Credit notes and its tax adjustments in light of the clarification issued by the CBIC on evidence to be considered for post-sale discount

– Recommendation of 53rd GST Council Meeting held on 22-6-2024
– Clarification issued by the CBIC vide Circular No. – 212/6/2024-GST dated 26-6-2024

Credit notes in GST amidst clarifications by the CBIC on post-sale discount related tax adjustments

1. ‘Discount’ – The term in itself contains a lot, right from the customers who often look for the discounts, suppliers who strategize their marketing policies to maximize their sales, revenue department from the perspective of scrutinizing whether the tax liability reduced through credit notes have been correspondingly reduced by the recipient or not, professionals from the perspective of advising the right approach in alignment with the law to safeguard the taxpayer from any future litigation, etc.
2. The same topic from the perspective of GST has been contagious since the beginning of the GST era and has gained momentum after the clarification has been issued by the CBIC vide Circular No. 212/6/2024-GST dated 26-6-2024 on the recommendation of the GST Council vide its 53rd meeting held on 22-6-2024.
3. Discount, if given before or at the time of supply of goods and/or services, and recorded on the face of the invoice, the value of taxable supplies is net of discount and on which GST is levied. Merely because discount is offered, does not necessarily means that credit note needs to be issued, as because in the instant case, the tax liability is not yet discharged as the transaction in itself is originating for the first time. Then the question that comes is when is the discount offered is given effect through credit note. In order to understand this, first we need to understand the meaning of ‘invoice’ and the ‘credit note’. The term ‘invoice’ is defined in clause (66) of section 2 of the CGST Act, 2017 which means the tax invoice referred to in section 31. Section 31(1) stipulates tax invoice needs to be issued before or at the time of removal/delivery/making available of the goods and likewise section 31(2) stipulates tax invoice needs to be issued before or after the provisions of service but within a prescribed time. So, the term ‘credit note’ is not covered within the meaning of ‘invoice’ u/s 31. Further, if any discount is given before or at the aforesaid timeline given in section 31(1) and 31(2), there is no requirement of issuance of separate credit note. Now, we can understand what exactly is ‘credit note’ and where it can be issued.
4. Credit note is dealt under section 34(1) and 34(2), therefore, it is important to reproduce the said provision to understand the law:
   • ‘Section 34(1): Where one or more tax invoices have been issued for supply of any goods or services or both and the taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient one or more credit notes for supplies made in a financial year containing such particulars as may be prescribed.
   • Section 34(2): Any registered person who issues a credit note in relation to a supply of goods or services or both shall declare the details of such credit not in the return for the month during which such credit note has been issued but not later than the thirtieth day of November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:
   • Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.’
5. In simple words, credit notes are not mandatory to be issued as per section 34(1) but is mandatory to be reported as per section 34(2) once it has been issued in accordance with section 34(1) as the choice of word are ‘may’ and ‘shall respectively.
6. The following needs to be ensured for issuing a credit note as per section 34(1):
   • Credit Note can be issued only against the tax invoices earlier issued;
   • The taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply; or
   • Where the goods supplied are returned by the recipient; or
   • Where goods or services or both supplied are found to be deficient;
   • Credit Note must be issued only in the manner prescribed in Rule 53(1A) of the CGST Rules, 2017
7. The situation ‘The taxable value or tax charged in that tax invoice is found to exceed the taxable value or tax payable in respect of such supply’ as mentioned in above point is wide enough to cover many scenarios like post supply discount, GST paid by issuing tax invoice on advances received but the contract has been cancelled thereafter, etc.
8. Once the Credit Note has been issued as per section 34(1), the reporting of the said credit note and adjustment of tax already reported in original tax invoice, needs to be done in accordance with section 34(2):
   • Such credit note shall be declared in the return for the month during which such credit note has been issued but not later than the 30th November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier; and
   • The tax liability shall be adjusted in such manner as may be prescribed.
   • However, as per proviso to section 34(2), no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Now, there arises a few important questions:-

• In which rule the manner has been prescribed for adjustment of tax liability on account of credit notes?
• What is the meaning of incidence of tax and interest on such supply has not been passed on? What is the meaning of ‘interest’ in this condition?
• Is it mandatory to issue credit notes (with GST) under section 34(1) or can the commercial/financial credit notes be issued (i.e., without GST) by the businesses? Will the recipients of supply have any say/reservations in getting commercial credit notes instead of GST Credit Notes? Will the suppliers be at loss/beneficial situation in case commercial credit notes are issued by them?

