Sellers often offer discounts to attract buyers and sometimes to encourage higher sales volumes. When a discount is given, the seller ends up with a lower net sale value for their products or services. Initially, when a sale is made, the seller pays ‘Output Tax’ on the original or full value of the tax invoice. Upon offering a post-sale discount, the seller’s primary goal is to proportionately reduce the Output Tax paid earlier, as the effective net sale price is now lower than what was initially disclosed and taxed.
While the seller seeks this tax benefit, it extracts some compliance burden. The seller must prove that the buyer has made the necessary adjustments of Input Tax Credit (ITC) in their GST returns to reflect this post-sale discount. Complying with such a provision becomes challenging in terms of producing evidence.
In this article, we will briefly explore the current legal framework for the treatment of discounts under GST, the prevailing chaos within the industry and tax authorities, the solutions proposed by the GST Council, the potential impact the solutions on taxpayers, and a few suggestions for effective implementation.
1. Present System – of treatment of discounts in GST:
Under the Goods and Services Tax (GST) regime in India, the treatment of discounts offered by a supplier is governed by Section 15 of the CGST Act, 2017. Discounts provided at the time of supply (i.e., when the invoice is raised) can be deducted in the invoice, allowing the supplier to reduce their ‘output tax’ liability accordingly. However, a significant portion of industry offers the discount after the supply has been made. These post-supply discounts are often used to encourage higher sales, bulk purchases, and timely payments.
In the case of post-supply discounts, the supplier first issues a tax invoice for the full amount (e.g., Rs. 1000) and subsequently issues a credit note (e.g., Rs. 200). The supplier then aims to pay tax to the government on the net amount of Rs. 800, reflecting the adjusted sales value. From the recipient’s (buyer’s) perspective, they initially receive a purchase invoice for Rs. 1000 and claim the corresponding Input Tax Credit (ITC). Upon receiving the GST credit note for Rs. 200, the buyer must reverse the ITC claimed earlier for the discounted amount.
2. Present Chaos – and why tax authorities are not allowing benefit of such Credit Notes:
Section 15(3)(b)(ii) of the CGST Act states that the supplier can reduce its output tax liability only if the buyer has reversed their Input Tax Credit (ITC). To facilitate this, the supplier issues a GST credit note to the buyer and uploads it to their GSTR-1, which then reflects in the buyer’s GSTR-2B as a suggestion to reduce the ITC claim. However, the GST law and the GSTN portal lack a mechanism to verify whether the buyer has actually reversed the ITC corresponding to such credit notes. This possesses a challenge for taxpayers in proving the compliance and for tax authorities in verifying or accepting the claimed positions.
As a result, tax officers often impose demands on suppliers who have reduced their output tax liability due to insufficient evidence. Moreover, some suppliers may exploit this gap by incorrectly uploading credit notes and, when questioned by tax authorities, claim that the GST law or GSTN portal does not provide a verification tool for ITC reversal.
3. Solution offered by GST Council – and implemented by way of a Circular:
In its 53rd meeting, the GST Council has recommended a 2-pronged solution to this deadlock.
i. A long-term solution to address the deadlock (a functionality on the GST portal); and
ii. An immediate arrangement (furnishing of CA certificate / self-undertaking).
Subsequently, Circular No. 212/6/2024-GST dated 26.06.2024 was issued by CBIC, providing a long-term, real-time and permanent solution through enhanced functionality on the GST portal. Until these changes are implemented, the Council also suggested an immediate stop-gap arrangement to resolve the conflict between compliance with section 15(3)(b)(ii) and the methods of verification by tax authorities.
Key Points and challenges of both the solutions are discussed below:
1. Key Points & Challenges of Immediate solution – CA/CMA Certificate or self-undertaking:
I. Submit a CA/CMA certificate or a self-undertaking by the recipient:
Circular No. 212 (supra) prescribes that in order to prove the compliance of section 15(3)(b)(ii), the supplier may procure a certificate from the Chartered Accountant (CA) / Cost Accountant (CMA) of the recipient (where the tax involved in credit notes is more than INR 5 Lakhs per person per year) or may procure & produce an undertaking/certificate from the recipient itself (where the tax involved is upto INR 5 Lakhs per person per year). Such CA / CMA certificate must carry a valid UDIN which can be verified from respective Institutes’ website. Such certificates / undertaking may also be produced for past periods.
Author’s View / Possible Challenges: For past periods, there may be situations where some customers are no longer in contact, resulting in the non-availability of the required certificates or undertakings from these customers. While such documents may be available for some customers, the assessee may face difficulties if they wish to partially utilize the benefit of this circular. This could lead to confirmed demands from tax authorities for those customers where the certificates cannot be submitted. In essence, tax authorities may still confirm the demand due to the non-submission of a document that was not originally required by law.
