| May-19-2021

Relevance of the Date of Debit Note for the Purpose of Availing Input Tax Credit Under the Gst Regime

Background

The concept of input tax credit (‘ITC’) is the backbone of the GST regime which is instrumental to achieve the stated objective of reducing the cascading effect of taxes on the cost of goods or services to the end consumer. The Central Goods and Services Tax Act, 2017 (‘the CGST Act’) has provided the “Eligibility and conditions for taking input tax credit” in Section 16 of the CGST Act.

Sub-section (4) of Section 16 read as follows when the GST law came into force on 1^st July 2017:

“(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

The provisions for issuing “debit note” are covered under sub-sections (3) and (4) of Section 34 of the CGST Act:

“(3) 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 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.”

As can be seen from Section 34(4), the CGST Act does not stipulate any time limit for issuing a debit note for the purposes of charging the differential tax and reporting it in the GST returns.

However, in case a debit note relating to an invoice is issued beyond September of the next financial year, the same is barred from claiming ITC by the recipient as per the provisions of Section 16(4).

Consider a scenario where the invoice was issued on 31^st March 2019. Thereafter, in the month of October 2019 it is discovered that the taxable value or the rate of tax charged was lesser than what it should have been charged. As per the requirements of Section 34(3) of the CGST Act, the supplier would be required to issue a debit note for the differential taxable value or tax or both (as the case may be) in October 2019 pertaining to the invoice issued on 31^st March 2019. Further, as per the requirements of Section 34(4) of the CGST Act, such debit note is required to be declared in Form GSTR-1 for October 2019 and the corresponding tax liability is required to be discharged through Form GSTR-3B for October 2019. However, due to the restriction stipulated in Section 16(4), the ITC of the tax charged in such debit note issued in October 2019 has become time-barred.

The above restrictive provisions of Section 16(4) were resulting into undue hardships for the recipients.

Remedial action taken by the GST Council

In order to set right the anomaly in Section 16(4) of the CGST Act related to the debit notes, the matter was taken up as part of the Agenda of the 38^th GST Council Meeting held on 18^th December 2019. An amendment was proposed to allow ITC on debit notes by linking it to the date of issuance of the debit note by amending Section 16(4) of the CGST Act as a “Trade facilitation and Simplification measure”. In this regard, the Agenda mentioned the following for consideration of the GST Council:

Gist of issue

1. Section 34 (3) allows issuance of debit note where “a tax invoice has 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”. Moreover, as per section 16(4), a registered person is not entitled to take credit of a debit note beyond “the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or invoice relating to such debit note pertains or furnishing of the relevant annual return, whichever is earlier”
2. Plain reading of the provisions suggests that in case debit note relating to an invoice is issued beyond September of the next financial year, the same is barred from claiming ITC by the recipient. This is leading to a problem for sectors such as Automobiles, Heavy Engg. PSUs etc. where a price revision is inbuilt in the contract, and as per the provisions, in case of escalation on this account a debit note can be issued and corresponding tax shall be collected and deposited to the Government along with interest, but corresponding credit to the recipient is barred.

Proposal

The Law Committee examined the matter and felt that credit may be allowed for debit notes irrespective of the date of issuance of the underlying invoice as anyway interest is being paid when tax liability is discharged in case of debit note. Accordingly, the Law Committee recommended to amend the provisions of section 16(4) to allow ITC on debit notes by linking it to the date of issuance of the debit note by omitting the words “invoice relating to such”.

Amendment introduced in the CGST Act by the Finance Bill, 2020

In accordance with the decision taken by the GST Council, amendment of Section 16(4) of the CGST Act was proposed by stating that the words “invoice relating to such” shall be omitted.

Notes on Clauses to the Finance Bill, 2020 gave the rationale of the stated amendment as follows:

“Clause 118 of the Bill seeks to amend sub-section (4) of section 16 of the Central Goods and Services Tax Act so as to delink the date of issuance of debit note from the date of issuance of the underlying invoice for purposes of availing input tax credit.”

The aforesaid amendment has come into force w.e.f. 1^st January 2021 vide Notification No. 92/2020-Central Tax dated 22^nd December 2020.

