Credit note = payment

[Nikhil Virkar]

Can issuance of financial credit note or GST credit note under Section 34 be considered as payment against the supply in terms of Section 16(2) read with Rule 34.

[Shilpi Jain]

It is in the nature of book adjustment. Can be regarded as payment. However, if the CN is for full amount of invoice then the further facts would be required in this regard.

[KASTURI SETHI]

Financial Credit Note and GST Credit Note both are different. What is factual position ? Which kind of Credit Note was issued ?

[Amit Agrawal]

Issuances of a financial credit note or GST credit note under Section 34 of CGST Act, 2017 can not be equated with payment of consideration to the supplier against supply made.

However, non-payment of consideration due to such credit-note means that there is no failure to pay to the supplier and hence, there will be no contravention under second proviso to Section 16 (2) in my view.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Nikhil Virkar]

Sirs/ Madam, say vendor charged bill for 100+18 GST in 21-22. Recipient did not pay due to bill amount issue. To save GST recipient claimed ITC in Sept22 and reversed since no payment within 180 days. Now In Dec22, bill is decided to settle @ Rs. 25 + GST. Hence (a) If vendor issue financial CRN, whether GST on 75 can be claimed by recipient (b) Whether this CRN can be considered as payment when the value of service itself is reduced to 25. (c) My view either one party shall bear the cost of GST. Please guide

[Padmanathan KV]

Dear Nikhil Virkar,

When the original bill value is 100 + 18 GST (118), how can it be reduced to 25 + 4.5 GST (29.5) using commercial credit note? In order to reduce the value of supply a GST credit note has to be issued for Rs.75 + 13.5 GST (88.5). In your case, the time limit has expired (on 30th Nov 2022).
The supplier can issue a commercial credit note for Rs.88.5 and recipient settle balance Rs.29.5. However the fact remains that original tax paid by supplier to Govt is Rs.18 and the recipient shall be eligible to take full credit of Rs.18.

This is my view. pls correct me if I am wrong

[Amit Agrawal]

Dear Shri Nikhil Virkar Ji,

W.r.t. your post at serial no. 4, my views are as under:

1. There is not time-limit to issue credit-note u/s 34 (1) in my view. Furthermore, issuance of such credit-note u/s 34 (1) is optional for supplier & not mandatory.

2. However, there is time-limit to declare such credit-notes in return filed by the supplier. And same is lapsed in given case on 30.11.2022. In other words, there is no option left with the supplier to adjust taxes paid earlier against current liability, against credit-note u/s 34 (1) if issued now.

3. Net-effect of above two Paras (& to avoid another set of needless controversies) is that it is better to settle disputes through financial credit-notes after 30th Nov, instead of credit-notes u/s 34.

4. Supplier can still issue financial credit-note now for Rs. 75 (& not Rs. 88.5) against taxable-value only and recipient can avail full ITC of Rs. 18 (i.e. even though taxable value is reduced to Rs. 25 as tax charged remains at Rs. 18). And recipient will pay supplier Rs. 43 before availing ITC of Rs. 18. (Here, it is presumed that supply is otherwise genuine in all respect and there is no effort to shift excess ITC available from supplier to recipient, in disguise of dispute about billing-amount).

5. Alternatively, Supplier can issue financial credit-note now for Rs. 88.5 (i.e. Rs. 75 for taxable value of Rs. 75 and Rs. 13.5 for tax charged) and recipient can avail ITC of Rs. 3.5 & not Rs. 18 (upon paying supplier Rs. 28.5). In this case, supplier needs to bear additional cost of Rs. 13.5 against gst paid at the time of original invoice.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

Please read Para 5 of above post of mine as follows:

Alternatively, Supplier can issue financial credit-note now for Rs. 88.5 (i.e. Rs. 75 for taxable value of Rs. 75 and Rs. 13.5 for tax charged) and recipient can avail ITC of Rs. 4.5 & not Rs. 18 (upon paying supplier Rs. 29.5). In this case, supplier needs to bear additional cost of Rs. 13.5, from his own pocket, against gst paid at the time of original invoice.

[Amit Agrawal]

One more thing, one can consider:

If Supplier issues financial credit-note now for Rs. 88.5 (i.e. Rs. 75 for taxable value of Rs. 75 and Rs. 13.5 for tax charged), he can try and claim refund of Rs. 13.5 from Dept. on the ground that same is taxes paid in excess, whom burden is not shifted upon anyone else.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Nikhil Virkar]

Dear Sirs, Thank you for your inputs. alternatively, suppose recipient paid 100+18 to vendor and to recover Rs. 75, recipient shall raise debit note for 75 + GST considering as supply of any service. in such case vendor as recipient shall claim GST and original recipieint shall get his 75.

