ITC reversal for Credit Notes in GSTR-3B – What if Net ITC is reported directly in GSTR-3B

At the time of GST Department audits it is being observed that department is making the taxpayers reverse ITC again with respect to credit notes if the ITC has been shown net by the recipient and not reported separately in Table 4(B)(2) in GSTR-3B.

In this article I have provided draft contentions that can be used to defend this query of the department.

1. Reduction of ITC by Recipient:

The CGST Act, requires the recipient to “reduce” the ITC for credit notes received in returns filed by the recipient and we have all the documents to substantiate that we have fulfilled this condition of law.

a) The credit notes received by us are reflected in GSTR-2A.

b) We have copies of credit notes available with us.

c) Corresponding invoice copies with respect to which credit notes have been received are available.

2. Section 34: Casts Responsibility of Reporting Credit note on Supplier:

Section 34 of the CGST Act with respect to Credit and Debit notes prescribes the circumstances under which credit or debit notes are to be issued and the time limit to issue the same.

Section casts a responsibility on the supplier of goods or services by mentioning that the supplier “shall declare the details of such credit note in the return for the month during which such credit note has been issued “. It doesn’t mention about the reporting of credit notes by recipient. The same is reproduced below for ready reference:

“Credit and debit notes .

34. (1)  [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 exceed the taxable value or tax payable in respect of such supply, or where the goods supplied are returned by the recipient, or where goods or services or both supplied are found to be deficient, the registered person, who has supplied such goods or services or both, may issue to the recipient  [one or more credit notes for supplies made in a financial year] containing such particulars as may be prescribed.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both “shall declare the details of such credit note in the return for the month during which such credit note has been issued” but not later than 34a[the thirtieth 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, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

(3) 35[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 35a[one or more debit notes for supplies made in a financial year] containing such particulars as may be prescribed.

(4) Any registered person who issues a debit note in relation to a supply of goods or services or both shall declare the details of such debit note in the return for the month during which such debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.”

3. Rule 73:

Rule 73 of the CGST Rules mentions the word “reduction” in ITC by the recipient and not reversal. Thus, we have “reduced” ITC of credit note and shown net ITC in GSTR-3B. The Rule has been reproduced below for ready reference:

Matching of claim of reduction in the output tax liability

73. The following details relating to the claim of reduction in output tax liability shall be matched under section 43 after the due date for furnishing the return in FORM GSTR-3, namely:—

(a) Goods and Services Tax Identification Number of the supplier;

(b) Goods and Services Tax Identification Number of the recipient;

(c) credit note number;

(d) credit note date; and

(e) tax amount:

Provided that where the time limit for furnishing FORM GSTR-1 under section 37 and FORM GSTR-2 under section 38 has been extended, the date of matching of claim of reduction in the output tax liability shall be extended accordingly:

Provided further that the Commissioner may, on the recommendations of the Council, by order, extend the date of matching relating to claim of reduction in output tax liability to such date as may be specified therein.

Explanation.—For the purposes of this rule, it is hereby declared that—

(i) the claim of reduction in output tax liability due to issuance of credit notes in FORM GSTR-1 that were accepted by the corresponding recipient in FORM GSTR-2 without amendment shall be treated as matched if the said recipient has furnished a valid return.

(ii) the claim of reduction in the output tax liability shall be considered as matched where the amount of output tax liability after taking into account the “reduction” claimed is equal to or more than the claim of input tax credit after taking into account the “reduction” admitted and discharged on such credit note by the corresponding recipient in his valid return.

4. Section 43(3):

Sub section (3) of Section 43 uses the word ‘reduction’ of ITC by recipient (This section has been omitted by the Finance Act 2022 as there is no more the concept of Matching, Reversal, Reclaim of ITC). Relevant extract of the sub-section has been produced below for ready reference:

“43. Matching, reversal and reclaim of reduction in output tax liability*.—

(3) Where the reduction of output tax liability in respect of outward supplies exceeds the corresponding “reduction” in the claim for input tax credit or the corresponding credit note is not declared by the recipient in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.

5. CBIC flyer

Information flyer issued by CBIC mentions the word “reduction” and not reversal. Hence, as per our understanding we have “reduced” ITC on credit notes received from eligible ITC as per books of accounts and have shown net ITC in GSTR-3B.

6. Matching, mismatching, and reversal mechanism:

Matching, mismatching, and reversal mechanism was for GSTR-1, GSTR-2 and GSTR-3 which were not available on the portal. Had the returns been available as prescribed in the Act, such issues would not have come up.

7. No Revenue loss:

By mentioning input tax credit net of ITC as per credit notes, there is no revenue loss to Government.

Disclaimer: Update is meant for information purposes only and does not purport to be advice or opinion. It is prepared based on the understanding of the provisions as applicable as on date.The author is not responsible for any error or omission or for any action taken based on its contents.

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