Some Common Misconceptions Under GST

Summary: Even after seven years of GST implementation in India, several misconceptions persist among taxpayers. Common misunderstandings include the belief that no GST is payable on the sale of fixed assets if no input tax credit (ITC) was availed during purchase, and that GST is payable only on the margin for non-motor vehicle sales. Many wrongly assume that sales returns must occur within six months, whereas GST permits credit notes until November 30 of the following financial year. Purchasers often incorrectly issue GST debit notes for purchase returns instead of accounting debit notes. Petrol pumps are obligated to file GSTR-9 if their aggregate turnover, including petrol/diesel sales, exceeds ₹2 crore. In cases of returns, delivery challans, not credit notes, must accompany goods during transport. There is confusion regarding reverse charge mechanism (RCM) on purchases from unregistered suppliers and freight payments to GTAs, with some taxpayers unaware that ITC is available on tax paid under RCM. Composition taxable persons must also comply with RCM provisions. Additionally, RCM on residential property rent applies regardless of landlord registration status. Taxpayers often incorrectly assume that ITC can be claimed on all business expenses, overlooking the specific restrictions listed under Section 17(5) of the CGST Act.

Introduction: It has been seven and a half years since GST was introduced in India . Despite several Circulars and Press releases issued by the Authorities, there are a few misconceptions in understanding the GST Law  among the taxpayers. This article deals with a few of them and tries to clarify the correct legal position in relation to these matters . The matters covered here are based on the queries received by the Author from the taxpayers during the course of professional practice  and therefore the Article is mainly intended for the taxpayers /general public  who may not have a working knowledge of the GST Law  .

1. No ITC availed under GST on purchase of fixed assets, so no GST payable on Sale?

There is a general misconception that if no Input Tax Credit ( ITC ) was availed on purchase of fixed assets, there is no need to pay GST on sale of such assets . In respect of fixed assets, which were purchased during the VAT regime (before introduction of GST), ITC may not have been availed on purchase of the assets or the ITC availed may be of VAT paid to the supplier on purchase of the assets. Many taxpayers are under the belief that since no GST ITC was availed on purchase of the assets , no GST is payable on sale of such assets. It may be noted that sale of fixed assets constitutes a supply under Section 7 of the CGST Act and accordingly , GST is payable on such sale, irrespective of whether ITC was availed on the purchase of such fixed assets or not .

It may also be noted that in case ITC of GST was availed on purchase of the assets being sold , it is  necessary to  comply with the provisions of Section 18(6) of the CGST Act 2017 , which reads as follows:-

In case of supply of capital goods or plant and machinery, on which input tax credit has been taken, the registered person shall pay an amount equal to the input tax credit taken on the said capital goods or plant and machinery reduced by such percentage points as may be prescribed or the tax on the transaction value of such capital goods or plant and machinery determined under section 15, whichever is higher.

Accordingly , where an asset on which ITC was availed is sold, it is necessary to pay back the ITC availed on purchase of the asset reduced by such percentage points as may be prescribed under the Rules. As per Rule 44(6) read with Rule 44(1) (b) of the CGST Rules  , the aforesaid ITC shall be calculated by assuming the useful life of the asset as five years ( 60 months ) .  Suppose , an asset is being sold after four years (48 months ) , the amount of ITC required to be paid back is Total ITC * 12/60.  However ,if the GST payable on the sale of such asset is higher than the amount of ITC calculated as aforesaid  ,the payment of such GST would be sufficient compliance . This is explained below with a simple example :-

Asset sold after four years (48 months)

ITC availed on purchase of fixed asset = Rs 60,000

ITC to be paid back as per Section 18(6) = Rs 12,000 (60000*12/60)

ITC payable on sale of the asset (assuming sales consideration Rs 1,00.000/- and GST rate 18%) = Rs 18,000

In this case , the taxpayer has to pay GST of Rs 18,000/-  since it is higher than the ITC to be paid back as computed under Section 18(6) of the CGST Act.