9. The manner of reduction in tax liability seems to have been specified in section 43 which has been omitted vide Finance Act, 2022, w.e.f., 1-10-2022.

Section 43:

Omitted by the Finance Act, 2022. w.e.f. 1-10-2022. Prior to its omission, section 43 read as under:

“*43. Matching, reversal and reclaim of reduction in output tax liability. —
(1) The details of every credit note relating to outward supply furnished by a registered person (hereafter in this section referred to as the “supplier”) for a tax period shall, in such manner and within such time as may be prescribed, be matched —

(a) with the corresponding reduction in the claim for input tax credit by the corresponding registered person (hereafter in this section referred to as the “recipient”) in his valid return for the same tax period or any subsequent tax period; and

(b) for duplication of claims for reduction in output tax liability.

(2) The claim for reduction in output tax liability by the supplier that matches with the corresponding reduction in the claim for input tax credit by the recipient shall be finally accepted and communicated, in such manner as may be prescribed, to the supplier.

(3) Where the reduction of output tax liability in respect of outward supplies exceeds the corresponding reduction in the claim for input tax credit or the corresponding credit note is not declared by the recipient in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.

(4) The duplication of claims for reduction in output tax liability shall be communicated to the supplier in such manner as may be prescribed.

(5) The amount in respect of which any discrepancy is communicated under subsection (3) and which is not rectified by the recipient in his valid return for the month in which discrepancy is communicated shall be added to the output tax liability of the supplier, in such manner as may be prescribed, in his return for the month succeeding the month in which the discrepancy is communicated.

(6) The amount in respect of any reduction in output tax liability that is found to be on account of duplication of claims shall be added to the output tax liability of the supplier in his return for the month in which such duplication is communicated.

(7) The supplier shall be eligible to reduce, from his output tax liability, the amount added under sub-section (5) if the recipient declares the details of the credit note in his valid return within the time specified in sub-section (9) of section 39.

(8) A supplier in whose output tax liability any amount has been added under sub-section (5) or sub-section (6), shall be liable to pay interest at the rate specified under sub-section (1) of section 50 in respect of the amount so added from the date of such claim for reduction in the output tax liability till the corresponding additions are made under the said sub-sections.

(9) Where any reduction in output tax liability is accepted under sub-section (7), the interest paid under sub-section (8) shall be refunded to the supplier by crediting the amount in the corresponding head of his electronic cash ledger in such manner as may be prescribed:

Provided that the amount of interest to be credited in any case shall not exceed the amount of interest paid by the recipient.
(10) The amount reduced from output tax liability in contravention of the provisions of sub-section (7) shall be added to the output tax liability of the supplier in his return for the month in which such contravention takes place and such supplier shall be liable to pay interest on the amount so added at the rate specified in sub-section (3) of section 50.”
*Enforced with effect from 1-7-2017 (Except the proviso to sub-section (9) of section 43)

Agenda Item 9A(iii) of 43rd GST Council Meeting in its Sl. No. 6 of Table -I has provided the rationale behind omission of said section 43 as mentioned below:

‘The existing section 43 may be omitted as a whole as the concept of 2-way communication proposed in earlier GSTR1/2/3 model is proposed to be done away with and liability to be determined on self-assessment basis. Further, Credit note and duplication related checks have already been incorporated in the GSTR-2B statement.’