Effect of the amendment

The amended Section 16(4) of the CGST Act now reads as follows w.e.f. 1^st January 2021:

“(4) A registered person shall not be entitled to take input tax credit in respect of any invoice or debit note for supply of goods or services or both after the due date of furnishing of the return under section 39 for the month of September following the end of financial year to which such invoice or debit note pertains or furnishing of the relevant annual return, whichever is earlier.”

Controversy created by the Gujarat Authority for Advance Ruling

Gujarat AAR gave a ruling (Advance Ruling No. GUJ/GAAR/R/10/2021 dated 20^th January 2021) in the case of I-tech Plast India Pvt. Ltd. on one of the following questions:

“Can the applicant claim Input Tax Credit in relation to CGST-SGST separately in debit notes issued by the supplier in current financial year i.e. 2020-21, towards the transactions for the period 2018-19?”

The applicant stated that the supplier of the applicant is seeking to issue debit notes in relation to transactions entered into and goods supplied to the applicant during the period 2018-19 and the debit notes proposed to be issued are in relation to price variation as the supplier had mistakenly charged low price and the said error was noticed by the supplier recently and hence, the supplier desires to rectify the same and proposes to issue debit notes to the applicant whereby CGST and SGST shall be reflected separately.

Upon comparing Section 16(4) before and after the amendment, the Authority stated as follows in its ruling:

“20. On comparing the two above, we find that in the fourth line, the words “invoice relating to such” before the words “debit note pertains” have been omitted vide the Finance Act, 2020. In other words, that portion of the sentence which read as “such invoice or invoice relating to such debit note pertains” will now read as “such invoice or debit note pertains”. However, upon going through the above as well as the submission of the applicant, we do not find it to be such a drastic or far reaching change affected by the Finance Bill, 2020 as interpreted by the applicant, as, irrespective of the fact as to whether the words “invoice relating to such” is connected to “debit note” or omitted, the fact remains that a debit note is always connected to the invoice and issued in relation to change in value of an invoice. Just because the words “invoice relating to such” connected to “debit note pertains” was omitted, does not mean that the relation of the debit note with the invoice has been cut off or that omission of the above words means, that the year in which the debit note was issued will be considered as the ‘financial year’ as per amended sub-section(4) of Section 16. Further, nowhere is it forthcoming from a plain reading of the said amended sub-section, that the intention of the Government, by omitting the words “invoice relating to such” from the words “invoice relating to such debit note pertains” in the said sub-section, was to disconnect the debit note from the original invoice so that the debit note gains an independent existence so as to entitle the applicant to claim Input Tax Credit in relation to CGST-SGST charged separately in debit notes issued by the supplier in current financial year i.e. 2020-21, towards the transactions for the period 2018-19. We are of the opinion that the aforementioned change affected as a result of Finance Act, 2020 has not brought about any drastic or far-reaching change in the interpretation of sub-section (4) of Section 16 ….. “

The Authority finally gave the following ruling:

“The applicant cannot claim Input Tax Credit in relation to CGST-SGST separately in debit notes issued by the supplier in current financial year i.e. 2020-21, towards the transactions for the period 2018-19 for the reasons discussed hereinabove.”

Views of the author

The AAR has given an erroneous ruling in this case. The Agenda notes of the 38^th GST Council Meeting and the Notes on Clauses to the Finance Bill, 2020 had adequately explained the reasons/ rationale for amending Section 16(4) of the CGST Act. It is evident that the learned members of the Authority for Advance Ruling did not make any efforts to apprise themselves of the same.

It is important to understand the law making process under the GST regime, wherein the GST Council plays an important role, in order to gain better clarity about the law.

Disclaimer:

Views expressed by the author are his personal and based on his understanding of the law as on date. It is requested that the readers should not take any decisions merely on the basis of this article and do their own research to take an informed decision depending on the facts and circumstances of their case.

About the author

CA. Rahul Kant– Seasoned finance and tax professional (CA and MBF) with 25+ years of experience in consulting, manufacturing and servicing organisations in diverse functions including Taxation, FP&A, Accounts & Audit, FDI, Corporate Finance and Strategy. Currently advising clients on complex indirect tax issues, identifying and advising on tax efficient business models, structuring business operations, financing options and Virtual CFO services, he is also a Registered Insolvency Professional.

Email id: rahulkant@icai.org
LinkedIn profile: www.linkedin.com/in/rahul-kant