However , if the sales consideration is Rs 60,000 in the above example , then the GST payable on such sale would be  Rs10,800 ( Rs 60000* 18%) . Additionally, the taxpayer has to pay back ITC  of Rs 1,200 i.e the ITC balance of Rs 12,000 minus Rs 10,800 payable by way of GST on the sales value. Accordingly , the total GST payable on the transaction would be Rs 12,000 (10,800 + 1,200). It may be noted that the additional Rs 1,200 may be paid by reporting the transaction as a B2C sale in GSTR-1 .

2. No ITC availed on purchase of fixed assets, so GST is payable only on margin ,when the assets are sold

Another common misconception is that , if no ITC was availed on purchase of fixed assets , GST is payable only on the margin/profit , when such assets are sold. This misconception stems from Notification 8/2018  , Central Tax dated 25^th January 2018 , issued by the CBIC. As per the said Notification , GST shall be payable @ 18% on the margin amount i.e selling price minus Written Down Value ( WDV)  of  the asset . It may be noted that the said Notification is applicable only on the sale of motor vehicles falling under Chapter 87 . If any asset other than a motor vehicle is sold, GST shall be payable at the rate applicable for such asset on the transaction value , irrespective of whether ITC was availed on purchase of such asset or not.

3. Sales Return has to be within six months of Sale

This misconception has its roots in the VAT regime . Under the VAT laws of certain States, tax paid on sale of goods, could be reversed, only if the sales return was made by the customer within six months of the sale. It may be noted that under GST, Section 34 (1) and (2) of the CGST Act, deal with the provisions regarding the issue of Credit Notes, by a supplier. As per the aforesaid provisions, when goods supplied are retuned by the recipient, the supplier may issue a credit note to the recipient and reverse the output tax paid on sale of such goods. However, such a credit note shall be issued before 30^th day of November of the financial year, subsequent to the financial year in which the sale took place. Accordingly, it may be noted that a credit note for sales return , under the GST law can be issued even after the expiry of six months from the sale of goods but before 30^th of November of the financial year , subsequent to the financial year in which the sale took place .

It may however be noted that a supplier can issue a credit note (accounting/financial/commercial ) for sales returns , even after 30^th November of the subsequent financial year , but output tax already paid on sale of the goods , cannot be reversed in such a case .

4. Debit Note for Purchases Returns

In the event of a purchase return , as per accounting norms , the purchaser /the recipient raises a debit note in his books of accounts and the seller /the supplier raises a credit note in his books. It is seen that the same logic is being extended to GST as well by certain taxpayers , by issuing GST Debit Notes for purchases returns. It may be noted that , under the GST Law , the documents to be issued are generally prescribed from the point of view of the Supplier . Section 34 (3) and (4) of the CGST Act ,deal with the provisions relating to the issue of Debit Notes under GST . Section 34(3) of the CGST Act, reads as follows :-

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 be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient one or more debit notes for supplies made in a financial year] containing such particulars as may be prescribed.

It may therefore be seen that a Debit Note is a document to be issued by the Supplier of goods , if the taxable value or tax charged in the invoice is less than the taxable value or tax payable on such supply . For example , if  a supplier charges 12 % GST instead of 18% and subsequently realises his mistake , he shall issue a debit note for the differential GST of 6% , on the recipient . It may be noted that there is no time limit prescribed under the GST Law , for the issue of debit note .

It may therefore be noted that in the event of a purchase return , there is no need for a purchaser/recipient to issue a GST Debit Note ; he may however raise an accounting debit note in his books of accounts for recording the purchases returns .

5. Petrol Pumps , whether to file GSTR-9

It is understood that a number of Petrol Pumps have not filed their GSTR-9 /Annual Return on the presumption that supply of petrol and diesel , do not form part of aggregate turnover under the GST Law and have  received notice from the Department for non-filing and consequent penalty .  It is a known fact that petrol/diesel are currently outside the purview of GST . However, it may be noted that supply of petrol and diesel are treated as non-taxable supplies under the GST Law .

