GST amendment Credit note and ITC availment

Background

Section 34(2) of the CGST Act allows a supplier to issue a credit note to adjust the taxable value or tax payable in case of:

• Post-supply discounts,
• Returns of goods, or
• Deficiencies in services.

Original Provision:

• The supplier could reduce their output tax liability by issuing a credit note, provided the recipient (buyer) also adjusts their Input Tax Credit (ITC) accordingly.
• The reduction in tax liability was contingent on the credit note being issued within a prescribed time and reported in the relevant GST return.

Amendment to the Proviso

The proviso to Section 34(2) has been amended to introduce two new conditions under which the supplier cannot reduce their output tax liability when issuing a credit note:

1. Condition 1:

• • The supplier cannot reduce output tax liability if the recipient has already claimed ITC on the original invoice and has not reversed the corresponding ITC after receiving the credit note.
  • Rationale: Prevents double benefit (ITC claimed by recipient + reduced liability for supplier).

2. Condition 2:

• • The supplier cannot reduce output tax liability if the tax burden has already been passed on to another party (e.g., the recipient further charged GST to an end consumer).
  • Rationale: Ensures the tax adjustment does not lead to revenue loss if the tax is no longer borne by the recipient.

Examples

Example 1: Recipient Fails to Reverse ITC

• Scenario:
  • Supplier issues an invoice for ₹1,00,000 + ₹18,000 GST.
  • Recipient claims ₹18,000 ITC.
  • Later, supplier issues a credit note for ₹10,000 (₹8,474 taxable value + ₹1,526 GST).
  • Recipient does not reverse ₹1,526 ITC.
• Impact:
  • Supplier cannot reduce output tax liability by ₹1,526.
  • Supplier must pay ₹18,000 GST (original liability), despite issuing the credit note.

Example 2: Tax Burden Passed On

• Scenario:
  • Supplier sells goods to a retailer, charging ₹18,000 GST.
  • Retailer sells goods to consumers, charging ₹21,600 GST (including their margin).
  • Supplier later issues a credit note for defective goods.
• Impact:
  • Since the retailer already passed the tax burden to consumers, the supplier cannot reduce their output tax liability.

Practical Implications

For Businesses:

1. Coordination with Recipients:

• • Suppliers must ensure recipients reverse ITC promptly after credit notes are issued.
  • Track ITC reversals through GST portals or written confirmations.

2. Documentation:

• • Maintain records proving the tax burden was not passed on (e.g., agreements, pricing structures).

3. Compliance Risks:

• • Increased scrutiny on credit notes to prevent misuse.
  • Mismatches in GSTR-1 (supplier) and GSTR-2B (recipient) may trigger notices.

Conclusion

Key Takeaways:

• The amendment ensures tax neutrality by blocking output tax reduction in cases of double benefits or shifted tax burdens.
• Suppliers must now proactively verify ITC reversals and tax burden status before claiming adjustments.

Compliance and monitoring:

1. Automate Compliance: Use GST compliance software to track credit notes and ITC reversals.

2. Strengthen Contracts: Include clauses requiring recipients to reverse ITC within stipulated timelines.

3. Regular Audits: Conduct periodic reviews of credit notes to ensure adherence to new conditions.

This amendment underscores the need for collaboration between suppliers and recipients and reinforces the GST framework’s focus on preventing revenue leakage. Businesses and practitioners must adapt processes to align with these stricter compliance requirements.