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CA Final · Indirect Tax Laws · Input Tax Credit

Narmada Pharma Ltd, an ISD, distributed credit of an input service invoice to three recipients in the ratio 5:3:2 (Units P, Q and R). In a later month the supplier issues a credit note to the ISD reducing the credit by Rs 50,000. Under rule 39 of the CGST Rules, 2017, how is the reduction handled?

The Rs 50,000 reduction is split Rs 25,000, Rs 15,000 and Rs 10,000 in the original 5:3:2 ratio, and reduced from the amount distributed in the month the credit note is included in GSTR-6. Any shortfall is added to the recipient's output tax liability.

  1. AApportioned as Rs 25,000, Rs 15,000 and Rs 10,000 in the original ratio, reduced from the amount to be distributed in the month the credit note is included in GSTR-6Correct
  2. BApportioned equally among P, Q and R at Rs 16,667 each in the month of the original invoice
  3. CApportioned on the basis of current-month turnover of P, Q and R
  4. DReduced only from the credit of the unit with the highest share, namely P

Explanation

A credit note to the ISD reduces credit apportioned to each recipient in the same ratio in which credit in the original invoice was distributed (clause n). The reduction is applied in the month the credit note is included in GSTR-6. If the credit under distribution is less than the adjustment, the negative amount is added to the recipient's output tax liability. The 5:3:2 split of Rs 50,000 gives 25,000, 15,000 and 10,000.

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