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CA Final · Indirect Tax Laws · Input Tax Credit

Lakshmi Engineering Ltd.'s ISD distributed IGST credit of ₹1,20,000 on an invoice from a supplier, split between Unit A and Unit B in the ratio 2:1. Later the supplier issued a credit note to the ISD reducing the credit by ₹30,000 IGST. The credit note is included in the ISD's GSTR-6 for a month in which the credit under distribution for Unit B is only ₹4,000 (Unit A has sufficient credit). What is the correct treatment under Rule 39?

The ₹30,000 reduction is apportioned 2:1, giving ₹20,000 to Unit A and ₹10,000 to Unit B. Unit B has only ₹4,000 under distribution, so ₹4,000 is reduced and the remaining ₹6,000 is added to its output tax liability, as clause (n) of Rule 39(1) provides.

  1. AReduce ₹20,000 from Unit A and ₹10,000 from Unit B; for Unit B, reduce ₹4,000 from the amount to be distributed and add ₹6,000 to its output tax liabilityCorrect
  2. BReduce ₹15,000 from each unit, since the credit note is a fresh common credit
  3. CReduce ₹30,000 from Unit A alone as it received the larger share
  4. DReduce ₹20,000 from Unit A and ₹4,000 from Unit B, and ignore the balance ₹6,000

Explanation

Under clause (n), the reduction is apportioned in the same ratio as the original distribution (2:1), giving ₹20,000 for A and ₹10,000 for B. Unit B's amount under distribution is only ₹4,000, so the apportioned amount becomes negative by ₹6,000. Clause (n)(ii) then requires this ₹6,000 to be added to Unit B's output tax liability; ignoring it is wrong.

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