Introduction
The Central Board of Indirect Taxes and Customs (‘CBIC’) has issued a circular[i] to address the mechanism for verifying compliance with s. 15(3)(b)(ii) of the Central Goods and Services Tax Act, 2017(‘CGST’), following the recommendations made during the 53rd GST Council Meeting held on 22.06.2024. The issue arose from the current lack of a facility on the common portal for suppliers or tax officers to verify whether the input tax credit (‘ITC’) attributable to a given discount has been reversed by the recipient. In response to requests for a suitable verification mechanism, this circular aims to clarify the requirements for trade and tax officers, thereby reducing litigation.
Key Amendments
S. 15 of the CGST Act provides for the value of taxable supply of goods or services or both. S. 15(3) specifies that the supply value shall not include a discount given by the supplier, subject to certain conditions. In cases where the suppliers offer discounts through tax credit notes after the supply has been effected, the discount is not to be included in the taxable value unless the conditions of s. 15(3)(b)(ii) of the CGST Act are met. The key amendments and clarifications are as follows:
Interim Solution for ITC Reversal Verification: Until a functionality is available on the common portal for suppliers and tax officers to verify the reversal of ITC attributable to discounts offered through tax credit notes, suppliers can obtain a certificate from the recipient. This certificate, issued by a Chartered Accountant (‘CA’) or Cost Accountant (‘CMA’), should certify that the recipient has proportionately reversed the ITC related to the credit note issued by the supplier. This interim solution ensures compliance with ITC reversal requirements until the portal implements the verification facility.
Details Required in the CA/CMA Certificate: The CA/CMA certificate should include details such as the credit notes, the relevant invoice numbers against which the credit notes were issued, the amount of ITC reversal for each credit note, and the details of FORM GST DRC-03, return, or any other relevant document through which the recipient has made the ITC reversal. Such certificate issued by a CA or CMA must contain a Unique Document Identification Number (‘UDIN’).
Simplified Compliance for Smaller Amounts: In cases where the total tax amount (CGST, State GST, Integrated GST, including compensation cess, if any) involved in the discount given by the supplier through tax credit notes in a financial year does not exceed ₹5,00,000, the supplier can instead obtain an undertaking or certificate from the recipient. This certificate should confirm that the recipient has reversed the ITC attributable to the discount and include the relevant details mentioned above.
Admissibility of Certificates and Undertakings: Certificates issued by the CA/CMA or undertakings/certificates issued by the recipient of the supply, as applicable, shall be treated as suitable and admissible evidence for the purpose of s. 15(3)(b)(ii) of the CGST Act. The supplier must produce these certificates/undertakings before tax officers during scrutiny, audits, or investigations. For past periods, where evidence is required under s. 15(3)(b)(ii) of the CGST Act regarding credit notes issued for post-sale discounts, the taxpayer can provide certificates issued by CA/CMA or undertakings/certificates from recipients to the relevant investigating, audit, or adjudicating authority as proof of ITC reversal by recipients.
Conclusion
This circular marks a significant step towards the compliance framework for post-supply discounts under the CGST Act. By introducing a certificate-based verification mechanism, the CBIC aims to ensure uniformity and ease in implementing ITC reversal provisions. The interim measure not only addresses the immediate verification challenges but also reinforces recipients' accountability in adhering to ITC reversal requirements.
It is important to note that if the conditions of s. 15(3)(b) are not met, the supplier cannot reduce the value of the supply; adjustments can be made through financial or commercial credit notes in such cases. This was clarified by the CBIC, particularly concerning additional or secondary discounts extended to dealers by suppliers. Although further details of the clarification are awaited, there should be no requirement to provide evidence in such instances, as the supplier cannot reduce the discount amount from the supply value, allowing the recipient to claim full ITC, provided other conditions are satisfied.
This move is expected to enhance transparency and reduce disputes arising from post-supply discounts, contributing to a more efficient GST regime. However, the reliance on certificates and undertakings until a portal functionality is established may still pose administrative burdens on taxpayers and professionals. The long-term resolution will hinge on developing and deploying robust system functionalities to streamline these processes further.
End Note
[i] Circular No.- 212/6/2024-GST, dated 26.06.2024
Authored by Shivangi Bhardwaj, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.