GST Audit Case Study 13 - Non-Reversal Of Input Tax Credit Involved In The Credit Notes Received From The Suppliers Which Are Reflected In The GSTR-2A CDN Folio.

ITC reversal is mandatory for the recipient of the supplies with regard to Credit notes issued by their suppliers. 

Aims and objectives of GST Audit

Audit in GST should intend to evaluate the credibility of self-assessed tax liability of a taxpayer based on the twin test of accuracy of their declarations and the accounts maintained by the taxpayer. Thus, Audit in GST should have the following objectives:

• Measurement of compliance levels with reference to compliance strategy of the tax administration.
• Detection of non-compliance and revenue realization
• Prevention of non-compliance in the future.
• Discovering areas of non-compliance to prevent taxpayers from continuing with such deviations from expected compliance behaviour that results in erroneous declaration of self-assessed liability.
• Providing inputs for corrections in/amendments to the legal framework which are being exploited by taxpayers to avoid paying taxes.
• Encouraging voluntary compliance.
• Any other goals deemed worth pursuing by the GST administration.

GST Audit Para

It is seen that the taxpayer has received certain amounts from the suppliers by way of credit notes, which are reflected in GSTR-2A CDN Folio involving GST of ₹ XXXXXX /-. (IGST ₹ XXXXXX /-, CGST & SGST of ₹ XXXXX /- each), as detailed in the  table below: Section 16 of CGST Act, 2017 provides the conditions  for fulfilment of which ITC can be availed by a registered taxable  person under GST. Second proviso to Section 16(2) of the CGST  Act, 2017 reads as “Provided further that where a recipient fails to  pay to the supplier of goods or services or both, other than the supplies  on which tax is payable on reverse charge basis, the amount towards  the value of supply along with tax payable thereon within a period of  one hundred and eighty days from the date of issue of invoice by the  supplier, an amount equal to the input tax credit availed by the  recipient shall be added to his output tax liability, along with interest  thereon, in such manner as may be prescribed”.

Therefore, if the taxpayer had availed the ITC on the original invoices against which the credit notes have been issued, the GST involved in the said credit notes is liable to be  reversed by the taxpayer. On verification of the GSTR-3B Returns and the statements submitted by the taxpayer, it is seen that the taxpayer has reversed Rs. XXXXX/- through their GSTR-3B Return. Further, it is seen from the GSTR-3B returns and from the ITC Register submitted by the taxpayer that they have not availed the IGST credit of  ₹ XXXXXX /-. Therefore the total short reversal on account of the ITC involved in the credit notes comes to  ₹ XXXXX/- only.

Therefore, an amount of ₹XXXXX/-(CGST & SGST: ₹XXXXX/- each) not reversed by the taxpayer as detailed above is liable to be recovered from them along with interest and penalty.

Author’s Note 

Credit notes play a crucial role in GST transactions, allowing registered persons to rectify errors and make adjustments.

Credit Note

Credit note” means a document issued by a registered person under subsection (1) of section 34 of CGST Act 2017.

Who Can issue credit note? 

Credit note can be issued by any registered person, who has supplied such goods or services or both to the recipient.

Circumstances under which credit note can be issued?

• Taxable Value charged for the supply in the tax invoice is found to exceed the taxable value. 
• Tax charged in the invoice is found to exceed the tax payable in respect of such supply. 
• Where the goods supplied are returned by the Recipient of goods. 
• Where goods or services or both supplied are found to be de%uFB01cient.

Last time limit for issuing credit note? 

It should be issued not later than the 30 November following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed.

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

Case : Mr A of Delhi has supplied goods of Rs. 10,00,000 to Mr B of Rajasthan. Assume it is an B2B transaction. 

Tax Invoice issued by MR A for the Month of July 2023:

Mr. A filed the GSTR-1 and GSTR-3B in August 2023, and the tax invoice reflected in the GSTR-2B of Mr. B.

Mr. B has claimed the credit of Rs. 1,80,0000 on the basis of GSTR-2B. 

We have assumed that Mr. B has satisfied all the conditions of Section 16 of the CGST Act for claiming ITC. 

Later on in the month of September 2023 , Mr. B., while going through books, sees that there is a mismatch between the tax invoice issued by the Supplier and the goods actually received.

Mr. B contacted the supplier, told them about the issue, and made a request to issue a credit note for the same. Mr. A, issued a credit note and filed the GSTR1, showing there as a credit note. The output tax liability of the supplier gets reduced once the credit note is issued and matched.

Now, As per Law what adjustments Mr. J has to Made ? 

Corresponding Input tax credit of Rs.18000 (1,00,000*18%) is to be reversed by Mr. J while filing GSTR3B for the relevant month. 

If Net ITC Is Reported Directly In GSTR-3B

At the time of GST Department audits it is being observed that department is making the taxpayers reverse ITC again with respect to credit notes if the ITC has been shown net by the recipient and not reported separately in Table 4(B)(2) in GSTR-3B

Reduction of ITC by Recipient:

The CGST Act, requires the recipient to “reduce” the ITC for credit notes received in returns filed by the recipient and have all the documents to substantiate that we have fulfilled this condition of law.