II. Contents of the Certificate/Undertaking:
Such ‘CA/CMA Certificate’ or ‘Undertaking by the recipient’ primarily declares that Input Tax Credit attributable to such discount has been reversed by the recipient. Further, the circular suggests that the certificate/undertaking may include details of credit notes, details of relevant invoice numbers against which said credit notes are issued, the amount of ITC reversal in respect of each of the said credit notes along with the details of the FORM GST DRC-03 / return / any other relevant document through which such reversal of ITC has been made by the recipient.
Author’s View / Possible Challenges: Although the circular specifies that the certificate should include details (of credit notes, the amounts of reversals made, the manner in which these reversals were carried out), failure to provide all such details may result in the tax authorities rejecting the certificate and still confirming the demand. Furthermore, if the recipient’s reversal (either in their GSTR-3B or through DRC-03) occurs after the month of the credit note issuance, the tax authorities may demand interest for the interim period from the supplier. They may argue that since the ITC reversal was done later by the recipient, the output reversal was also only eligible later.
III. Key Points & Challenges of the permanent solution – functionality on the portal
The circular 212 (supra) suggests implementing a real-time functionality on the portal, which possibly could be a real-time acceptance of credit notes by the buyers. Considering the concept of credit matching introduced at the onset of GST implementation, a potential solution could involve the following process: once the supplier uploads the details of credit notes in their GSTR-1, these details would be reflected in the recipient’s GSTR-2B. The recipient would then need to either accept or reject the credit notes. Upon acceptance of the credit note by the recipient, the system would automatically determine the amount of ITC reversal required and the specific invoices associated with this reversal. Real-time acceptance of credit note entries by the recipient would effectively fulfill the current requirement of the recipient confirming the ITC reversal.
Author’s View / Possible Challenges: This process further complicates the already extensive and growing list of GST compliance requirements. After the supplier uploads their GSTR-1 by the 11th of the month, the recipient must accept it on the portal, and any follow-up by the supplier in case the recipient fails to take any action, must be completed by the 20th of the same month, before filing the GSTR-3B. Failure to adhere to this timeline may result in delayed benefits (of output tax reduction) for the supplier.
IV. Future possibilities / additional burdens / plan of action / suggestions for implementation:
- The corporates may need to re-evaluate the entire process of issuance & treatment of Credit Notes for discounts. Till the functionality is made available on the GST portal, obtaining the certificates / undertaking on a real-time basis may be required to be added in the existing SOP (Standard Operating Procedure) of the organization. There will be numerous practical challenges in obtaining such documents on a regular basis, for which the organizations must have effective pre-emptive plans ready.
- Although this circular is specific to Credit Notes (CN) for discounts, tax authorities (in order to protect interest of revenue) can also demand it for other CN cases, such as goods returned, price difference etc., which would increase the compliance burden. Appropriate planning in this regard is suggested.
- Obtaining a CA certificate might have cost implications for the buyer, who may eventually pass these costs to the original supplier, thereby increasing overall compliance costs. The possibility of using ‘financial credit notes’ instead of ‘GST credit notes’ may be considered, in situations where it is cost-neutral for the supplier.
- In case of ‘sales return’ where goods are physically returned to the supplier, instead of the supplier issuing a credit note, the buyer issuing a Tax Invoice could be an option to dodge the debacle of compliance of credit notes. However, this might affect certain financial and accounting ratios for the buyer, making it a less preferred option. Businesses may have to evaluate the best fit option suiting their business environment.
- In situations where compliance with this circular is not beneficial for the supplier/tax payer (possibly due to the difficulty or impossibility of obtaining the required certificate or undertaking for past periods), the tax payer may choose to disregard the applicability of this circular as circulars are not binding on the tax payer.
The Supreme Court in the case of Commissioner of Central Excise, Bolpur v. Ratan Melting & Wire Industries (2008) gave a significant decision related to the binding nature of circulars issued by the then Central Board of Excise and Customs (CBEC). In this judgment, the Supreme Court held: The circulars issued by the CBEC are binding on the departmental authorities and officers. However, they are not binding on the courts or the assessee. This means that while the departmental authorities must follow the CBEC circulars, courts can interpret the law independently of these circulars.
Conclusion:
Businesses need to prepare for these compliance requirements to avoid potential demands. If the department hasn’t been demanding this previously, they will likely start now. For open litigations, begin obtaining the necessary certificates or undertakings. Additionally, secure these certificates for subsequent periods not covered by litigation to prevent repetitive work in the future. Re-examine the modus of giving GST credit notes for discounts and, if possible, issue financial credit notes. Inputs and feedback are welcomed at [email protected]
Author Bio
VERY INSIGHTFUL SUMMARY OF THE CIRCULAR