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, including conditional waivers for late fees, interest exemptions for small taxpayers, and extensions for e-way bill validity. This article examines the specific GST adjustments made during the pandemic, covering Input Tax Credit eligibility, compliance waivers, and handling of cancelled contracts and destroyed goods.

ITC 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 sanitizers distributed to employees for workplace safety compliance.

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 was no specific restriction on claiming ITC for items such as temperature-reading machines, hand sanitizers, face masks, and gloves distributed to staff in accordance with the Ministry of Home Affairs guidelines, companies were generally permitted to avail of the ITC paid on such personal protective equipment.

This interpretation was significant for businesses that incurred substantial costs on PPE during the pandemic. The ability to claim ITC on these purchases helped offset the financial burden of maintaining workplace safety standards. Businesses were advised to maintain proper documentation, including purchase invoices and records demonstrating that the PPE was distributed for workplace use, to support their ITC claims during any future audits.

ITC for Invoices Not Uploaded by Suppliers During Lockdown

Prior to the lockdown, Rule 36(4) of the CGST Rules allowed provisional ITC claims up to 110% of the ITC reflected in GSTR-2A. This meant recipients could claim actual ITC in GSTR-2A plus an additional 10% as provisional ITC. Each month, previous provisional credits had to be reconciled with the current GSTR-2A before reporting fresh ITC.

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. Importantly, Rule 36(4), which capped provisional ITC at 10% of GSTR-2A, was suspended until August 2020. This meant recipients filing GSTR-3B from February 2020 onwards could claim an unlimited amount of provisional ITC, exceeding the normal 10% 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 reconcile GSTR-2A with all ITC previously claimed cumulatively. Any excess ITC claimed had to be reversed, with interest at 24% per annum applied to the portion of excess ITC utilized from the electronic credit ledger.

GST Treatment of Cancelled Contracts Due to COVID-19

During the pandemic, many contracts were cancelled, leading to uncertainty regarding GST treatment of advance payments. 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. This simplified scenario required minimal compliance effort.

For a service order cancelled after an advance payment, where GST might have already been paid based on an invoice or a receipt voucher, the treatment depended on the documentation. If an invoice was issued upon receipt of the advance, 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. The ‘Force Majeure’ clause, commonly included in business contracts, could be invoked to support cancellations during the pandemic.

ITC Treatment for Goods Destroyed or Disposed of During 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 lockdown, many factories, warehouses, and godowns were closed, leading to physical stock being destroyed or expiring due to a lack of maintenance, or perishable goods being disposed of.

In such cases, any input tax credit previously claimed on this stock had to be reversed, as ITC is not permitted for such losses. This created a double burden for businesses: they lost the value of the goods and had to reverse the ITC claimed on them. However, the interpretation of this clause was subject to litigation, especially when destruction or disposal resulted from unforeseen circumstances such as the pandemic.

Businesses that suffered such losses were advised to document the destruction thoroughly, including photographic evidence, insurance claims, and official records of the lockdown orders that prevented access to their premises. This documentation could be valuable in supporting any legal challenges to the ITC reversal requirement in cases where the loss was entirely attributable to government-mandated lockdowns rather than business negligence.

Handling Discounts and Bad Debts During the Lockdown

GST is typically not charged on discounts agreed upon between the supplier and buyer before or at the time of supply, provided they are clearly stated on the invoice. 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 the supply. No reduction in the supply value for such discounts was allowed.

In these scenarios, the supplier would usually issue a credit note, and the buyer would need to 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.

Regarding bad debts, the GST provisions did not explicitly provide for a reduction or refund of GST on bad debts or irrecoverable receivables during the pandemic period. ITC regulations stipulate that recipients must reverse ITC claims if they fail to pay the supplier within 180 days of the invoice date, along with interest. The absence of specific relief measures for pandemic-related bad debts was a significant concern for businesses facing widespread payment defaults.

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Frequently Asked Questions

Q1: What is Input Tax Credit (ITC) under GST?

Input Tax Credit (ITC) allows businesses to reduce the tax they pay on their output by the tax they have already paid on inputs used in the course of business. It prevents the cascading effect of taxes, where tax is levied on tax.

Q2: How does the GST Council impact tax rates and compliance?

The GST Council, chaired by the Union Finance Minister and comprising state finance ministers, is the governing body for GST. It makes decisions on GST rates, laws, procedures, and exemptions, directly influencing tax rates and compliance requirements across India.

Q3: What is the purpose of GSTR-3B in GST?

GSTR-3B is a monthly self-declaration form that registered taxpayers must file, providing a summary of outward supplies, inward supplies, and ITC claimed. Its primary purpose is to declare tax liabilities and make payments, ensuring the timely collection of revenue.

Q4: Can a business claim ITC on all its purchases?

No. While ITC is generally available for goods and services used for business purposes, Section 17(5) of the CGST Act specifies categories of goods and services for which ITC cannot be claimed, such as goods for personal consumption, specific construction services, and certain food and beverages.

Q5: What are the consequences of late GST return filing?

Late filing of GST returns attracts penalties in the form of late fees and interest. A late fee is charged per day until the return is filed, and interest is levied on the outstanding tax liability from the due date until the actual payment date.

Q6: Was ITC available on PPE purchased for employees during COVID-19?

Yes, companies were generally permitted to claim ITC on face masks, sanitizers, and other PPE distributed to employees, as these were mandated by law for workplace safety. The exception in Section 17(5) permits ITC on goods provided by employers to employees when mandated by law.