1. The credit notes received are reflected in GSTR-2A.
2. have copies of credit notes available.
3. Corresponding invoice copies with respect to which credit notes have been received are available.

Section 34 Casts Responsibility  of Reporting Credit  note  on Supplier:

Section 34 of the CGST Act with respect to Credit and Debit notes prescribes the circumstances under which credit or debit notes are to be issued and the time limit to issue the same.

Section casts a responsibility on the supplier of goods or services by mentioning that the supplier “shall declare the details of such credit note in the return for the month during which such credit note has been issued “. It doesn’t mention about the reporting of credit notes by recipient. The same is reproduced below for ready reference:

Credit and debit Notes.

34. (1) [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.

(2) Any registered person who issues a credit note in relation to a supply of goods or services or both “shall declare the details of such credit note in the return for the month during which such credit note has been issued” but not later than 34a[the thirtieth day of November] following the end of the financial year in which such supply was made, or the date of furnishing of the relevant annual return, whichever is earlier, and the tax liability shall be adjusted in such manner as may be prescribed:

Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person.

(3) 35[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 be less than the taxable value or tax payable in respect of such supply, the registered person, who has supplied such goods or services or both, shall issue to the recipient 35a[one or more debit notes for supplies made in a financial year] containing such particulars as may be prescribed.

(4) Any registered person who issues a debit note in relation to a supply of goods or services or both shall declare the details of such debit note in the return for the month during which such debit note has been issued and the tax liability shall be adjusted in such manner as may be prescribed.”

Rule 73:

Rule 73 of the CGST Rules mentions the word “reduction” in ITC by the recipient and not reversal. Thus, we have “reduced” ITC of credit note and shown net ITC in GSTR-3B. The Rule has been reproduced below for ready reference:

Matching of claim of reduction in the output tax liability

73. The following details relating to the claim of reduction in output tax liability shall be matched under section 43 after the due date for furnishing the return in FORM GSTR-3, namely:-

(a) Goods and Services Tax Identification Number of the supplier;

(b) Goods and Services Tax Identification Number of the recipient;

(c) credit note number;

(d) credit note date; and

(e) tax amount:

Provided that where the time limit for furnishing FORM GSTR-1 under section 37 and FORM GSTR-2 under section 38 has been extended, the date of matching of claim of reduction in the output tax liability shall be extended accordingly:

Provided further that the Commissioner may, on the recommendations of the Council, by order, extend the date of matching relating to claim of reduction in output tax liability to such date as may be specified therein.

Explanation.- For the purposes of this rule, it is hereby declared that-

(i) The claim of reduction in output tax liability due to issuance of credit notes in FORM GSTR-1 that were accepted by the corresponding recipient in FORM GSTR-2 without amendment shall be treated as matched if the said recipient has furnished a valid return.

(ii) The claim of reduction in the output tax liability shall be considered as matched where the amount of output tax liability after taking into account the “reduction” claimed is equal to or more than the claim of input tax credit after taking into account the “reduction” admitted and discharged on such credit note by the corresponding recipient in his valid return.

Section 43(3):

Sub section (3) of Section 43 uses the word ‘reduction’ of ITC by recipient (This section has been omitted by the Finance Act 2022 as there is no more the concept of Matching, Reversal, Reclaim of ITC). Relevant extract of the sub-section has been produced below for ready reference:

“43. Matching, reversal and reclaim of reduction in output tax liability-

(3) Where the reduction of output tax liability in respect of outward supplies exceeds the corresponding “ reduction” in the claim for input tax credit or the corresponding credit note is not declared by the recipient in his valid returns, the discrepancy shall be communicated to both such persons in such manner as may be prescribed.

CBIC flyer

Information flyer issued by CBIC mentions the word “reduction” and not reversal. Hence, as per my understanding we can “reduced” ITC on credit notes received from eligible ITC as per books of accounts and have shown net ITC in GSTR-3B.

Matching, mismatching, and reversal mechanism:

Matching, mismatching, and reversal mechanism was for GSTR-1, GSTR-2 and GSTR-3 which were not available on the portal. Had the returns been available as prescribed in the Act, such issues would not have come up.

No Revenue loss:

By mentioning input tax credit net of ITC as per credit notes, there is no revenue loss to Government.

What if recipient has not reversed the ITC?

• If the supplier has reduced the tax liability and the recipient has not reversed the ITC for the whole year, then the excess ITC availed by the recipient, based on the original invoices, is an undue ITC availed by the recipient 
• Since the supplier has less paid to the Government as the excess ITC corresponding to the Credit notes was adjusted from the taxable value of supplies made by him. 
• If any undue or excess credit is availed by the recipient, the same is recoverable along with interest and penalty under the provisions of Section 73 of CGST Act, 2017or Section 74 of CGST Act, 2017.

Author's Suggestion

ITC reversal or reduce ITC on credit notes is mandatory for the recipient of the supplies with regard to Credit notes issued by their suppliers though GSTR-3B. Taxpayer will be liable to reverse the Tax on credit before issuance of notice by the department though  Form GSTR-3B or DRC-03 as soon as detected the un-reversed ITC along with Interest at the rate of 18%  per annum. If not utilized the claimed ITC then no interest is required.