Analyzing GST Adjustments and Impacts During the COVID-19 Period

India experienced a nationwide lockdown starting in March 2020 due to the COVID-19 pandemic. In response, the government introduced various relaxations for Goods and Services Tax (GST) compliance. These measures included conditional waivers for late fees on GST filings for early 2020, provided they were completed by specific dates in June-July 2020. Small taxpayers also benefited from interest exemptions and extensions for e-way bill validity until June 30, 2020. The 40th GST Council meeting further approved reduced interest rates for small taxpayers for tax periods from February to July 2020, extended until September 2020. For more details on these measures, refer to our article on ‘GST Compliance Relief Measures and Clarifications‘.

Input Tax Credit Eligibility for Employee Face Masks and Sanitisers

Businesses can claim Input Tax Credit (ITC) on purchases if they meet the conditions outlined in Section 16 of the CGST Act and if the items are not part of the blocked credits under Section 17(5). Section 17(5) generally disallows ITC on healthcare services and goods used for personal consumption provided to employees. However, it does not explicitly cover personal protective equipment (PPE), such as face masks and hand sanitisers, which companies distribute to employees to comply with social distancing guidelines from the Ministry of Home Affairs. While these items are for personal use, they are utilized during commuting to or while working.

An exception in Section 17(5) permits ITC claims for services or goods provided by an employer to employees when mandated by law. Given there's no specific restriction on claiming ITC for items like temperature-reading machines, hand sanitisers, face masks, and gloves distributed to staff, companies are generally permitted to avail the ITC paid on such personal protective equipment.

ITC Availability for Invoices Not Uploaded by Suppliers Due to Lockdown

Prior to the lockdown, the process for reporting ITC involved recipients verifying their purchase register against the ITC displayed in GSTR-2A for the month before declaring the credit in GSTR-3B. Rule 36(4) of the CGST Rules allowed provisional ITC claims up to 110% of the ITC reflected in GSTR-2A. This meant a sum of actual ITC in GSTR-2A plus 10% provisional ITC. Each month, previous provisional credits had to be reconciled with the current GSTR-2A before reporting fresh ITC. This procedure was followed until January 2020.

Subsequently, the CBIC announced waivers for late fees for delayed GSTR-1 filings from March to May 2020 and GSTR-3B filings from February to April 2020. Similar relief was extended for quarterly GSTR-1 for January-March 2020, with new deadlines set between June 24 and July 6, 2020, offering late fee waivers and reduced or no interest, as applicable. Additionally, Rule 36(4), which capped provisional ITC at 10% of GSTR-2A, was suspended until August 2020.

Consequently, recipients filing GSTR-3B from February 2020 onwards were not strictly required to reconcile GSTR-2A with their purchase register due to the temporary suspension of Rule 36(4). Despite this, other GST provisions and regulations for input tax credit still applied. The relaxation of GSTR-1 deadlines from March to May 2020 caused delays in suppliers uploading invoices and debit notes. To ensure continuous credit flow, recipients could claim an unlimited amount of provisional ITC in GSTR-3B during this period, exceeding the 10% GSTR-2A threshold.

However, when claiming such provisional ITC, businesses had to ensure they possessed genuine purchase invoices or debit notes, met eligibility criteria under Section 17(5), and had received the relevant goods or services. By September 2020, recipients were required to cumulatively reconcile GSTR-2A with all ITC previously claimed. Any excess ITC claimed would need to be reversed, with interest at 24% per annum applied to the portion of excess ITC utilized from the electronic credit ledger. Therefore, careful consideration was necessary when claiming ITC for invoices not appearing in GSTR-2A during this specific timeframe.

GST Treatment of Advances Received for Cancelled Contracts Due to COVID-19

It is a common scenario in business. Manufacturers or traders often request advances for bulk goods, and most service providers require an upfront payment before service completion. During the pandemic, contracts were cancelled, leading to uncertainty regarding GST treatment. A “Force Majeure” clause, often included in contracts, could be invoked in situations like a pandemic.

If a goods order was cancelled and no tax invoice had been issued, the manufacturer only needed to issue a refund voucher for the advance received, as there were no GST implications. For a service order cancelled after an advance payment, GST might have already been paid based on an invoice or a receipt voucher.

If an invoice was issued when the advance was received, the supplier had to issue a credit note, and the tax liability in GSTR-1 and GSTR-3B would be adjusted accordingly. If there was no output liability in GSTR-3B, a refund claim could be filed using form RFD-01 under the "Refund of excess payment of tax" category. The deadline for issuing credit notes for post-sales discounts on invoices raised before March 31, 2020, was the due date for GSTR-3B of September 2020, or the date of filing the annual return in GSTR-9, whichever came first. If a receipt voucher was issued for the advance, the supplier would also file a refund claim in form RFD-01 under the "Refund of excess payment of tax" category.

Input Tax Credit Treatment for Goods Destroyed or Disposed Due to COVID-19

Section 17(5) of the CGST Act, which deals with blocked credits, specifically disallows ITC on "goods stolen, lost, destroyed, written off or disposed of as gifts or free samples." Due to the COVID-19 pandemic and subsequent lockdowns, many factories, warehouses, and godowns across India were closed. This led to instances where physical stock was destroyed or expired due to lack of maintenance, or perishable goods were disposed of. In such cases, any input tax credit previously claimed on this stock must be reversed, as ITC is not permitted for such losses. However, the interpretation of this clause could be subject to litigation, especially when destruction or disposal resulted from a natural calamity or unforeseen circumstances like the COVID-19 pandemic.

Handling Discounts Provided During the Lockdown Period

Several types of discounts are prevalent in trade, including in-bill, off-bill, cash, quantity, and special discounts, as well as those involving free stocks or nominal value supplies. GST is typically not charged on discounts agreed upon between the supplier and buyer before or at the time of supply, and which are clearly stated on the invoice. If a discount is given after the sale, it must have been pre-agreed (e.g., quantity discounts) and linkable to specific invoices to avoid GST.

However, if parties mutually agreed to a discount post-COVID-19 lockdown to settle outstanding dues, and this discount was not part of a pre-existing contract clause, GST would still apply to the original value of supply. No reduction in the value of supply for such discounts would be allowed. The supplier would usually issue a credit note. In these scenarios, the buyer must identify and reverse any ITC claimed to the extent of the discount received, but only if GST was not charged on the discounted amount.

The deadline for issuing credit notes for post-sales discounts on invoices raised before March 31, 2020, was the due date for GSTR-3B of September 2020, or the date of filing the annual return in GSTR-9, whichever was earlier. Similarly, any associated ITC reversal by the buyer needed to be completed by the same deadline.

Addressing Bad Debts During the Lockdown

Currently, GST provisions do not explicitly offer a reduction or refund of GST for bad debts or irrecoverable receivables. Only if a service was deficient could GST potentially not be charged, via a credit note. ITC regulations also stipulate that recipients must reverse ITC claims if they fail to make payment to the supplier within 180 days from the invoice date, along with interest. However, no action is required from the supplier in this specific situation. It is anticipated that the government may introduce further relaxations for businesses to navigate the post-lockdown economic landscape.