Introduction
In the Goods and Services Tax (GST) regime, the
reversal of Input Tax Credit (ITC) is a crucial aspect that businesses must
manage carefully. One area that often leads to confusion is the treatment of
discounts provided by suppliers through commercial (non-GST) credit notes.
These credit notes differ from GST credit notes and have a unique impact on
ITC. This article explores the legal provisions, relevant case laws, and
practical insights regarding ITC reversal in cases of non-GST credit notes.
Understanding
Commercial (Non-GST) Credit Notes
Commercial credit notes are issued by suppliers for
discounts that are not part of the initial supply agreement or known at the
time of supply. Common examples include:
- Trade discounts for early payments
- Price protection discounts
- Bulk quantity discounts
- Target-based incentives
Unlike GST credit notes, commercial credit notes do
not adjust the supplier's output tax liability. As a result, they are
considered secondary discounts, which do not affect the taxable value under
GST.
Legal Framework and Relevant Circulars
As per Section 15(3)(b), a supplier can reduce the value of supply only if the discount is established in the terms of an agreement before or at the time of supply, is linked to specific invoices, and the corresponding ITC is reversed by the recipient.
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
Only after complying with
the aforesaid conditions, the supplier can issue a credit note with GST and
reduce its output liability. In other cases, where the discount component is
not known at the time of supply, such discounts are referred to as secondary
discounts. If the transaction does not meet the triple test mentioned above, a
commercial (non-GST) credit note should be issued.
Circular No. 92/11/2019-GST dated 07.03.2019: Clarification of various doubts related to treatment of sales promotion schemes under GST.
This circular clarified on the treatment of sales
promotion scheme under GST as
A. Free samples & Gifts,
B. Buy one get one free offer,
C. Discounts including ‘Buy more save more’ offers,
D. Secondary Discounts
The relevant extract of above circular i.e. “Secondary
Discount” is reproduced as under:
i. These are the discounts which are not known at the
time of supply or are offered after the supply is already over. For example,
M/s A supplies 10000 packets of biscuits to M/s B at Rs. 10/- per packet.
Afterwards M/s A re-values it at Rs. 9/- per packet. Subsequently, M/s A issues
credit note to M/s B for Rs. 1/- per packet.
ii. The provisions of sub-section (1) of section 34 of
the said Act provides as under: “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 one or more credit notes for supplies made in a
financial year containing such particulars as may be prescribed.”
iii. Representations have been received from the trade
and industry that whether credit notes(s) under sub-section (1) of section 34
of the said Act can be issued in such cases even if the conditions laid down in
clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.
It is hereby clarified that financial / commercial credit note(s) can be issued
by the supplier even if the conditions mentioned in clause (b) of sub-section
(3) of section 15 of the said Act are not satisfied. In other words, credit
note(s) can be issued as a commercial transaction between the two contracting
parties.
iv. It is further clarified that such secondary
discounts shall not be excluded while determining the value of supply as such
discounts are not known at the time of supply and the conditions laid down in
clause (b) of sub-section (3) of section 15 of the said Act are not satisfied.
v. In other words, value of supply shall not include
any discount by way of issuance of credit note(s) as explained above in para 2
(D)(iii) or by any other means, except in cases where the provisions contained
in clause (b) of sub-section (3) of section 15 of the said Act are satisfied.
vi. There is no impact on availability or otherwise of
ITC in the hands of supplier in this case.
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."
Authority
for Advance Ruling, Madhya Pradesh on the application filed by Rajesh Kumar Gupta proprietor of M/s
Mahaveer Prasad Mohanlal, Gandhi Ganj, Jabalpur (M.P.) [Case No. 07/2021 order
dated 06.01.2022] has held that:
o The
applicant can avail the Input Tax Credit of the full GST charged on the invoice
of the supply and no proportionate reversal of ITC is required in respect of
commercial credit note issued by the supplier for cash discount for early
payment of supply invoice (bills) and Incentive/scheme provided without
adjustment of GST, if the said discount is not covered under Section 15(3)(b)
of CGST Act, 2017 and the said discount is not in terms of prior agreement.
This is subject to the conditions that the GST paid for the said goods/service
is not reversed or reimbursed / re-credited by the supplier to the applicant in
any manner.
o Since the
amount received in the form of credit note is actually a discount and not a
supply by the applicant to the supplier, no GST is leviable on receiver on cash
discount/incentive/scheme offered by the supplier to applicant through credit
note against supply without adjustment of GST.
o The
ruling is valid subject to the provisions under section 103(2) until and unless
declared void under section 104(1) of the GST Act.
In
summary, businesses must carefully distinguish between GST credit notes and
commercial credit notes to avoid unnecessary ITC reversal. The key takeaway is
that ITC reversal is not mandatory if the discount is offered through a
commercial credit note and the supplier has not reduced their output tax
liability.