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THE INSIGHT

Financial/Commercial Credit Notes
By B Ramachander Rao
Jan 22, 2021

CIRCULAR 92/11/2019-GST dt. 07.03.2019 appears to have been issued by the Board to simplify the procedure involved in issuing tax credit notes in terms of section 34 of the CGST Act, 2017. In the Circular, it is clarified that financial/commercial credit notes can be issued by the supplier even if the conditions mentioned in clause (b) of sub-section (3) of section 15 of the said Act are not satisfied. In other words, credit notes can be issued as a commercial transaction between the two contracting parties.

2. If tax credit note is issued in terms of section 34 of the CGST Act, 2017 when the taxable value or tax charged is found to exceed the actual value or actual tax, as the case may be, then -

(i) the supplier needs to reduce his output tax liability; and

(ii) recipient needs to reverse the input tax credit to the extent of tax mentioned in such tax credit note.

3. The Board's circular intends to allow the supplier to issue financial/ commercial credit notes instead of issuing tax credit notes, when the taxable value or tax charged is found to exceed the actual value or actual tax, as the case may be. If financial/ commercial credit notes are issued for reduction of value, then -

(i) the supplier need not reduce his output tax liability; and

(ii) recipient need not reverse the input tax credit to the extent of tax mentioned in such tax credit note.

4. There is an apprehension that issuance of financial/ commercial credit notes may lead to undue transfer of accumulated input tax credit by the supplier to his favoured recipients. It is known that earlier accumulated input tax credit used to be transferred by unscrupulous taxable persons by following two illegal means: -

(i) Issuing invoices without supply of any goods or services; and

(ii) Over-invoicing, i.e. issuing an invoice with higher value and tax thereon than the actual value and tax.

In both cases, the supplier used to receive the money through bank or any other official channel for the invoiced amount from the recipient and return the extra amount by cash or any other unofficial channel to the recipient.

5. Now, by taking shelter under this circular such unscrupulous taxable persons need not worry as to how to unofficially return extra amount to their recipients . Now, they can happily -

(i) issue an invoice for a desired higher amount;

(ii) pay an amount, which they want to transfer as undue input tax credit, as GST; and

(iii) subsequently issue a financial/ commercial credit note for the differential amount without any GST implication.

In such case, there will be no unofficial financial transactions. All financial transactions can be made through bank or official channels, but undue input tax credit can be transferred to the favoured recipients.

6. It is expected that the departmental officers will verify such deliberate undue transfer of accumulated input tax credit by issuing financial/ commercial credit notes and take necessary action.

Lighter side: - Taxpayers are expecting a similar Circular for issuance of commercial debit notes also, by which they can issue tax invoices for a lower value and pay GST on such lower value and, subsequently, issue commercial debit notes for the differential value without any GST implication.

[The views expressed are purely personal.]