GST Payers who reduced Value of Outward Supply in GSTR3B due to Credit Notes to face demand for playing Blind

By RS Sharma Advocate

Honeymoon of Taxpayers with GST Return filing is all set to be over. 90 per cent of GST Payers who reduced value of Outward Supply while filing GSTR3B returns on ground of discounts given by Credit Notes issued by them against supply already made in past, have taken a High Risk by playing blind and are going to be soft target of GST Department for demand at the time of scrutiny and audit which is going to start once Annual GST Return filing process is over. Being ignorant of legal and statutory provisions of  a new law; majority of Taxpayers have failed to appreciate and fulfill the conditions prescribed under GST law for reduction in Tax liability due to Credit Notes issued by them.

Section 15 (3) (b) of CGST Act, 2017 stipulates that the value of the supply shall not include any discount which is given after the supply has been effected, if following twin conditions are fulfilled:

( i ) such discount is established in terms of an agreement entered into at or before the time of such supply and specifically linked to relevant invoices; and

( ii) 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.

Hence the recipient must have reversed the proportionate credit availed by him earlier when supply was made. The Onus is on supplier to ensure that credit was reversed by recipient and it is a mandatory condition. But in practice majority of suppliers have not kept a track of fulfilment of this statutory condition and in absence of it they are not entitled to reduce the value of supply in GSTR3B due to discounts given by credit notes.

But the above is not the only test to be passed by the suppliers for reducing conditions; the suppliers are required to fulfill many other conditions also.

Tax liability due to Credit Notes is allowed to be adjusted under GST Law in terms of sub-section (2) of Section 34 of CGST Act, 2017 which prescribes that any taxpayer can adjust his tax liability if he issues a credit note in relation to a supply of goods or services or both and declares 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. But the facility of this adjustment is subject to condition prescribed vide Proviso to sub-section(2) of Section 34 which clearly provides that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax on such supply has been passed on to another person.

Hence another test of unjust enrichment has to be passed by the supplier before opting for reduction in value of outward supply and reduction in output tax liability due to credit notes. If a supplier has already recovered the billed amount inclusive of the tax amount; it is deemed by the law that incidence of tax on such supply has already been passed on to another person. Annual discounts and turnover discounts are given by suppliers after receipt of payment of billed amount including tax. In such cases suppliers have already failed the test of unjust enrichment as the incidence of tax has already been passed on by them.

Larger Bench of Supreme Court vide a Ruling dated 29th August 2016 has already ruled that the claim for refund of excess duty paid can be allowed only in case where the burden of duty has not been passed on to any other person, which includes the ultimate consumer as well. Refunds of excise claimed on ground of trade discounts given by credit notes were rejected by the Apex Court as the claimants did not pass the test of unjust enrichment.

I foresee biggest litigation in GST regime on account of reduction of tax liability in GSTR3B by reducing value of outward supply by taking cover of Credit Notes. The demands of tax liability are imminent. Majority of taxpayers may fail one or the other test prescribed under statute and failure to pass the prescribed tests will result in confirmation of demand with interest.

(Writer is a Supreme Court Lawyer & Managing Partner of Law Firm RS Sharma Associates based in Gurgaon. He can be reached at rssharma@gmail.com )

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