Introduction
This paper aims at providing a brief overview of GST and Input Tax Credit (ITC).
India launched the GST to eliminate the range of central and state taxes on goods and services, to integrate the taxation system. Goods and Service Tax provides for carry forward of credit of integrated tax paid on inputs which means that a business can set off or adjust the taxes paid on inputs against the taxes to be paid under the GST regime.
Provisions Related to ITC
1. Basic Mechanism: GST enables wherein the supplier is able to claim credit of taxes paid on the inputs that are used for the supply of goods or services. Such a credit mechanism helps in avoiding cases of passing of taxes from one level to another in the supply chain of credits.
2. Conditions for Claiming ITC: The provisions concerning the issuance and utilization of ITC are provided under Section 16 of the Central Goods and Services Tax Act, 2017 which establishes the conditions that entitle a recipient to avail ITC, which is the possession of tax invoices or goods/service received.
3. Exceptions: Some exceptions are that ITC limited to certain extent and does not apply to the sale of motor vehicle and goods/ services for own use.
Section 15(3)(b)(ii) and Its Importance
1. Context: The provision relating to the circumstances under which the value of the supply of goods or services or both shall be determined under section 15 of the CGST Act.
2. Sub-section 3(b)(ii): Indeed, this provision casts its focus on discounts that are provided after supply. It provides that any tax credit note which the supplier grants to the recipient through a discount after the supply has been made can be exempted from the taxable value so long the recipient has involving the input tax credit pertaining to the discount.
3. Importance: The latter is important as it comes as Section 15(3)(b)(ii) block the possibility to treat all discounts given by suppliers as nontaxable discounts. It is designed to avoid overcharging of the taxable amounts as well as assist in the computation of the total GST amount.
It is valuable to comprehend such basic elements of GST and ITC in order to make sense of the recent circular, which explains the way of proving compliance with Section 15(3)(b)(ii). This lays down the tone for a critical evaluation of the issues and consequences associated with the verification of reversals ITC which has been explained later in this article.
Understanding the Circular
Intent of the Circular
Understanding the Circular
What’s it all about?
The government recently released a circular regarding to GST Act. That is an effort to qualify how the business can manage ITC positions when offering discounts after a sales have been done. They wish to ensure people are observing the provisions of section 15(3)(b)(ii) of the GST Act relating to the discounts issued through credit notes after the sale.
What did section 15(3)(b)(ii) provide?
Well, it just means the reduction of price in goods sold which comes after some quantity has been sold. For these discounts to be excluded from the taxable value:
For these discounts to be excluded from the taxable value:
It means before or at the time of sale, there has to be consensus on the extent of the discount.
It has to be possible to directly relate the discount with specific invoices.
The buyer has to ‘’reverse’’ the Input Tax Credit of the amount of the discount, provided the seller issues a document in this regard such as a Credit Note.
Why is this important?
These rules ensure that only the correct value of whatever is sold subject to tax is taxed and this is arrived at taking into consideration any additional reductions made after the sale. It prevents business entities from exaggerating the taxable amount and is in consonance with the concept of GST – to only tax the addition value at each stage of the supply chain.
What function does the circular serve?
It elaborates how sellers and tax authorities can ensure people are abiding by the provision laid down under Section 15(3)(b)(ii). As for now, they advise enforcement of certificates from buyers or written statements from them since they plan on establishing a better system on the GST website later.
Business Relevance
These have to be known and applied by business to avoid any non compliance issues which will lead to tax disputes. This circular simplifies the verification process in case of reversal of ITC and brings uniformity in its application across field formations and jurisdictions.
Given the conditions under Section 15(3)(b)(ii) and the clarity in the circular, if business is transparent in transactions, the risk of wrong GST calculations can be reduced to a large extent. This will help us to sail through more smoothly on post supply discounts related issues.
