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CA Final · Indirect Tax Laws · Input Tax Credit

Narmada Logistics Ltd, an ISD, distributed credit of an invoice from a supplier to three recipients in the ratio 5:3:2. In a later month, the supplier issues a credit note to the ISD reducing the credit by Rs 20,000. For one recipient, the credit under distribution in that month is lower than the amount to be adjusted. Which treatment follows Rule 39?

The reduction is apportioned in the original distribution ratio of 5:3:2. It is reduced from the credit being distributed in the month of the credit note, and if a recipient's amount turns negative because credit is insufficient, it is added to that recipient's output tax liability.

  1. AThe reduction is apportioned in the ratio 1:1:1 and ignored if the recipient has insufficient credit
  2. BThe reduction is apportioned in the ratio 5:3:2 and, where a recipient's amount is negative because credit under distribution is lower, it is added to that recipient's output tax liabilityCorrect
  3. CThe ISD must reverse the whole Rs 20,000 from its own electronic credit ledger
  4. DThe reduction is apportioned by current-month turnover and carried forward to later months indefinitely

Explanation

Rule 39(1)(n) requires the reduction to be apportioned to each recipient in the same ratio in which credit in the original invoice was distributed (5:3:2, i.e. Rs 10,000, 6,000, 4,000). It is reduced from the amount to be distributed in the month the credit note is included in GSTR-6, or added to the recipient's output tax liability if the amount is negative.

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