Validity of re-claiming/re-availing in form GSTR-3B of ITC already reversed in case of exempt supply

This is an attempt to briefly discuss the provisions with regards to issuance of credit note in case of exempt supply and simultaneous reclaiming/reavailing of input tax credit under GST regime.

Question:

Taxpayer has entered into an arrangement for rendering of exempt supply of service to a government entity which has been notified as exempt supply by CBIC and accordingly issued and reported a bill of supply say in ‘March 2020’ along with reversing the proportionate ITC w.r.t. rule 42 and 43 of CGST Rules, 2017. Now say in ‘May 2021’, due to some negotiations with its customer, taxpayer has to issue a credit note to the customer against this supply.

Please find below a brief discussion with regards to the provisions of GST law on this aspect and backdrop of documents to be issued for such credit note and whether there is a provision to re-claim/re-avail the ITC already reversed in FY 2019-20.

Author’s view:

• Section 2(47) of the CGST Act provides the definition of exempt supply to mean ‘supply of any goods or services or both which attracts nil rate of tax or which may be wholly exempt from tax under section 11, or under section 6 of the Integrated Goods and Services Tax Act, and includes non-taxable supply.’

Central board of Indirect Taxes (CBIC) has vide various notifications to exempt certain supplies from levy of GST either permanently or temporarily, fully or partially.

• Section 31(3)(c) of CGST Act, 2017 is a non-obstante provision and provides that ‘Notwithstanding anything contained in sub-sections (1) and (2), a registered person supplying exempted goods or services or both or paying tax under the provisions of section 10 shall issue, instead of a tax invoice, a bill of supply containing such particulars and in such manner as may be prescribed: Provided that the registered person may not issue a bill of supply if the value of the goods or services or both supplied is less than two hundred rupees subject to such conditions and in such manner as may be prescribed.’

Further, Rule 49 of CGST Rules, 2017 provides the details and particulars which shall be contained in a BoS issued as referred to in clause (c) of sub-section (3) of section 31.

Vide the above provisions, GST law explicitly provided a separate set of provisions w.r.t. BoS to be issued in case of exempt supply and barred the issuance of a tax invoice in such case. Basis this, Taxpayer has issued bill of supply (BoS) in ‘March 2020’ for exempt supply made to its customer

• Reversal of ITC: Section 17 of CGST Act, 2017 provides that ‘where the goods or services or both are used by the registered person partly for effecting taxable supplies including zero-rated supplies under this Act or under the Integrated Goods and Services Tax Act and partly for effecting exempt supplies under the said Acts, the amount of credit shall be restricted to so much of the input tax as is attributable to the said taxable supplies including zero-rated supplies’.

Rule 42 ‘Manner of determination of input tax credit in respect of inputs or input services and reversal thereof’ and Rule 43 ‘ Manner of determination of input tax credit in respect of capital goods and reversal thereof in certain cases’ of CGST Rules, 2017 provides the manner of proportionate reversal of ITC, in case the input tax credit, which attract the provisions of sub-sections (1) and (2) of section 17, being partly used for the purposes of business and partly for other purposes, or partly used for effecting taxable supplies including zero rated supplies and partly for effecting exempt supplies.

Basis the above provisions, Taxpayer has reversed the proportionate ITC in the return period ‘March 2020’.

• Issuance of credit note: Section 34 of CGST Act 2017 provides for issuance of credit note as:

• ‘Where a tax invoice has 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 credit note containing such particulars as may be prescribed.’
• ‘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.’

Basis the above provisions, it is clear that credit note can only be issued against a tax invoice and that the time limit for issuance and reporting/declaring of the same in return for September period of following financial year or GSTR9, whichever is earlier, shall apply strictly to credit notes issued against a taxable supply only.

Further, it is pertinent to highlight here that GST law does not provide for issuance of any credit note apart from the one mentioned in section 34(1) i.e. against a tax invoice and that in this case, taxpayer may have to issue to commercial credit note (CCN) only. Also, the same might not be contradictory to GST law considering no tax impact in issuance of a CCN. Also, it can be inferred that time limit to issue a CCN has not been provided under GST law and thus the same can be issued at any point of time.

Furthermore, since no mention of CCN has been given under the GST law, thus, it remaining a question of deliberating as to whether such CCN can be reported in the periodic GST returns or not. In our view, taxpayer can report such CCN in the GSTR1 return for the period in which said note is issued and w.r.t. GSTR3B return, taxpayer can net-off/reduce the exempt supplies as and when available since the functionality on common GST portal does not allow to report negative figures.

• Reclaim/Reavailment in form GSTR3B of the ITC already reversed: Section 16(4) of the CGST Act, 2017 provides that ‘A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.’

Above provision restricts the time limit to claim ITC till September of following financial year or GSTR9, whichever is earlier, and once can take a standpoint that only the time limit for original/first-time availment of ITC is restricted and same does not apply to the reavailment/reclaiming of ITC already reversed in the past which comes out to be in excess of the actual.

Please note that the GST authorities might take a contrary/different view and question/dis-allow the aforesaid view of re-claiming/re-availing the ITC and relief can be expected to be granted at the higher forums.

Trust the above suffices and helps.

Should you require any clarification, please feel free to revert back in the comment section.