Uncertainty: ITC Reversal Verification
The main issue with suppliers in this existing GST framework for post supply discounts is actually in this law itself as to who is to verify the reversals of ITC. Section 15(3)(b)(ii) clearly says recipients have to reverse ITC for discounts supplied through tax credit notes. But there is no mention in the circular and existing GST portal for any mechanism for suppliers or tax authorities to verify the same.
Supplier’s Dilemma: Suppliers are in a dilemma as to what is their role in ITC reversal compliance. They issue credit notes to the recipient for the taxes but the tools on the GST portal don’t allow them to check if the recipient has actually reversed the ITC.
Uncertainty in Compliance: Most of this uncertainty leads to confusion during audits or assessments where tax authorities may ask suppliers about their compliance under Section 15(3)(b)(ii). This can’t be proved by the supplier if there is no verification mechanism.
Supplier’s Burden
Apart from the lack of clarity, suppliers have a huge administrative burden to comply with ITC reversal:
Procurement of Certificates: The circular says suppliers can procure certificates from recipients issued by Chartered Accountants (CA) or Cost Accountants (CMA) for ITC reversal. But this adds to the administrative work and may cost extra to the suppliers.
Relying on Undertakings: Alternatively suppliers can rely on undertakings from recipients for ITC reversal especially for small transactions.
Business Impact
Procurement of certificates or undertakings will add operational costs for the suppliers specially for business which involves very high transactions.
Dedicated resources are needed to manage and track ITC reversal compliance which will distract companies from core business activities.
Non compliance can lead to penalties and legal issues affecting the financial health and reputation of the supplier for an action which was almost impossible to perform on suppliers end.
Operational Issues
Current System Limitations: No functionality on GST Portal
The biggest operational issue suppliers are facing is the absence of a dedicated functionality on the GST portal to verify the reversal of Input Tax Credit (ITC) under Section 15(3)(b)(ii). Suppliers don’t have the required tools or mechanism on the GST portal to verify if the recipient has reversed the ITC for the discounts supplied through tax credit notes. The current process is manual and based on documentation and third party certifications from Chartered Accountants (CA) or Cost Accountants (CMA) which is time consuming. A mechanism must be brought in order to automate this time consuming process and remove the extra burden which is levied on suppliers.
Compliance: Timeliness and Accuracy of ITC Reversals
Without a verification mechanism, suppliers cannot meet Section 15(3)(b)(ii) requirements and have to face penalties and audit issues. Manual compliance consumes resources and distracts from core business activities. Inadequate documentation or delay in getting certificates increases the risk of non-compliance during audits.
Legal and Compliance Perspective
GST Law: Section 15(3)(b)(ii)
The circular is issued by the tax authority to provide guidance on implementation of Section 15(3)(b)(ii). But challenges persist in aligning with GST law. While the circular explains the process, no system-driven mechanism on GST portal raises questions on practical implementation of ITC reversal. Legal interpretation may vary on supplier’s liability under Section 15(3)(b)(ii) especially on burden of proof and compliance documentation. Suppliers are required to maintain records and documentation to prove compliance with ITC reversal requirements including certificates from recipients of the credit notes.
Conclusion
circular issued under Section 15(3)(b)(ii) of the CGST Act covers the GST compliance aspects related to post supply discounts and ITC reversal. It aims to provide clarity on procedural requirements for suppliers and tax authorities especially on ITC reversal verification after discounts are given through tax credit notes. But the implementation has raised many issues.
There is no automated tool on GST portal for ITC reversal verification, businesses are facing operational issues. Suppliers are unclear on their obligations and absence of process is adding to administrative burden and compliance cost. Interpretative issues on legal obligations and evidences required for ITC reversal need clarity and system enhancements.
Going forward we need to simplify the process and enhance system capabilities on GST portal. This includes automation, standardization of documents and clear guidelines so that there is uniformity across all states. By addressing these and implementing reforms India can have a business friendly GST regime, transparency, efficiency and ease of doing business for all.
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