[Nikhil Virkar]

Regarding inputs from Mr. Padmanathan, I have doubt whether it will hit by 2nd proviso of Section 16(2) wherein it is mentioned that 'value of supply along with tax payable thereon'. in this case recipient will not pay Rs. 75 then even though how he can claim ITC attributable to Rs. 75/-. It seems litigative in my view. Please guide.

[Padmanathan KV]

Dear Nikhil Virkar,

The entire amount will be treated as paid - via cash and book adjustment i.e. commercial credit note. In my opinion, it will not be hit by second proviso to Sec. 16(2)

[Amit Agrawal]

Dear Shri Nikhil Virkar Ji,

W.r.t. your post at serial no. 9, my views are as under:

A. Option of raising debit-note u/s 34 (3) lies exclusively with supplier and not by the recipient.

B. Recipient should NOT raise tax-invoice against some services, as a colorful devise, to overcome legal hurdles. When there is no underlying supply of any services, such invoices will be treated as issuance of fake-invoices and severe consequences under law will follow at end of supplier as well as recipient (i.e. if same is detected by or came in knowledge of Dept.)

Bottom line, in my humble view, is that we should never play with law - by planning colorful devices - just to overcome legal hurdles or difficulties in compliance/s etc.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

If supplier issue financial credit-note (or for that matter, credit-note u/s 34 (1), due to my views explained in Para 1 in post serial no. 6 above) now for Rs. 88.5 (i.e. Rs. 75 for taxable value of Rs. 75 and Rs. 13.5 for tax charged) and recipient can avail ITC only of Rs. 3.5 & not of Rs. 18 (upon paying supplier Rs. 29.5 against underlying supply) in my humble view.

This is because input tax charged - in such case - will be Rs. 3.5 & not Rs. 18 in terms of sub-section (62) & (63) of Section 2 of the CGST Act, 2017.

These are ex facie views of mine and the same should not be construed as professional advice / suggestion.

[Amit Agrawal]

In the continuation of my last post above, Circular No. 122/03/2010 - ST dated the 30th April 2010 (bearing F. No. 137/71/2009 - CX.4) is relevant to my mind (even though it deals with period of excise & service tax regime wherein Cenvat Credit of service tax was available to the recipient only on 'payment basis' i.e. after he pays value of services (i.e. service charges) and service tax to the supplier)

Relevant portion is reproduced below for ready reference:

3. As per sub-rule (7) of Rule 4 of the CENVAT Credit Rules, 2004,

"Credit in respect of input service shall be allowed, on or after the day on which payment is made of the value of input service and the service tax paid or payable as is indicated in invoice, bill or as the case may be, challan referred to in Rule 9".

A doubt raised is as to whether the receiver of input service can take credit only after the full value that is indicated in the invoice, bill or challan raised by the service provider, and also the service tax payable thereon, has been paid. It has been represented that in many cases, after the invoice is issued by the service provider, the service receiver does not make the full payment of the invoiced amount on account of discount agreed upon after issuance of invoice; or deducts certain amount due to unsatisfactory service; or withholds some amount as security to be held during contract period. Due to these reasons the value paid may not tally with the amount indicated in the invoice, bill or challan. In such cases the department has raised objections to the taking of credit as it does not meet the requirement of the said sub-rule (7).

.............

(b) In the cases where the receiver of service reduces the amount mentioned in the invoice/bill/challan and makes discounted payment, then it should be taken as final payment towards the provision of service. The mere fact that finally settled amount is less than the amount shown in the invoice does not alter the fact that service charges have been paid and thus the service receiver is entitled to take credit provided he has also paid the amount of service tax, (whether proportionately reduced or the original amount) to the service provider. The invoice would in fact stand amended to that extent. The credit taken would be equivalent to the amount that is paid as service tax. However, in case of subsequent refund or extra payment of service tax, the credit would also be altered accordingly."

[HASMUKH PATEL]

My question is not realated to GST impact. It's for non received of payments form foreign buyer and impact on banking-RBI rule and custom effect. How to close shipping bill in AD code bank ???

AI Summary

Credit note as payment may not suffice for input tax credit; entitlement depends on credit note type and timing.
The central issue is whether issuance of a financial or GST credit note can be treated as payment for claiming input tax credit. The commentary distinguishes statutory credit notes from financial/book adjustments, stresses the importance of timing and return-declaration limits for adjusting taxes already paid, and outlines practical options: treat a late instrument as a financial credit note preserving original tax credit, issue a credit note adjusting both value and tax thereby shifting tax burden to supplier, or consider refund routes. The choice affects ITC entitlement and compliance risk.