Circular on Procedure of GST return of time expired drugs or medicines: Analysis

Analysis of Circular 72/2018 dated 26-10-2018 on Procedure in respect of return of time expired drugs or medicines

The Circular puts forth following options and persuant actions:

Important points to ponder:

1. The earlier clarification issued on the subject vide letter no. 349/57/2017-GST dated 26-12-2017 to IPA mentioned that return of expired medicine is not a supply. However, the circular says that in case the person returning the time expired goods is a registered person (other than a composition taxpayer), he may, at his option, return the said goods by treating it is as a fresh supply and thereby issue an invoice for the same (hereinafter referred to as the, “return supply”).
2. While the circular treats the delivery by composition person as not a supply , in the same breadth it says that composition dealer may issue bill of supply at the rate applicable to composition dealer and unregistered person may issue commercial invoice (and not a GST Invoice)
3. Where manufacturer receives medicine from the wholesaler against fresh invoice and not credit note, then ITC available against this fresh invoice of return supply shall only be reversed and not the ITC availed at the time of manufacture. This shall result in not increasing the cost of the manufacturer and hence no increase shall be passed down the supply chain of wholesaler and retailer.
4. It further implies that if goods are returned by composition dealer or unregistered person against the invoice, no ITC need to be reversed. The circular, however, is silent on this aspect.
5. Where return of goods is made by issue of fresh invoice, following proposition need to be taken care:
6. Return of goods may be valued at the rate or amount at which original invoice was issued or Return of goods may be at the amount or rate mutually agreed.
7. There may, however, be a change in rate of tax from the date when original invoice was issued, in which case though value may be adopted as per original invoice but the rate of tax to be charged shall be as per rates of taxes applicable at the time of issue of invoice.

• There may be direct return by consumer to the manufacturer e.g. return of medicines by the hospital. This situation has not been discussed in the circular.

6. The issue of fresh invoice could have been an ideal situation but the moot question is whether drugs and medicine law permits the issue of fresh invoice by retailer. If not, whether industry needs to use mix of invoice and credit note mechanism, thus issuing credit note for return by retailer and then issuing invoice for return by wholesaler to manufacturer.
7. Where credit note is issued after the expiry of time period u/s 34(2), it shall only be a financial credit note and not GST credit note. No reduction of output tax liability shall be allowed to the supplier. Such credit note even need not be reflected in Table 9B of GSTR-1 and shall form part of reconciliation in GSTR-9C.
8. The return of goods against credit note has been stipulated to be made by issuing delivery challan and not credit note. Though for the purpose of liability adjustment credit note has been required to be issued. This shall have effect on the E –way bill to be issued. It shall create confusions as to whether generate E way bill against invoice or against delivery challan.
9. An important observation in the circular is about issue of credit note in case of supplies to unregistered person. Para 3(B)(b) of the circular states that if the credit note is issued within the time limit specified in sub-section (2) of section 34 of the CGST Act, the tax liability may be adjusted by the supplier, subject to the condition that the person returning the time expired goods has either not availed the ITC or if availed has reversed the ITC so availed against the goods being returned. This observations is important because the contents of the circular have been stated to be applicable to other scenarios also where the goods are returned on account of reasons other than time expired medicines. Reduction of tax liability against sale to unregistered person is a moot point. Section 43 allows reduction of tax liability against credit note only if there is matching reduction of ITC by the recipient. Table 7 of GSTR-1, however requires to state B2C(Small) turnover net of credit notes, without declaring the details. For B2C(L) details are required to be disclosed in Table 9B of GSTR-1. GSTR-9, Point 4A also requires to declare supplies to unregistered person net of debit and credit notes. Since section 43 is not in operation, due to suspension of GSTR-2, the above circular and form of GSTR-1 fortifies the view that tax liability can be adjusted against B2C supplies on account of credit note.

Conclusion: This circular need some further clarity because:

1. It does not take cognizance of law relating to drugs and medicines.
2. It does not address the issue of reversal of ITC in case of return by unregistered person or composition person.
3. This circular makes supply a subject of “option”. In earlier clarification dated 26-12-17 issued to IPA, the return of expired medicines was categorically denied the status of supply and perhaps correctly so.
4. Situation of direct return by consumer to manufacturer has not been discussed.
5. Both credit note and delivery challan have been required to be issued for return by credit note.

Since the contents of circular have themselves been stated to have wider ramifications, the areas of obscurity should be done away.