India witnessed a complete lockdown for over a month from March 2020 due to the COVID-19 pandemic. The government has been providing certain relaxations for GST compliance since March 2020.
These include conditional late fee waiver on completion of GST filings for February, March and April 2020 within specified dates of June-July 2020, interest exemption for small taxpayers, an extension to the validity of e-way bills till 30th June 2020, etc. For more information, read our article on 'GST Compliance Relief Measures and Clarifications'.
As per the 40th GST Council meeting, a reduced interest rate has been further allowed for small taxpayers up to September 2020 for tax periods from February to July 2020.
Eligibility of ITC paid on face masks and sanitisers to employees
A business entity will be eligible to claim an Input Tax Credit (ITC) on its purchases if it satisfies the conditions of Section 16 of the CGST Act and the item does not fall under Section 17(5) of the CGST Act as blocked credits.
Under the blocked credits, the ITC on health care services provided to the employees is disallowed for claims. Also, ITC on goods and services used for personal consumption is blocked.
But none of these specifically cover personal protective equipment distributed by a company to its employees to follow the social distancing norms placed by the Ministry of Home Affairs, India.
Even though the face masks or gloves are for personal use, these are used either when travelling to work or while at work. Further, the exception to Section 17(5) states that any service or goods provided by the employer to an employee as per a mandate of law shall still be allowed for ITC claims.
Since there is no specific restriction on claiming ITC on temperature reading machines or hand sanitisers, face masks and gloves distributed by a company to its employees, it can avail the ITC paid on such personal protective equipment.
Availability of ITC on invoices not uploaded by suppliers due to lockdown
The procedure for reporting ITC before the lockdown was as follows:
A recipient filing GSTR-3B could declare the tax credit for a month after verifying and matching his purchase register with the ITC appearing in his GSTR-2A for that month. He was allowed ITC in GSTR-3B equal to 110% of ITC in GSTR-2A as per rule 36(4) of the CGST Rules. In other words, it was a sum of actual ITC in GSTR-2A and a provisional ITC equal to 10% of ITC in GSTR-2A.
Every month, he had to reconcile the provisional credits claimed in the previous month's GSTR-3B with that of current month GSTR-2A, before proceeding to report ITC in GSTR-3B of the current month freshly.
The procedure given above was followed up to January 2020. After that, CBIC notified late fee waiver for any delay in filing of monthly GSTR-1 from March to May 2020 and GSTR-3B from February to April 2020. A similar relaxation was given to quarterly GSTR-1 of January-March 2020. The new deadlines are notified between 24th June 2020 and 6th July 2020 without late fee and with a reduced interest rate or without interest, as the case may be. Additionally, the rule 36(4) was suspended up to August 2020 for capping the provisional ITC at 10% of ITC appearing in GSTR-2A.
Now, a recipient filing GSTR-3B from February 2020 onwards may not be required to thoroughly verify GSTR-2A with his purchase register due to the suspension of rule 36(4) of the CGST Rules. Yet, other GST provisions and regulations on input tax credit must be followed.
Due to the deadline of GSTR-1 from March to May 2020 being relaxed, there will be a delay by suppliers in uploading invoices and debit notes. But to facilitate a smooth flow of credits along the supply chain, the recipient can continue claiming an unlimited amount of provisional ITC in his GSTR-3B. In other words, provisional ITC may be claimed more than 10% of ITC appearing in GSTR-2A.
However, while claiming such provisional ITC, care must be taken to ensure that the genuine purchase invoice/debit note is on hand, it satisfies the eligibility criteria of Section 17(5), and the respective goods or services are received.
Later, in September 2020, the recipient must cumulatively match or reconcile GSTR-2A with what has already been claimed as ITC. Any excess ITC claimed shall be reversed but interest at 24% p.a. shall apply on the portion of excess ITC utilised from the electronic credit ledger. Hence, caution must be exercised to prudently claim ITC on invoices not appearing in GSTR-2A during this period.
Advances received before lockdown, but contracts cancelled due to COVID-19
It is very commonly found across business communities. In the case of the delivery of bulk goods, manufacturers or traders ask for some advance. Also, most service providers ask for an advance before service completion.
There may be ambiguity among people about the GST treatment when service is withdrawn, or goods are not delivered due to cancellation. “Force Majeure” clause in a contract could have been invoked in certain circumstances, including a pandemic situation.
In case of goods, suppose the order is cancelled any time later. Since there is no GST implication and no tax invoice was issued, the manufacturer would need to issue a refund voucher for the advance received.
In the case of a service order being cancelled after advance payment, GST may have been paid on advance received based on either an invoice or a receipt voucher.
If an invoice was issued at the time of receiving an advance, the supplier is required to issue a credit note, and the tax liability in GSTR-1 and GSTR-3B shall be adjusted. In case there is no output liability in GSTR-3B, then he may file a refund claim in form RFD-01 under the category “Refund of excess payment of tax”.
The time limit to issue credit notes in case of post-sales discounts for an invoice raised before 31st March 2020 is the due date of GSTR-3B of September 2020 or date of filing annual return in form GSTR-9, whichever is earlier.
If a receipt voucher was issued at the time of receiving an advance, the supplier has to file a refund claim in form RFD-01 under the category “Refund of excess payment of tax”.
Treatment of ITC on goods destroyed/disposed of due to COVID-19
Section 17(5) of CGST Act that covers blocked credits has explicitly a clause to disallow ITC on "goods stolen, lost, destroyed, written off or disposed of as gifts or free samples". Due to the COVID-19 pandemic outbreak and the resulting lockdown, several factories, warehouses and godowns across India were shut. There have been instances of the physical stock getting destroyed/expired due to lack of maintenance and perishable goods being disposed of/thrown away.
Accordingly, input tax credit taken on such stock must be reversed since the ITC is not allowed. But the matter could be litigated on the grounds of a natural calamity such as the COVID-19 pandemic.
Treatment of discounts given during lockdown
In common trade parlance, there are several types of discounts such as in-bill discounts, off-bill discounts, cash discounts, quantity discounts, special discounts, discounts given in kind, free stocks, buy-one and take-two and nominal value supplies.
GST is not charged on discounts which are agreed between the supplier and the buyer before or when the supply takes place and found mentioned in the invoice. If any discount is given after the sale has taken place, such discounts must have been already agreed upon before or when supply took place, such as quantity discounts, and can be linked to specific invoices. Then, GST will not be charged.
But later, due to COVID-19, if both the parties mutually agree for a discount to clear off the dues, then the GST continues to apply. No reduction of such discounts from the value of supply will be allowed. It is because there would be no clause that pre-existed in their supply contract for such a discount.
The supplier will usually issue a credit note. In such a case, any ITC claimed to the extent of discount received must be identifiable and reversed by the buyer, only in cases where GST is not being charged.
The time limit to issue credit notes in case of post-sales discounts for an invoice raised before 31st March 2020 is the due date of GSTR-3B of September 2020 or date of filing annual return in form GSTR-9, whichever is earlier. Likewise, the ITC reversal in such cases must be done before the same deadline.
Treatment of bad debts during the lockdown
At present, no provision in GST explicitly provides reduction/refund of GST to the extent of bad debts or the receivables that are irrecoverable.
Only if the service provided was deficient, then by way of issuing a credit note, GST may not be charged to such extent.
The ITC provisions also state that the recipient must reverse ITC claims if he/she fails to clear the supplier's payment within 180 days from the invoice date along with interest. But no action is required to be taken by the supplier.
The government is expected to come up with more relaxations for businesses to deal with the post lockdown situation as the days pass by.