This Tax Alert summarizes a recent ruling [1] of the Andhra Pradesh Authority for Advance Ruling (AAR). The issue involved was whether a recipient is required to proportionately reverse the input tax credit (ITC) to the extent of commercial credit note issued by the supplier towards post-sale discount.
Applicant in the present case is engaged in the business of selling various electronic items purchased from its supplier. The supplier provides various post-sale discounts for which it raises commercial credit notes (without the tax component). Further, the supplier does not reduce its value of supply and adjust the corresponding output GST attributable to such credit notes since it does not fulfil the conditions provided in Section 15(3)(b) of the Central Goods and Services Tax Act, 2017 (CGST Act).
AAR observed that the post-sale discount received by the applicant should not affect the transaction value determined as per Section 15 of the CGST Act [2]. Accordingly, the applicant is eligible for full credit of tax charged in the original invoice, provided it pays to the supplier the value of supply, as reduced by the discount, plus the amount of original tax charged in the invoice. Thus, applicant is not required to reverse ITC to the extent of commercial credit notes received.
AAR also pointed out that such credit notes should not be used as a conduit to transfer ITC fraudulently. If such a case is noticed at any point, the same shall be liable for penalty under Section 132(b) of the CGST Act.
Earlier, vide Circular No. 105/24/2019-GST, it was clarified that the recipient is not required to reverse ITC attributable to post-sale discount received through commercial credit notes issued by supplier, as long as such recipient pays the balance amount to the supplier along with the entire tax charged in the original invoice. However, the above Circular was subsequently withdrawn.
[1] TS-265-AAR(AP)-2023-GST
[2] Circular No. 92/11/2019-GST dated 7 March 2019
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