Credit notes issued after change in rate of tax in respect of goods or services

When ever there is a rate change in the goods or services, the tax payers need to revisit their cost structures and business process. Though anti profiteering is one of the major concerns, one key confusion that arises is whether the credit notes, related to goods returned or goods/services are found deficient or for pre agreed discounts allowed, will be issued at the tax rates charged in the invoice or as per  tax rates applicable on the date of issuance of credit notes. I am attempting to put forward my thoughts on the same. Though the impact of Change in rate of tax in respect of supply of goods or services can determined through Section 14 of CGST Act, 2017, no similar provisions exists for credit notes.

In order to find a suitable reply to the above query, we would first of all need to visit the relevant provisions of  CGST Act,  2017  in this regard.

Section 34 of CGST Act 2017 states

(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 a 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 September 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.

Rule 53 of CGST Rules. 2017

(1A) A credit or debit note referred to in section 34 shall contain the following particulars, namely:–

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

(b) nature of the document;

(c) a consecutive serial number not exceeding sixteen characters, in one or multiple series, containing alphabets or numerals or special characters-hyphen or dash and slash symbolised as “-” and “/” respectively, and any combination thereof, unique for a financial year;

(d) date of issue of the document;

(e) name, address and Goods and Services Tax Identification Number or Unique Identity Number, if registered, of the recipient;

(f) name and address of the recipient and the address of delivery, along with the name of State and its code, if such recipient is un-registered;

(g) serial number(s) and date(s) of the corresponding tax invoice(s) or, as the case may be, bill(s) of supply;

(h) value of taxable supply of goods or services, rate of tax and the amount of the tax credited or, as the case may be, debited to the recipient; and

(i) signature or digital signature of the supplier or his authorised representative.”

So from a combined reading of the above provisions it can be ascertained that for any invoices issued upto the date of change from old rates, the rate applicable as per the corresponding tax invoice can only be applied.

Further more if we take an illustration, the above derivation can be more clarified. Say the Invoice on goods was issued at applicable rate of 12% as per following details.

Invoice Details ( All figures in INR)

Taxable Value    9,671.43
OUTPUT CGST @ 6% 580.29
OUTPUT WBGST @ 6%   580.29
Less : ROUNDING OFF   0.01
Total 10,832.00

On return of goods  say CN is issued with  tax rates as per tax invoice as per following details.

Taxable Value    9,671.43
OUTPUT CGST @ 6% 580.29
OUTPUT WBGST @ 6%   580.29
Less : ROUNDING OFF   0.01
Total 10,832.00

IMPACT

1. Output CGST of Rs 580.29 and Output WBGST of Rs 580.29 will be reversed by supplier.

2. Input CGST of Rs 580.29 and Input CGST of Rs 580.29 will be reversed by recipient.

Now say the rate of the goods has increased from 12% to 18% and  lets examine the impact if the CN is issued with 18%  – the tax rate applicable on goods on the date of issuance of Credit notes.

Taxable Value 9,671.43
OUTPUT CGST @ 9% 870.39
OUTPUT WBGST @ 9% 870.39
Less : ROUNDING OFF 0.21
Total 11,412.00

 IMPACT

1. Since the taxable value has not undergone any change, it will remain the same.

2. Output CGST of Rs 870.39 and Output WBGST of Rs 870.39 will be reversed by supplier.

3. Input CGST of Rs 870.39 and Input CGST of Rs 870.39 will be reversed by recipient.

Author’s note

A cursory view of the above impact clearly shows that higher output tax will be reversed by supplier and higher input tax will need to be reversed by the recipient. Since the maximum tax that can be reversed by the supplier is upto the amount charged by him in the invoice, the remaining output tax will be in excess and will be beyond the provisions of law and intent of legislature.

Similarly the recipient will incur loss if they have to reverse higher input tax than what was claimed at the time of booking the invoice.

Hence in our opinion, if there is a change in rate, the credit note will be issued at the rate at which the invoice was issued and not at the rate which is applicable when the credit note is being issued.

Disclaimer : The above view is based on the law as applicable as on date 15th June 2020 and for the purpose of knowledge sharing. The author assumes no liability whatsoever for any decision taken basis the same. However if there is reasonable difference  or any query based on position of law the same may be forwarded to dgarup@gmail.com or shared in the comment section.

CA Arup Dasgupta

Author Bio

Qualification: CA in Practice
Company: ARUP DASGUPTA
Location: kolkata, West Bengal, IN
Member Since: 11 Jun 2020 | Total Posts: 3

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