This in itself speaks volumes that the concept of two-way communication between supplier and recipient regarding the invoices/credit notes never went live as it was envisaged and basis which the law was initially drafted, hence, the section 43 was omitted and liability for the said relevant period has to be determined on self-assessment basis. In simple words, where the credit notes have been issued by the supplier which are getting reflected in GSTR 2A of the recipients, it is the responsibility of the recipients to reverse the credits on such credit notes as per the provisions of section 16 of the CGST Act, 2017 read with section 39(9) and if such recipients have not reversed such credits on self-assessment basis, then it is the violation of law on the part of the recipients of supply and accordingly, proceedings should be initiated against such recipients and not the supplier, as per the aforesaid agenda notes basis which section 43 has been omitted. Hence, after the omission of section 43, proceedings can be initiated only where self assessment in regard to reversal of input tax credit by the recipients has been done incorrectly. Further, even after the omission of the section 43, it has been clearly mentioned that credit note and duplication related checks have already been incorporated in the GSTR-2B statement which signifies that the GSTR 2B needs to be considered for availing credits net of credit notes by the recipients only.

 

Clarification issued by the CBIC vide Circular No. 212/6/2024-GST dated 26-6- 2024 on the recommendation of the GST Council vide its 53rd meeting held on 22-6-2024.

10. CBIC has clarified that in order to fulfil the condition of section 15(3)(b)(ii), in light of the fact that there is no system functionality/ facility presently available on the common portal to enable the supplier or the tax officer to verify the compliance of the said condition of proportionate reversal of input tax credit by the recipient, and till the time a functionality/ facility is made available on the common portal to enable the suppliers as well as the tax officers to verify whether the input tax credit attributable to such discounts offered through tax credit notes has been reversed by the recipient or not, the supplier may procure a certificate from the recipient of supply, issued by the Chartered Accountant (CA) or the Cost Accountant (CMA), certifying that the recipient has made the required proportionate reversal of input tax credit at his end in respect of such credit note issued by the supplier.

11. . It is worth noting that the mechanism of procuring the undertaking/certificate is a temporary mechanism but at the same time it appears from para 2.4 of the circular that the functionality to verify whether the ITC attributable to such discounts offered through tax credit notes has been reversed by the recipient or not, may be introduced on the common portal. It needs to be seen whether mechanism earlier prescribed in section 43 would be re-introduced or some other mechanism.

CA/CMA Certificate from the recipient where the amount of tax is exceeds INR 5 lakhs:

The said CA/CMA certificate may include details such as:

• the details of the credit notes,
• the details of the relevant invoice number against which the said credit note has been issued,
• the amount of ITC reversal in respect of each of the said credit notes along with the details of the FORM GST DRC-03/ return / any other relevant document through which such reversal of ITC has been made by the recipient.
• Such certificate issued by CA or CMA shall contain UDIN (Unique Document Identification Number).
• UDIN of the certificate issued by CAs can be verified from ICAI website https://udin.icai.org/search-udin and that issued by CMAs can be verified from ICMAI website https://eicmai.in/udin/VerifyUDIN.aspx

Undertaking/Certificate from the recipient where the amount of tax is not exceeding INR 5 lakhs:

In cases, where the amount of tax (CGST+SGST+IGST and including compensation cess, if any) involved in the discount given by the supplier to a recipient through tax credit notes in a Financial Year is not exceeding Rs 5,00,000 (rupees five lakhs only), then instead of CA/CMA certificate, the said supplier may procure an undertaking/ certificate from the said recipient that:

• the details of the credit notes,
• the details of the relevant invoice number against which the said credit note has been issued,
• the amount of ITC reversal in respect of each of the said credit notes along with the details of the FORM GST DRC-03/ return / any other relevant document through which such reversal of ITC has been made by the recipient.
• the said input tax credit attributable to such discount has been reversed by him.

