Credit Issued under Section 34 of CGST Act & Customer ITC Reversal

Understanding Credit Issued under Section 34 of the CGST Act and Input Tax Credit (ITC) Reversal by Customer

In the realm of Goods and Services Tax (GST) compliance, the issuance of credit notes plays a pivotal role in rectifying errors or discrepancies in transactions. However, the subsequent reversal of Input Tax Credit (ITC) by customers due to the issuance of credit notes introduces complexities in GST accounting. This article aims to delve into the intricacies of ITC reversal by customers and its implications on GST compliance.

1. Section 34(1) of the Central Goods and Services Tax Act, 2017 (‘CGST Act’) provides an exhaustive list of situations under which the registered supplier is entitled to issue a credit note. These situations are enumerated as follows:

• • When the actual value of the supply is less than what was stated in the original tax invoice;
  • When the tax charged in the original tax invoice is higher than what was applicable on the supply;
  • When goods supplied are returned by the recipient;
  • When goods or services supplied are deficient.

2. As per section 34(2) of the CGST Act, credit note must be declared in the return for the month during which such credit note has been issued but not later than 30^th 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. Credit note must contain all the applicable particulars as specified in rule 53(1A) of the Central Goods and Services Tax Rules, 2017 (‘CGST Rules).

3. Furthermore, upon a combined reading of section 15(3)(b)(ii) of the CGST Act and the proviso to section 34(2) of the CGST Act, a reduction in the outward tax liability of the supplier is permitted only when the recipient of the supply has reversed the input tax credit attributable to such credit note.

4. The validity of the aforementioned provision is being challenged on the grounds of workability by Hindustan Unilever Limited Vs Union of India [2023 (9) TMI 998 – Rajasthan High Court] and Tata Motor Limited Vs Union of India & Ors [2024 (2) TMI 589 – Rajasthan High Court], which are pending as of today before the Honourable Rajasthan High Court.

5. The requirement to reverse the credit, as stated in section 15(3)(b)(ii) of the CGST Act shall not be applicable to B2C transactions since an unregistered person is not eligible to avail ITC.

Conclusion:

The reversal of Input Tax Credit by customers on account of issued credit notes adds another layer of complexity to GST accounting. It requires careful consideration of legal provisions, effective communication between parties, and accurate documentation to ensure compliance and accuracy in GST transactions. By understanding the intricacies of ITC reversal, businesses can navigate these challenges effectively and maintain seamless GST compliance.