CBIC’s New Mandate on Post-Sale Discounts and ITC Reversal: A Detailed Analysis

The Central Board of Indirect Taxes and Customs (CBIC) has recently introduced a significant measure affecting suppliers providing post-sale discounts under the Goods and Services Tax (GST) regime. This directive mandates that suppliers issuing credit notes for post-sale discounts must obtain an undertaking or a certificate from the recipient of the supply, confirming the reversal of Input Tax Credit (ITC) on the discount value. This move aims to ensure compliance and transparency in the application of ITC on such discounts.

The Current Challenge in ITC Reversal Tracking

One of the critical issues under the current GST framework is the absence of a robust mechanism to track whether the ITC availed on post-sale discounts has been reversed by the recipient. This gap has led to ambiguity and potential disputes between the tax authorities and businesses. To bridge this gap, the CBIC’s new circular mandates specific documentation to verify the ITC reversal.

Documentation Requirements for ITC Reversal

1. Chartered Accountant (CA) or Cost Accountant (CMA) Certification:

• For transactions where the total tax (comprising CGST, SGST, IGST, and compensation cess, if applicable) involved in the discount exceeds Rs 5 lakh in a financial year, suppliers must procure a certificate from a CA or CMA. This certificate should confirm that the recipient has proportionately reversed the ITC concerning the credit note issued by the supplier.

2. Undertaking for Smaller Transactions:

• If the tax amount involved in the discount does not exceed Rs 5 lakh, the supplier can obtain an undertaking from the recipient instead of a CA/CMA certificate. This undertaking should assure that the necessary ITC reversal has been made.

Retrospective Effect and Relief for Taxpayers

The circular has been given retrospective effect, impacting all demands related to this issue since the inception of GST in 2017. This retrospective application is a significant relief for taxpayers engaged in litigation over this matter, providing them with a clear basis for resolving disputes.

Implications for the Industry

The clarification provided by this circular is expected to benefit the industry by outlining a clear process for issuing credit notes and managing ITC reversals. However, the requirement for additional documentation, such as CA/CMA certifications or self-certifications for smaller transactions, increases the compliance burden on businesses. Companies will need to update their accounting systems and processes to accommodate these new requirements.

Despite the increased documentation burden, the long-term benefits include more predictable and streamlined GST operations. The documentation, marked with a unique ID number, will serve as proof during audits, ensuring consistent application of GST rules on post-sale discounts. This consistency will help in resolving disputes between the tax department and businesses, fostering a more transparent tax environment.

Clarification on ITC for Insurance Companies

In a separate circular, the CBIC has also provided clarification regarding the availability of ITC to insurance companies for motor vehicle repair expenses incurred during reimbursement-based claim settlements.

Scenario 1: Dual Invoices

• If the garage issues two separate invoices – one to the insurance company for the approved claim cost and another to the customer for any excess amount – the insurance company can avail of ITC on the invoice issued to them, provided the insurance company reimburses the amount to the customer.

Scenario 2: Single Invoice

• If a single invoice covering the total repair cost is issued to the insurance company, and the insurance company only reimburses the insured for the approved claim cost, ITC is available to the insurance company only to the extent of the reimbursed amount, not on the full invoice value.

Conclusion

The CBIC’s new mandates on post-sale discounts and ITC reversals are significant steps towards enhancing compliance and transparency within the GST framework. While they impose additional documentation requirements on businesses, the benefits of clear, predictable, and streamlined GST operations are substantial. These changes are poised to reduce disputes, ensure consistent application of tax rules, and ultimately contribute to a more efficient tax administration system in India.

For suppliers and insurance companies alike, staying informed about these new requirements and updating their compliance practices accordingly will be crucial in navigating the evolving GST landscape.