12. Such certificates issued by the CA/CMA or the undertakings/ certificates issued by the recipient of supply, as the case may be, shall be treated as a suitable and admissible evidence for the purpose of section 15(3)(b)(ii) of the CGST Act, 2017. The supplier shall produce such certificates/undertakings before the tax officers, if required, during any proceedings such as scrutiny, audit, investigations, etc.

13. Even for the past period, where ever any such evidence as per section 15(3)(b)(ii) of CGST Act in respect of credit note issued by the supplier for post-sale discounts is required to be produced by him to the tax authorities, the concerned taxpayer may procure and provide such certificates issued by CA/CMA or the undertakings/ certificates issued by the recipients of supply, as the case may be, to the concerned investigating/audit/adjudicating authority as evidence of requisite reversal of input tax credit by his recipients.

14. The clarification seems to be on the basis of direction of The Hon’ble Rajasthan High Court in the case of Tata Motors Limited v. Union of India & Ors. [D.B. Civil Writ Petition No. 19967/2023] where the constitutionality of Section 15(3)(b)(ii) was challenged and direction was prayed to ask the Revenue to suggest a mechanism to make the section workable.

15. The question that arises is how will the taxpayer know at the beginning of the tax period whether the credit notes on account of post-sale discount exceed INR 5 lakhs or not. Further, are the documents that will be produced to satisfy that the ITC reversal has been made in cases where ITC is availed net of credit notes received in his GSTR 2A. Is DRC-03 a conclusive proof that ITC reversal has only been done and how to ascertain that the reversal has been made on those credit notes only which has been issued by the supplier to whom the undertaking/certificate is being issued.

16. Now, how about the cases where the false undertaking/certificate is being issued by the recipients’, what would be the impact on the supplier? It seems that once the undertaking/certificate is issued by the recipient, the recipient acknowledges the fact that he has received the credit notes and such notes belongs to the recipient, therefore, now the onus is on the recipient to reverse the ITC. But what if the false undertaking/certificate is being issued by the supplier himself in the name of the recipients, then in such circumstances producing the false evidences may lead to tax liability, interest and penalty under section 74 along-with penalty under other sections.

17. Tax invoice issued by the supplier and reported in his GSTR 1 reflect in the recipients GSTR 2A basis which ITC is availed in accordance with section 16(2) read with rule 36(4), the credit notes also issued by the supplier are reported in his GSTR 1 which reflects in the recipients GSTR 2A basis which ITC to be claimed in his GSTR 3B appears as net off Credit Notes in ‘ITC Comparison Table’ on the GST Common Portal. The verification of the GSTR 2A vs GSTR 3B is an ongoing exercise in every jurisdiction and wherever such credits have not been reversed on account of credits notes appearing in GSTR 2A, demand have either been raised or may be raised. Ultimately, even if the undertaking/certificate is procured in compliance with the circular, then also the department needs to validate it with the recipients GST return.

18. The similar mechanism of seeking undertaking/compliance has already been implemented in cases where ITC claimed in GSTR 3B is not appearing in GSTR 2A but in such cases, it is recipient who arranges for the undertaking/certificate from the supplier. In those cases, there is no more requirement of any undertaking/certificate as section 16(2)(aa) has been introduced but in the instant case, the mechanism is not yet in place so it is applicable for the past periods as well as prospectively.

19. The question that arises is what if the ITC reversal has been done by the recipient of supply in subsequent to the month in which the tax liability has been adjusted by the supplier. In terms of section 39(9), ideally any correction done within the timeline specified shall also be along-with interest. The issue is whether the supplier can also be charged interest for reducing its liability before the ITC reversal done by the recipient?

20. The question that also arises is whether the supplier who has paid the tax on notices being issued and in case of failure to provide the undertaking/certificate, will the supplier be again eligible to reduce his tax liability:

• if the ITC is reversed within the timeline specified in section 39(9) or
• where the ITC reversal has been done beyond the timeline specified in section 39(9) or
• where the ITC reversal has been demanded by the jurisdictional officer of the recipient through issuance of notice?

