Invoice raised by business is settled in discount due to Covid-19, how to adjust ITC in GST
The current situation of Covid -19 has definitely given a bad financial crunch and hit to all the businesses and businessmen. There is no doubt that this has lead to Cash flow issues in the working capital and the customer may now ask for discounts on final payments due on invoices which are already raised earlier. How will this impact the GST and ITC working and what measures can you take in this prospect is the matter of discussion in this article. Further, to back our discussion we will also see and interesting case of M/s MRF Limited- under Authority of Advance Ruling Tamil Nadu.
Does the agreement play a vital role for discounts post sales?
The key condition for reduction in the tax liability in consideration with the post sales discounts is that theses discounts shall be confirmed or accepted in terms of an agreement that was entered into at or before the time of such supply and specifically connected to the relevant invoice. Further the ITC needs to be reversed by the recipient.
This pandemic has disturbed the demand for goods and services across the globe. The demand for all products except consumer goods precisely essentials has otherwise dropped like never before and the buyers are thereby forced to ask for heavy discounts. Since the hit of this pandemic was a surprise and there was no clue of the same the current agreement do not have any clause in respect to discounts in the occurrence of a pandemic.
Section 15 (3) of CGST Act States
(3) The value of the supply shall not include any discount which is given-
(a) before or at the time of the supply if such discount has been duly recorded in the invoice issued in respect of such supply; and
(b) after the supply has been effected, if
(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.
Cautions to be taken into consideration
- Since the current agreements do not include the clause of, “discounts in the occurrence of a pandemic” there will arise a difficulty in providing justification to tax officers on the reduction of tax liability on account of reducing the price by way of discounts
- One can still prove the B2B supplies by way of payments, but it is advised to take a counter sign on credit notes for B2C supplies. One can also use the Financial credit notes.
Relevant Case under Authority of Advance Ruling- M/s MRF Limited- Tamil Nadu
Briefs of the Case:
Post-invoice discount is offered by the supplier in the C2FO platform, the Applicant intends to use and this discount is not captured in PO. The Applicant submits that the proportionate Input Tax Credit attributable to such discount is not required to be reversed.
Facts of the Case:
The Applicant intends to enter into an agreement with C2FO for setting up an interactive automated data exchange which can be installed for data interaction relating to sale & purchase of goods and services between them and their Suppliers. Both the Supplier and Recipient of goods or services should register on the platform provided by C2F0. From the transactions envisaged in the platform, it is seen that a schedule is to be defined, based on which approved open invoices and supplier data is picked for offering the same for discounting by the supplier and if agreed by the supplier, the discounted invoices are placed for early payment.
It is observed that by registering in the platform, the supplier is agreeable to offer certain discount in return for an early payment and the discount offer can either be as APR (Annual Percentage Rate) or flat discount pre-fixed. Based on the discounted invoice the applicant pays the supplier. The supplier on raising the invoice (undiscounted price), pays the applicable GST. The Applicant on receipt of the goods/services and the invoice avails the tax paid by the supplier as credit and thereafter when such invoice is staged for discount against early payment in the C2FO platform and the price is discounted, only the discounted amount is paid by the applicant to his suppliers and not the amount indicated in the invoice. The Applicant claims that there is no need on their part to reverse the Input Tax credit availed by them in proportion to the discount in the invoice price. The Applicant has sought ruling only on whether proportionate ITC is to be reversed. The Applicant has stated that the discount in price which is offered through the platform is not captured in the Purchase order/ agreement. The question is about the admissibility of the ITC to the extent of the undiscounted value or of the value after discount and requirement of reversal of proportionate credit.
Issues on which Advance Ruling is required:
Admissibility of Input Tax Credit
Question on which advance ruling is required:
Whether the Applicant can avail the Input Tax Credit of the full GST charged on the supply of invoice or a proportionate reversal of the same is required in case of post purchase discount given by the supplier of the goods or services
It is observed that , Proviso to Section 16 states that where a recipient fails to pay to the supplier of goods or services or both, 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, and the recipient shall be entitled to avail of the credit of input tax on payment made by him of the amount towards the value of supply of goods or services or both along with tax payable thereon. In the instant case, the value of supply is the full undiscounted value indicated in the tax invoice and the recipient /Applicant only makes payment to the extent of invoice value less the discount thrown up by the C2FO software. As per proviso to Section 16, the recipient is entitled to avail the credit of input tax on the payment made by him alone and if any amount is not paid as per the value of supply and the recipient has availed full input tax credit, the same would be added to his output tax liability. Therefore, in the instant case, the Applicant can avail Input Tax Credit only to the extent of the invoice value less the discounts as per C2FO software. If he has availed input tax credit on the full amount, he should reverse the difference amount equal to the discount, to avoid adding to his output liability.
Ruling and Order:
As per the Provisions of Section 16 of the CGST Act 2O|7/TNGST Act 2OI7, the Applicant can avail Input Tax Credit only to the extent of the invoice value raised by the suppliers less the discounts as per C2FO software which is paid by him to the suppliers.