As per Section 44(1) of the CGST Act , a registered person, other than an Input Service Distributor, a person paying tax under section 51 or section 52, a casual taxable person and a non-resident taxable person,  whose aggregate turnover in a financial year exceeds Rs 2 Crore in a financial year , shall file an annual return in GSTR-9 , for the financial year . As per Section 2(6) of the CGST Act , aggregate turnover includes exempt supplies and as per Section 2(47) of the CGST Act , exempt supplies include non taxable supplies . Accordingly, turnover by way of supply of petrol and diesel , shall be included while calculating aggregate turnover . It is therefore for mandatory for all petrol pumps , whose aggregate turnover exceeds Rs 2 crore in a financial year , to file GSR-9 for such financial year. It may also be noted that if the aggregate turnover exceeds Rs 5 Crore in  any financial year , they shall also file GSTR-9C ( reconciliation statement ) along with GSTR-9.

6. Return /Sales Return – Document to be carried on transportation

It is well known that if the value of a consignment being transported, exceeds Rs 50,000, an e-way bill shall be generated and carried along with the consignment. Where the movement of goods is necessitated by purchase return/sales return , there is a confusion among the taxpayers on the document to be carried along with the e-way bill .It may be noted that in the event of a sales return/purchase return, the document to be issued under the GST Law, is a Credit Note, as prescribed under Section 34 of the CGST Act (by the supplier). However, as per Rule 138A of the CGST Rules , the documents to be carried by a person in charge of a conveyance ,along with e-way bill (wherever applicable) are the following:-

• Invoice or b) Bill of Supply  or c) Delivery Challan

It may therefore be seen that a Credit Note is not one of the prescribed documents under Rule 138A of the CGST Rules . Accordingly , in the event of  sales return /purchase return , the goods shall be transported under the cover of a delivery challan , irrespective of whether it is the supplier or recipient , who generates the e-way bill .

7. RCM on purchases from unregistered suppliers

Under the GST Law , RCM /reverse charge mechanism ( recipient to pay tax instead of the supplier)  is applicable under Section 9(3) and Section 9(4) of the CGST Act .

Under Section 9(3) of the CGST Act, reverse charge is applicable on such goods /services which are specifically notified by the CBIC ( Notification 4/2017 -Central Tax Rate – for goods and Notification 13/2017-Central Tax Rate – for services ) .   For example cashew nuts ,raw cotton , tobacco etc purchased from Agriculturists , transportation charge paid to Goods Transport Agencies , legal charges paid to advocates etc .

When GST was introduced in July 2017 , Section 9(4) of the CGST /SGT Act  provided for payment of GST under RCM  in respect of all supplies of goods and services received by a registered person from an unregistered person . However considering the cumbersome compliance and representations received from the taxpayers , this provision was suspended from 13^th October 2017 till 1^st February 2019 . With effect from 1^st February 2019 , the provision was amended providing that the Government shall specify the categories of suppliers of goods/services , who shall be liable to pay GST under RCM on supply of goods/services received from unregistered persons .

Even now there is a perception among certain taxpayers that GST under RCM is applicable on all purchase of goods/services from unregistered suppliers . It may be noted that as explained above, the Government shall notify the category of suppliers of goods/services who shall be liable to pay GST under RCM on purchase of goods/services from unregistered suppliers . Currently only promoters ( as defined under the Real Estate Regulation and Development Act ) are liable to pay reverse charge under Section 9(4) of  the CGST Act in respect of supply of goods received from unregistered suppliers , subject to certain conditions. In respect of other suppliers of goods/services , RCM is not applicable under Section 9(4) of the CGST Act.

However, it is pertinent to note that while evaluating the applicability of reverse charge on inward supplies of goods and services from unregistered suppliers , it is necessary to consider the Notifications 4/2017-Central Tax -Rate and 13/2017-Central Tax Rate , to ascertain whether reverse charge is applicable  on such supplies under Section 9(3) of the CGST Act 2017.

To summarize , reverse charge under Section 9(3) of the CGST Act is based on the nature of the transaction/supply ( specified under Notifications 4/2017-Central Tax -Rate and 13/2017-Central Tax Rate) , while reverse charge under Section 9(4) of the CGST Act is based on the category of registered persons ( currently only promoters  as defined under the Real Estate Regulation and Development Act are notified).

