Why Should You Pay Vendor Invoices on Time?

Failing to clear vendor invoices can lead to severe repercussions considering it falls under breach of contract under the Indian Contract Act. In such cases, the vendor can file a First Information Report (FIR) under Section 415 of the Indian Penal Code (IPC) against the Director(s) or owner(s) of the company. Vendors can recover the due amount through a civil suit.

Impact of Failing to Pay Invoices

Failing to clear invoices on time can impact and potentially damage your relationship with vendors. It can lead to your account being put on hold and restrict you from acquiring essential supplies for your business. In addition, a business’ profits are significantly impacted by how one manages their purchasing/sales relationships. As such, defaulting on vendor invoice payments can impact your sales strategies and limit you from profiting from any prompt payment discounts.

Failing to pay invoices can significantly impact a company’s reputation. Defaults can lead to it being viewed as unreliable and result in people not trusting you to conduct any business with your organization. It can basically present your company to be facing some issues.

It can also adversely affect the credit rating of a company, which shall create issues when opening a credit account in the future. Companies may have to bear some interest for the unpaid invoices for each day they default on payment.

Considering late payments fall under breach of contract, failing to timely pay invoices can lead to you losing the contract and facing legal action.

If there are several unpaid invoices, it can hinder your ability to accurately analyze company funds and make apt financial decisions. Finally, it shall also impact the financial status of the company as a whole and limit any potential growth.

Reversal of Credit/Payment of Output Liability

GST payments to vendors are available as Input Tax Credit (ITC) to the purchaser of goods or services. However, this shall be subject to the provisions and conditions defined under the Central Goods and Services Tax (CGST) Act, 2017. This GST would be added by the supplier to their output liability and reported in Form GSTR-1 periodically.

One of the above-mentioned conditions provided under CGST Act, 2017 mandates purchasers to settle invoices within 180 days of its issuance regardless of the reason behind non-payment. If they fail, the ITC availed by the purchaser shall be added to the output liability. It is actually unclear why such ITC must be reported as output liability in regular tax declarations. Besides, when the proviso was primarily drafted, a ‘Form GSTR-2’ was established as the document where such declarations would be made. However, this form was never introduced for this purpose.

It is also necessary to consider that no ‘supply’ is affected by the non-payment of vendor invoices by the purchaser. As such reporting such liability as output tax liability shall result in payment of this liability without affecting any ‘supply’, which is contrary to the basic conditions mentioned under Section 9 of the CGST Act, 2017.

Therefore, at this time, there is no proper structure for reporting such liabilities in tax declarations that must be filed periodically by the taxpayers. As such, this issue must be clarified by the Government through an adequate amendment/clarification.

Non-Payment to MSME Vendors

All matters related to the non-payment of invoices of micro, small and medium enterprises (MSME) are governed by the MSME Act, 2006. As per the provisions of the Act, if the invoices are not cleared within 45 days from receiving such goods/services, the defaulter shall be charged three times the bank rate prescribed by the Reserve Bank of India (RBI).

Vendors can file an application with respect to this on the MSME ministry portal - https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx.

The Government of India introduced clause (h) in Section 43B of the Income Tax Act, 1961 to reduce the delays in payments. This move aimed to penalize the defaulter in such cases as well. As per this clause, expenses claimed by the defaulter under MSME shall not be permissible if the payments have not been made to the respective vendor.

Remedies

Under Civil Law

• Order 37 of Civil Procedure Code

This order grants individuals who wish to recover their dues the power to file a summary suit against the purchaser. This order falls under speedy trials and once the case is filed and the defender is summoned, they are granted 10 days to defend their stand. Failing to do so would result in the Court deeming the plaintiff’s claims to be valid.

Defendants can defend the case by providing apt evidence and through cross-examination. If the Court is convinced that the credit was not taken by the defendant, the plaintiff shall receive nothing. However, if the plaintiff’s claims are found to be true, the defendant shall have to pay the due amount and be held liable for failing to make timely payments.

• Negotiable Instruments Act, 1881

Laws provided under the Negotiable Instruments (NI) Act govern matters related to non-payment of invoices through cheque or bill of exchange, etc. Different sections of the NI Act address different types of instruments.

In case a purchaser delays the payment for certain invoices through cheques, the vendor may file a suit under Section 138 of the NI Act. Under Section 138 of the Act, if the purchaser’s cheque bounces, a legal notice may be sent to them. If the payment is still not cleared within 30 days, the vendor may file a suit against the purchaser under this section.

Under Criminal Law

• Section 406 of the Indian Penal Code

This Section addresses matters related to breach of trust. Under Section 406 of the Indian Penal Code (IPC), vendors can file a legal suit against purchasers in case of breach of trust. The vendor must prove that the purchaser has done so by not paying for the goods/services they have received.

Anyone who commits criminal breach of trust may either face imprisonment that may extend up to three years or a fine or both.

• Section 417 of Indian Penal Code

Matters related to cheating are governed by this section of the IPC. Cheating, here, refers to any kind of cheating between purchasers and vendors or between any two individuals.

Anyone found cheating shall be punishable either with imprisonment that may extend up to one year or with a fine or both.

• Section 420 of Indian Penal Code

This Section offers relief to an individual who has been cheated. This includes the cheating mentioned in Section 417 of the IPC.

Individuals punished under this Section may face imprisonment that may extend up to seven years and shall be required to pay a mandatory fine as well.

Legal Action Against Organization for Defaulting on Invoice Payments

Apart from the legal actions mentioned above, the insolvency resolution process is another legal action that may be taken against any company that fails to clear vendor invoices. This process can be initiated by filing an application with the National Company Law Tribunal (NCLT).

Conclusion

Considering the number of legal actions that a vendor can take, purchasers must ensure to clear all vendor invoices within the specified period. Besides, this must not just be done to safeguard against legal actions but also to prevent any damage to your relationship with the vendor or to your company’s reputation in the market.