“Seamless flow of credit” is one of the key features of GST. Barring a few exceptions, a registered person is allowed to avail the credit for GST paid on all inputs, input services and capital goods. However, in certain situations the provisions of law obliges such registered persons (recipients of supplies) to reverse the credit availed. Let’s discuss the provisions of law that deal with the same –
- ITC attributable to discount given after the supply has been effected [Section 15(3)] –
The recipient of the supply on which discount is given after the said supply has been effected, shall reverse the ITC attributable to the discount on the basis of the credit note (or any other document) issued by the supplier. This is in line with the provision that such discount shall not be included in the value of the said supply, thereby allowing the supplier to reduce his output tax liability. However, there is one other condition that such discount shall be established as per an agreement entered into at or before the time of such supply and specifically linked to relevant invoices. If this other condition is not satisfied, then despite the fact that the recipient reverses the ITC availed by him as mentioned above, the supplier will not be able to exclude the discount from his value of supply and reduce his output tax liability.
- Non-payment of consideration along with tax amount within 180 days [Second Proviso to Section 16(2)] –
If a recipient fails to pay the amount towards the value of supply, along with tax payable thereon, to the supplier within 180 days from the invoice date, the ITC availed by him on such supply shall be reversed and added to his output tax liability, along with interest calculated @ 18% for the period starting from the date of availing the ITC (i.e. the date when the relevant return was furnished, thereby crediting the amount of ITC to the e-CrL) till the date when the amount added to the output tax liability is paid. This reversed amount can be reclaimed when the due payment of the consideration is made.
- Common inputs/ input services/ capital goods used partly for business purpose for effecting taxable supplies and partly for exempt supplies or non-business purposes [Sections 17(1) and (2)] –
A registered person who is involved in making both taxable supplies (including zero-rated supplies, whether taxable or exempt) and exempt supplies (other than zero-rated supplies) shall reverse the amount of common inputs/ input services/ capital goods that he uses for effecting both the kind of supplies, calculated as per Rules 42 and 43 and Section 17(3). The same provision applies to a registered person who uses such inputs/ input services/ capital goods commonly for his business as well as non-business purposes (legally speaking, it even includes the ITC on telephone expenses that is used for making both official as well as personal phone calls).
NOTE: The calculations as per Rules 42 and 43 have to be done both monthly as well as annually.
- Receipt of Credit Note [Section 34] –
If a recipient of goods/ services receives a Credit Note from his supplier for any reason, including overbilling or purchase returns, he shall reverse the amount of ITC claimed on the basis of the original invoice to the extent covered by such credit note, thereby allowing the supplier to reduce his output tax liability. The same provision shall apply to the apportionment of reduction of ITC by an ISD on account of receipt of credit note from the supplier. However, the ISD shall adjust the amount of reduction from the ITC required to be distributed in the month of receipt of the said credit note, and in case the amount goes negative, shall add to the output tax liability of such recipient(s).
- Discrepancies in claim of ITC [Section 42] –
The provisions of this section is not effective as of now, but might soon be. Where a mismatch between the claim of ITC by the recipient and the corresponding details of output tax liability of the supplier is found and communicated to both the parties and yet no rectification is made by either of them timely, the said mismatched amount of ITC shall be added to the output tax liability of the recipient in his return (FORM GSTR – 3) for the month succeeding the month in which the discrepancy is made available.