21. Further, it is important to note that there could be scenarios especially in past period cases where the taxpayers may have discontinued business with few dealers or dealers may be changed their line of business or dealer may have discontinued their business, etc., where it becomes very difficult to procure such undertaking/certification from them, so, are there any alternatives available especially in the past period cases. This is what taxpayers need to think about and ascertain how to deal in such scenarios.

Is circular applicable on all credit notes or only credit notes issued on account of post-sale discount?

22. The condition of ensuring reversal of ITC by the recipients has been mentioned only in two specific scenarios in the law while the credit notes can be issued on account of other reasons also as envisaged in section 34(1):

(i) In section 15(3)(b)(ii) in case of issuance of credit note on account of post-sale discount; and

(ii) In proviso to section 142(2)(b) in case of issuance of credit note on account of reduction in price in pursuance of a contract entered into prior to the introduction of GST.

23. The important question that arises is whether the clarification issued by the CBIC in regard to the requirement of undertaking/certificate is applicable only in case of post-sale discount or also in respect of reasons other than post-sale discount? The subject of the Circular clearly clarifies that the mechanism is for providing evidence to compliance of conditions of section 15(3)(b)(ii) by the suppliers. Further, the same has been clearly re-iterated in para 2.8 of the said circular. So, in our personal opinion, the said mechanism does not seem to apply on all type of credit notes as because the condition of ‘input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply’ is given only in section 15(3)(b)(ii).

Impact of circular on refunds arising out of non-adjustment of tax liability on account of issuance of credit notes

24. The clarification may prima facie appear to have a bearing on refunds which has been claimed under “Excess payment of tax, if any” through FORM GST RFD-01, as in such type of refunds, taxpayer needs to support their claim with proper undertaking/certificate from the recipient of supply that the ITC has been reversed by them. In this regard, it is pertinent to note that the claim has to be supported by an undertaking/certificate in accordance with rule 89(2)(l)/ 89(2)(m) of the CGST Rules, 2017, as refunds is governed under section 54. But the question arises is whether before granting refund, officer can verify credit notes issued in accordance with section 34. There may be two scenarios, (i) refund arising on account of credit notes issued in respect of post-sale discount; and (ii) refund arising on account of credit notes issued in respect of reasons other than post-sale discount. In scenario (ii), it appears that the refund can be granted in accordance with section 54 read with rule 89(2), but in case of scenario (i), the officer may look forward to verification of compliance with the requirements of the circular also. In regard to scenario (i), reliance can be placed in the case of Order in Appeal AHM-CGST-002-APP-ADC-14/2023-24 dated 31.05.2023 passed in the case of M/s TML Distribution Company Ltd, wherein The Additional Commissioner (Appeals) has denied refund on the grounds that the dealers on the part of the appellant failed to provide evidentiary proof of ITC reversal and exact amount in respect of ITC reversal made by them.

25. The question that also arises is whether the past cases in scenario (i) be opened on the ground that the circular is also applicable in respect of the past period as mentioned in para 2.8.

Is the condition mentioned in proviso to section 34(2) becomes redundant with the introduction of this circular or a taxpayer needs to comply with both the norms

26. Proviso to section 34(2) stipulates that the tax liability shall not be permitted to be adjusted if the incidence of tax and interest has been passed on to any other person while the Circular clarify that the undertaking/certificate procured from the recipient and produced by the supplier shall be the mechanism of complying with section 15(3)(b)(ii). Therefore, the important question that arises is whether a taxpayer is supposed to comply with both the conditions:

(i) Prove that the incidence of tax and interest has not been passed on which can be proved only by way of an undertaking/certificate backed by proper supporting from the supplier; and

(ii) Provide the undertaking/certificate by procuring from all the recipients of supplies that the ITC reversal has been made by them.

It is worth noting that in case credit note is issued to an unregistered person, supplier needs to comply with condition (i) only. Condition (ii) will not be applicable as the recipient is unregistered so no question of availing and reversal of ITC.

