GST rules for credit notes tightened to stop leakage

MUMBAI: A supplier of goods or services can issue a credit note to the buyer in several instances. Typically this happens if the supplier has made mistakes in the original invoice, such as declaring a value higher than the value of goods or services actually provided or has mentioned an incorrect higher GST rate. A credit note is also issued when goods are returned by the buyer.
Rohit Jain, deputy managing partner, at Economic Laws Practice explains, “There exists a possibility that the recipient (buyer) could have taken

input tax credit

(ITC) based on the original invoice and subsequently, the supplier issues a credit note and claims adjustment (refund). The Budget proposes that it is now necessary for the supplier to ensure that the recipient reverses ITC before such adjustment is claimed.”
The amendment appears to have been introduced to prevent

revenue leakage

. It will prevent scenarios where the supplier claims a reduction in its GST liability, owing to the credit note, but the buyer continues to avail of the corresponding ITC. This results in a double tax benefit with an adverse impact on GST collection.
Jain points out that proposed amendment is based on recommendations of the GST Council. As it places an additional burden on suppliers, there exists a possibility that the amendment may be challenged in courts on the premise that suppliers will have to bear consequences of the recipient’s non-compliance, despite having no control over the recipient’s actions.