8. Availability of ITC of Tax Paid under RCM on freight paid to GTA

GST under the reverse charge mechanism (RCM ) @5% is applicable on freight paid by certain categories of taxpayers to Goods Transport Agencies ( GTA ) , except in cases where the GTA has opted for forward charge . There is a perception among many taxpayers that ITC of such tax paid under RCM is not available for the recipient ( who pays the tax under RCM ) . It may be noted that there is no restriction on claiming ITC of the tax paid under RCM , subject to other conditions regarding eligibility of ITC . The restriction regarding ITC is applicable to those GTAs who have  opted to pay 5% GST under the forward charge mechanism . In such a case, there is no liability for the recipient to pay GST under RCM and therefore the question of ITC does not arise .

9. Composition Taxable Persons Are Not Liable to RCM

In many cases , it has been seen that Composition Taxable Persons have not discharged their liability under RCM either on account of omission or based on misconception that RCM is not applicable in the case of Composition Taxable Persons. It may be noted that Section 10 of the CGST Act , which specifically deals with the provisions relating to Composition Taxable Persons, starts with  “ Notwithstanding anything to the contrary contained in this Act but subject to the provisions of sub-sections (3) and (4) of section 9”  .  It may therefore be seen that Sections 9(3) and 9(4) of the CGST Act , which deal with the provisions relating to reverse charge mechanism , are applicable to a Composition Taxable Person . Therefore a Composition Taxable Person is also liable to pay GST under RCM . However , it may be noted that a Composition Taxable Person is not liable to pay GST under RCM in respect of  Services by way of renting of an immovable property , other than a residential dwelling received from an unregistered person  , as per Serial number 5AA of Notification 13/2017-Central Tax -Rate , issued by the CBIC .

10. RCM is not applicable on rent paid for residential property if the landlord is registered

As per Serial number 5A of Notification 13/2017-Central Tax -Rate , issued by the CBIC, GST under RCM is applicable on services by  way of renting of residential dwelling  provided by any person to a registered person .. There is a general misconception that RCM is applicable only if the landlord is an unregistered person . It may be noted that RCM is applicable irrespective of whether the landlord is registered or not , as the provision uses the word “provided by any person “, in the case of renting of residential dwelling . However it may also be noted that , RCM is applicable only if such residential dwelling is used by a registered person in the course or furtherance of his business .

11. ITC can be availed on all expenses  incurred in the course or furtherance of business

There is a general perception that ITC can be claimed on any expenditure , if such expenditure is incurred in the course or furtherance of business. This misconception arises on account of the fact that the definition of inputs /capital goods / input service, uses the words “used in the course or furtherance of business “. For example it is argued by many taxpayers that sales promotion expenses by way of gifts to customers and employees are incurred for the business and accordingly, ITC can be claimed on such expenses.

It may be noted that although, use in the course or furtherance of business , is one among the essential conditions to be satisfied for availing ITC, there are a number of other conditions , which are prescribed under Section 16 of the CGST Act . Further it may be noted that, under Section 17(5) of the CGST Act 2017, ITC on certain expenses is specifically blocked /barred. This provision actually beings with a non obstante clause which states “Notwithstanding anything contained in 16(1) and 18(1)”, which implies that  even if all conditions for availing ITC are satisfied, ITC cannot be availed on expense, if the expenses are incurred for the purposes specified under Section 17(5). One such blocked credit is expenses on goods disposed by way of gift . Since ITC on expenses by way of gift is specifically blocked under Section 17(5) of the CGST Act , it may be noted that ITC cannot be claimed on such expenses, even if it is incurred in the course or furtherance of business.  There are a number of transactions specified under Section 17(5), such as purchase /repair  of passenger vehicles (subject to certain exceptions), expenses incurred on food and beverages , goods or service used for works contract /construction of immovable property ( subject to certain exceptions) .

While evaluating the eligibility of ITC on expenditure incurred in the course or furtherance of business , it is necessary to go through the list of expenses specified under Section 17(5) of the CGST Act , to ascertain whether such ITC is a specifically blocked one.