Different practices for claiming refund and adjustment of tax liability on account of issuance of credit notes

27. The question arises is why a need is there to follow different practices in respect of the same issue i.e.,

• Undertaking/Certificate from the ‘supplier’ that incidence of tax has not been passed on to the recipient in case of claiming refund, whilst
• Undertaking/Certificate to be produced before the authorities by the supplier after obtaining it from the ‘recipient’ in case of adjustment of tax liability.

28. The adjustment of tax liability was subject to the condition as given in proviso to section 34(2) which clearly stipulated that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person. It is important to understand the meaning of incidence of tax for which reliance can be place on Explanation (ii) of rule 89(2) which stipulates that:

‘where the amount of tax has been recovered from the recipient, it shall be deemed that the incidence of tax has been passed on to the ultimate consumer.’

29. Whether the incidence of tax has been passed on or not can be perused from the statutory financial statements wherein the sales of the company are certified by the statutory auditor and therefore the amount received from such customers cannot be more that the invoiced issued net of credit notes.

30. So, ideally, the supplier is supposed to prove that the incidence of tax and interest has not been passed on to the recipient. Whether the incidence of tax has been passed on to the recipient or not can be verified from the books of supplier itself, therefore, the onus lies on the supplier to prove whether the incidence of tax has been passed on or not which can be supported by way of an undertaking/certificate from the supplier itself wherein the recipient has no role to play in. It is worth noting that section 15(3)(b)(ii) was envisaged in light of the fact that mechanism of ascertaining whether the ITC has been reversed or not by the recipient was clearly enshrined in section 43 read with rule 73 but the same never got implemented, therefore, in the absence of such mechanism, mechanism prescribed in proviso to section 34(2) could have been relied upon, as a measure of ease of doing business. The reason is that like the tax invoice issued by the supplier and reported in his GSTR 1 reflect in the recipients GSTR 2A basis which ITC is availed in accordance with section 16(2) read with rule 36(4), the credit notes also issued by the supplier are reported in his GSTR 1 which reflects in the recipients GSTR 2A basis which ITC to be claimed in his GSTR 3B appears as net off Credit Notes in ‘ITC Comparison Table’ on the GST Common Portal. It is pertinent to note that in the era of data analytics where the notices are send on the basis of mis-matches could easily identify such scenarios where ITC availed by the recipient in his GSTR 3B exceeds GSTR 2A, and therefore, in cases where ITC has not been reversed or not taken into account while availing ITC can easily be demanded. Ultimately, even if the undertaking/certificate is procured in compliance with the circular, then also the officer needs to validate it with the recipients GST return.

31. Therefore, from the perspective of compliance of section 15(3)(b)(ii), issuance of undertaking/ certificate from the supplier itself could have suffice rather than procuring from recipients of supplies if the ITC reversal has been done by them or not, which could have fallen in alignment with refunds claimed on account of non adjustments of credit notes by issuance of undertaking/certificate from the supplier itself.

32. Further, in respect of past periods, where taxpayer has complied with GSTR 9C, which a Chartered Accountant has already certified could be considered in respect of the credit notes which are accounted in the books of accounts and reported in GST returns are genuine and in respect of which the incidence of tax has not been passed on.

Undoubtedly, in the absence of any functionality/facility to ensure the ITC reversal made by the recipients, the suppliers were facing litigations but the clarification has brought some respite to them for the past periods and an added compliance for the future. Government has given some flexibility which needs to be properly channelised. Certainly, there remains a grey area as it is difficult procuring undertaking/ certificates in entire 100% credit notes issued on account of post-supply discount due to plethora of practical challenges, which needs to be figured out for the past periods and calls needs to be taken for future compliances. Certainly, the tax leakages with such dual controls will largely minimise but at the same time, a permanent mechanism of ensuring ITC reversals on common portal should also be deployed with time

Hope the aforesaid adheres to your professional/business needs. In case of any clarification, please feel free to reach us at info@singhaniasgstconsultancy.com

Disclaimer: The views are strictly personal.