QUESTION

In case of credit note issued by supplier, department asking Interest for late reversal of GST against the credit note received under section 42 of the CGST Act, 2017 read with GST2A /2B return, What is remedy to avoid this interest demand? Penalty is also payable or not? Secondly, department asking us to produce evidence that the incidence of tax and interest on such supply has been passed on to any person. But, the taxable person is unable to get any evidence that the tax has been reversed by the buyer , department is of the view that as per proviso of Section 34(2) of the CGST Acts, 2017 which says as under: Provided that no reduction in output tax liability of the supplier shall be permitted, if the incidence of tax and interest on such supply has been passed on to any other person. The Taxable person had reduced output tax liability by GST on credit note amount but department is raising demand to pay GST on reduce amount, along with interest and penalty under Section 74 of the CGST Act read with Section 50 and 122(2)(b) of the Act for not providing the support or proof of reversal. Whether department is doing proper practice or it is not logical and impossible i.e. `The law does not compel a person to do that which he cannot possibly perform. The law does not compel the performance of what is impossible. It is not in the hand of supplier to verify this fact?

ANSWER

FACTS OF THE CASE:

1. ITC against a credit note was reversed in the months after it was reported by the supplier in their GSTR1. To check applicability of interest on the late reversal.
2. Credit notes were issued and output tax liability is reduced thereon. Now, the department has raised notice u/s 74 demanding proof of reversal of ITC by the buyer on these credit notes.

LAW APPLICABLE:

1. Subsection (3) of section 50 CGST is laid as under;

" A taxable person who makes an undue or excess claim of input tax credit under subsection (10) of section 42 or undue or excess reduction in output tax liability under subsection (10) of section 43, shall pay interest  on such undue or excess claim or on such undue or excess reduction, as the case may be, at such rate not exceeding twenty-four per cent., as may be notified by the Government on the recommendations of the Council. "

2. Section 74(1) CGST specifies that;

" Where it appears to the proper officer that any tax has not been paid or short paid or erroneously refunded or where input tax credit has been wrongly availed or utilised by reason of fraud, or any wilful-misstatement or suppression of facts to evade tax, he shall serve notice on the person chargeable with tax which has not been so paid or which has been so short paid or to whom the refund has erroneously been  made, or who has wrongly availed or utilised input tax credit, requiring him to show cause as to why he should not pay the amount specified in the notice along with interest payable thereon under section 50 and a penalty equivalent to the tax specified in the notice. "

INTERPRETATION:

Case 1 : The registered person is eligible to claim the ITC only to the extent the documents are intimated to them in their GSTR 2B. If the registered person is in receipt of a credit note and the same is also reflected in  their GSTR 2B then the eligible amount of ITC to be claimed stands reduced by the tax amount of the credit note. The recipient is therefore liable to reverse the proportionate ITC amount in the month in which the credit note is communicated to them. If there is a delay in this then interest u/s 50(3) @ 24% would be applicable on the amount of ITC which is reversed with delay.

Case 2 : The notice received u/s 74 is not tenable on the following grounds;
(i) There is no intention of fraud, willful misstatement or suppression of fact since the credit notes were timely reported by the supplier in their GSTR1.
(ii) The law through its rule 36(4) restricts the buyer's ITC upto an amount which is reflected in their GSTR 2B. In fact the portal is also designed and operative in a manner which sends the intimation of the credit note  being uploaded by the supplier to the recipient. There is no such facility on the portal by which the supplier is communicated about the ITC claims and reversals thereof which are made by the recipient. Therefore the  bare act and the operative common portal both have rested the responsibility of reversal of ITC on the recipient and not the supplier.
(iii) The onus of proof that excess ITC has been claimed or not lies on the recipient and should be requested by the department from the recipient of supply. The same can be verified by reconciliation of GSTR 3B and  GSTR 2B of the recipient.

CONCLUSION:

Case 1 : Interest u/s 50(3) is chargeable @ 24%. wherever it is applicable as discussed above.

Case 2 : Notice u/s 74 is not tenable due to grounds mentioned above. (Reply dt. 07/04/2022)