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CMA Intermediate · Direct and Indirect Taxation · Input Tax Credit

An ISD distributed Rs 1,00,000 of credit from an invoice in the ratio 60:40 to recipients P and Q. In a later month the supplier issues a credit note reducing the credit by Rs 20,000. In that month, P has only Rs 5,000 of credit under distribution, and Q has Rs 30,000. How does Rule 39 treat the reduction?

The Rs 20,000 is split 60:40 as originally distributed, giving P Rs 12,000 and Q Rs 8,000. P's excess of Rs 7,000 over its Rs 5,000 available credit is added to its output tax liability; Q's reduction is absorbed by its distribution.

  1. AP's share Rs 12,000 is reduced from the month's distribution to the extent of Rs 5,000 and the excess Rs 7,000 is added to P's output tax liability; Q's share Rs 8,000 is reduced from its distributionCorrect
  2. BEntire Rs 20,000 is reduced from Q's distribution because Q has more credit
  3. CRs 10,000 is reduced from each recipient equally
  4. DRs 20,000 is added to the output tax liability of both recipients in equal parts

Explanation

Rule 39(1)(n) apportions the reduction in the ratio of the original distribution: P = 60% x 20,000 = Rs 12,000 and Q = Rs 8,000. Each amount is reduced from the amount to be distributed in that month. Where it exceeds the credit under distribution, as for P (12,000 against 5,000), the negative balance of Rs 7,000 is added to the recipient's output tax liability. Q's Rs 8,000 is covered by Rs 30,000.

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