• Notification Date: 15-11-2021
• Notification No: 31/2021-22

Companies approach the government for clarity on GST Impact on credit notes

Many companies that provided discounts, reduced prices, or extended payment cycles to customers during the Covid-19 pandemic have reached out to the government to clarify the goods and services tax (GST) applicability on these amounts.

According to tax experts, businesses that issue credit notes or credit memorandums to consumers when the money is not paid immediately - are witnessing a GST impact.

“The pandemic saw many customers renegotiating prices offered by companies - from manufacturing companies to information technology firms - and credit notes have been issued across sectors”, experts said.

GST is typically paid when an invoice or bill is issued, due to which the businesses are now finding it difficult to claim credit or amend taxes already paid when they have not received payment from customers or have received less amounts.

"IGST element on the credit note issued is not treated as an input tax credit and as a corollary, there is a restriction in the system to adjust IGST with CGST or SGST," said Abhishek A Rastogi, partner at law firm Khaitan & Co.

GST is divided into three categories: IGST, CGST, and SGST. A part of the tax is levied on goods imported. CGST and SGST are two segments of the tax framework where revenue generated is collected by the central and state governments, respectively.

Under the GST framework, the input tax credit is essentially a tax paid on raw materials (or input services). This can be utilised to reduce future GST liability.

"As there is no specific provision in the statute to provide such a restriction, the constitutional validity of this restriction may be tested as the situation is a clear example of tax cascading, which is not the objective of GST," Rastogi said.

Companies and business entities are unable to claim GST already paid under the present GST framework even if they have not received the money or have had to return it or offer reductions to their clients.

According to industry watchers, if the government does not provide clarity, some of these corporations may appeal to the courts.