Treatment of credit notes received without GST

[Syamaprasad Menon]

We regularly receive credit notes from our principals for passing down to our dealers as post-sale discounts to them. We hold no contract/agreement either with the dealers or our principals . Therefore, we treat these credit notes to us as post-purchase discounts (credit note amount *100/100+rate of GST) and reverse the corresponding ITC involved. We issue credit notes to our dealers capturing the corresponding GST and report the same in our GSTR-1. Is this in order?

[KASTURI SETHI]

Sh.Syamaprasad Menon Ji,

(1) In order to qualify for deduction of post-supply discount from the transaction value all the following conditions are to be fulfilled by the supplier:-

(i) Such discount is established in terms of an agreement entered into at or before the time of such supply 

(ii) Such discount must be specifically linked to relevant invoices; and

(iii) input tax credit as is attributable to the discount on the basis of document issued by the supplier has been reversed by the recipient of the supply

(2) In your case, discount is not known at the time of supply or before the time of supply due to non-execution of an agreement /contract between the supplier and buyer and it is only known after supply. Hence the supplier will not be entitled to reduce such amount from its output tax liability. Go through circular no.92/11/2019-GST dated 7.3.19. The supplier can give discount by way of financial/commercial credit note but he will not be entitled to reduce his output tax liability.

(3) In the given example by you, since the supplier has discharged GST on the whole amount, the buyer is not required to reverse ITC. Here it is pertinent to go through para no.5 of the decision of CESTAT in the case of Brown Craft Industries Ltd. Vs. CCE, Thane-II - 2006 (11) TMI 85 - CESTAT, MUMBAI which is extracted below :

"5. After going through the facts and circumstances of the case and on consideration of the grounds cited supra, I am of the view that the contentions raised by the Appellant have substantial force in law. There is no loss to the revenue as far as the payment of duty is concerned by the assessee i.e. supplier of the goods on the proper correct assessable value. If there is a short payment of duty or refund claimed by the assessee supplier or reduction of sale price of the goods, there is some meaning in the action of the department to demand the appellants to reduce or reverse the credit equal to short payment of duty or refund claim. There is no such exercise by the authorities concerned at the suppliers end. Duty is paid on the basis of regular practice which is as per trade practice or on mutual agreement and the trade discounts/cash discounts and other discount are the normal practice, which cannot be quashed by the department as long as they receive the correct quantum of duty, on correct assessable value. Therefore, I am of the confident view that the department cannot direct the appellant to reverse the credit or to disallow the credit as the Appellants had paid the duty and taken credit which is equivalent to duty shown in the invoice issued by the supplier, as such the confirmation of the demand for excess credit is not sustainable and penalty imposed thereof along with interest is not sustainable. Both the authorities had erred in demanding reversal of credit. Therefore, both the impugned orders are to be set aside and the appeal is allowed with consequential."

Although this case law pertains to pre-GST era, yet it is relevant. As per EXCUS this case law was accepted by the department.

Post-sales discount must be prior known to the buyer.It is statutory requirement and has to be complied with.

[Syamaprasad Menon]

Sri Kathuri Sethi Ji,

Thank you very much for your clarifications. I perfectly understand the issue between our supplier and us. They had already collected GST on the full value and not claimed any ITC on the value of the credit note. By the same logic, this applies between our dealers and us, to whom we cascade these discounts. If so, how can we undo what we have been practising all this while?

Regards

[KASTURI SETHI]

Dear Sir,

I am not in the know of full facts of the practices adopted by you in both situations. Pl. ensure that no revenue loss is caused with your practices. . If revenue loss has been caused, pay tax along with interest. You can ascertain with the following illustrations.

An illustration :

(1) Suppose Principal is 'A'

Your company is 'B'

Your Dealer is 'C'

(2) Contract/agreement is absent in both scenarios. Since the condition of Section 15 (3)(b)(i) of CGST Act has not been fulfilled in both scenarios, the buyers do not know the discount at the time of supply. The buyers came to know about the discount only after the supply from A (supplier) to 'B' and from B supplier to C.

Practice of issuance of Credit Notes between both 'A' and 'B' and B and 'C' is the same. Both A and B when invoices were issued to their buyers did not record the amount of discount due to non-execution of agreement/contract. Thus both A & B while supplying goods to their buyers charged GST on the entire amount (transaction value) from their respective buyers. GST charged was NOT net of discount because the element of discount was not known at the time of supply.. Hence both the buyers i.e. B and C had initially availed ITC of the entire amount of tax paid in the original invoices.

(3) Now after supply both A & B decided to give discount to their respective buyers by way of Credit Notes. Now the question arises whether reversal of ITC attributable to the amount of discount is required or not. If required, in which situation and if not required in which situation.

Credit note can be issued with GST or without GST.

HYPOTHETICAL SITUATIONS

Scenario 1 If credit note is issued with GST :

Suppose Taxable Value : ₹ 200000/-

Tax @18% : ₹ 36000/-

Invoice Value : ₹ 2,36,000/-

Suppose Credit note is issued for ₹ 10,000/- Proportionate GST works out to ₹ 1800/-(18% of ₹ 10,000) The supplier is actually paying GST of ₹ 34200/-(36000-1800) into Govt. account after accounting for the credit note. Accordingly ITC of ₹ 1800/- (18% of ₹ 10000/-) is required to be reversed by the buyer.

Scenario 2 : If credit note is issued without GST, then no reversal of ITC is required as already explained above in my reply.

Pl. note that these are my personal views/interpretations and analysis on the issue.

[KASTURI SETHI]

Dear Sir,

In continuation of my reply above, it is further clarified that in the absence of contract/agreement i.e.non-fulfillment conditions laid down in Section 15 (3)(b), if you intend to give post-sales(supply) discount to your buyer, give the same from your own pocket i.e. without influencing GST (without reduction of tax liability on outward supply).

In case you have contravened Section 15(3)(b)(i), you are required to pay tax on the amount/value of discount along with interest an inform the department.

AI Summary

Post sale discount eligibility: only pre established, invoice linked discounts can reduce GST liability; otherwise give discount without tax impact. To deduct a post supply discount from taxable value the supplier must meet all limbs of Section 15(3)(b): a discount established by agreement at or before supply, specifically linked to invoices, and reversal of attributable ITC by the recipient on supplier documentation. Absent such agreement the supplier cannot reduce output tax; if a credit note reduces supplier tax (issued with GST) the recipient must reverse proportionate ITC, whereas a credit note without tax adjustment does not require ITC reversal.