on their own facts may write to the GST practice at AMLEGALS.
Write to the GST practiceQuestions we are asked on this
Does the 180 day rule apply to related party supplies without consideration?
No. Where consideration is not required, as in Schedule I supplies between distinct persons, the value is deemed to have been paid.
Is reversal required for reverse charge supplies?
No. The rule excludes supplies on which tax is payable under reverse charge.
Can we re avail credit after the November deadline for the year?
Yes. Re availment following payment is not subject to the Section 16(4) date, and a demand asserting otherwise is wrong.
What if we pay only the tax component and not the value?
The rule requires payment of the value together with tax. Paying only the tax does not save the credit.
Does a book adjustment count as payment?
A genuine set off against a receivable from the same party, recorded in the books, is generally accepted as payment. Keep the confirmation of accounts.
In this cluster
- Input tax credit under GST: the complete 2026 position
- Section 16(2)(c): can your ITC be denied because the supplier did not pay tax?
- Section 16(4) time limit for claiming ITC: what survives after the amnesty
- GSTR-2A and 2B mismatch notices: how to answer without conceding
- Blocked credits under Section 17(5): the clause by clause map
- Safari Retreats: what the Supreme Court decided on ITC for construction, and what Parliament then undid
- ITC on canteen, transport, insurance and other employee benefits
- ITC reversal under Rules 42 and 43: working the formula correctly
- Rule 37A: reversal where your supplier did not file its GSTR-3B
- Rule 86A blocking of the electronic credit ledger: the remedies that actually work
GST Insights is published by AMLEGALS for general information. Law stated as on 3 September 2026. Not advice on any particular set of facts; not an advertisement or a solicitation under Rule 36 of the Bar Council of India Rules. Readers with a question on their own facts may write to the GST practice of their own accord.