There is no denying that GST was meant to be an easy law, easy to comprehend and easy to understand. With four years and plus of the GST law, we still have issues where the portal and the law don’t seem to go hand in hand. One such issue is in respect of credit notes.
Before delving deeper into the curious case of credit notes, let us understand the statutory provisions in respect to credit notes.
Section 34 of the CGST Act, 2017 (‘Act’)
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 credit note 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.
The credit note is therefore a convenient and legal method by which the value of the goods or services in the original tax invoice can be amended or revised. The issuance of the credit note will easily allow the supplier to decrease his tax liability in his returns without requiring him to undertake any tedious process of refunds
Further, as noted above, the GST law prescribes the issue of credit notes only for specified reasons and also the taxpayer is required to declare the details in a return not later than September of the following financial year.
Some practical issues
Time limit for issue
However, there are practical examples where the issue of credit notes may note be possible within the time frame prescribed. E.g., in case of travel contracts for events, where a travel agent receives money against a supply to be made at the future date, issues and invoice and pays the GST as applicable. It is only after the time period under section 34 of the Act has elapsed, does the travel agent know that the contract is cancelled. A recent and pragmatic example of this would be Olympics 2020. The pandemic caused the sudden cancellation and hence the travel agents were left in a lurch.
What is he expected to do in such a scenario? Is he to pay the GST and sit tight? Answer would be no, but the law does not leave him with any other recourse. So ultimately GST is paid on a supply which was never made.
Inadequacy of GST portal
Another issue with which the taxpayer seems to be grappling with is the inadequacy of the portal in respect to credit notes. Let’s assume a credit note for FY 19-20 was issued well within the time limit as prescribed under section 34 of the Act, say June 2020. The credit note had a GST implication of Rs. 50,00,000/-. However, starting the month of June 2020, the taxpayer does not have or foresee a GST liability of any amount exceeding say Rs. 7,00,000/-. Hence, he is left with no choice to adjust the balance of Rs. 43,00,000/-. This further implies a definite locking of working capital for such a taxpayer. Further, even if we assume that the taxpayer carries forward this excess, there is no disclosure of the off set of such amount on GSTR3B except by reducing the liability under the respective table of GSTR3B.
Another pertinent question which arises is whether the time limit prescribed under section 34 of the Act also apply in this case? Hence for a credit note of June 2020, is the taxpayer well within the ambit of law, if it continues adjusting the amount with tax liability of say till January 2022?
One obvious way out of the above, seems to be going ahead and filing a refund application, and we all know what a long arduous journey that is for any tax payer.
Hence, a better way out, perhaps, would be a functionality on the GST portal which allows such excess tax paid, Rs. 43,00,000/- in the above example to be transferred to the E Cash ledger of the taxpayer.
Reasons of issue of credit notes
As noted above, credit notes may be issued only for specific reasons. More than often, across industries, rampant misuse of credit notes is seen, e.g., incentives are passed on under the garb of credit notes. Since incentive will not affect the sale price of the goods, it should be treated as a separate independent supply. However, many such supplies are hidden under the cover of credit notes. Further, since financial credit notes do not need to follow the time limits prescribed under the Act, many credit notes which otherwise should have been issued under GST are issued as financial credit notes, not reversing the impact of GST. While the government exchequer does not stand to lose any GST component is such cases, the Input tax credit admissibility of the recipient may be at stake for noncompliance of conditions as prescribed under section 16(2) of the Act.
There is no denying that we as a country are doing a great job pulling off a reform as big as GST. However, there is much that needs to be done to make it a success in the real terms.