Many businesses that provided discounts, reduced prices, or extended payment cycles to customers amid the Covid-19 pandemic have approached the government to clarify the impact of goods and services tax (GST) on these amounts.
According to tax experts, enterprises that issue credit notes or credit memorandums – which are given to consumers when money isn’t paid straight away – are witnessing a GST impact.
The pandemic saw many customers renegotiating prices offered by companies – from manufacturing companies to information technology firms – and credit notes have been issued across sectors, experts said.
“IGST element on the credit note issued is not treated as an input tax credit and as a corollary there is a restriction in the system to adjust IGST with CGST or SGST,” said Abhishek A Rastogi, partner at law firm Khaitan & Co.
GST is divided into three components: IGST, CGST, and SGST. A part of the tax is levied on goods imported. CGST and SGST are two components of the tax framework where revenue generated is collected by the central and state governments, respectively.
Under the GST framework, the input tax credit is essentially a tax paid on raw materials (or input services). This can be used to reduce future GST liability.
“As there is no specific provision in the statute to provide such a restriction, the constitutional validity of this restriction may be tested as the situation is a clear example of tax cascading, which is not the objective of GST,” Rastogi said.
Companies are unable to claim GST already paid under the present GST framework even if they have not received the money or have had to return it or offer reductions to customers.
According to industry watchers, if the government does not provide clarity, some of these corporations may turn to the courts.