How can businesses cut down on tax risk during and post pandemic?

Even as India moves toward normalisation and starts to ’unlock’ the country after a three-month nationwide lockdown, the full blow of the economic difficulties that businesses are likely to face is yet to be visible.

From being strapped for cash, alarmingly low pools of working capital and the difficult task of recovering outstanding credit from customers, businesses are expected to see even darker months in their future. Amidst this chaos, a number of businesses are facing the concern of GST that has been paid to the Government on issue of an invoice and the fact that customers are unable to make their outstanding payments - leaving businesses in a dual lurch. In such a situation, what can companies do to cut down on tax risk?

As per GST law, businesses can avail of a full adjustment on taxes on pre-sale discounts. The same is not the case, however, for post-sale discounts. Tax liability on a post-sale discount can only be adjusted provided the discount clause has been established in terms of an agreement entered at or before the time of such supply and specifically linked to relevant invoices. Obviously, because the pandemic falls under the force majeure clause, there will not be any specific terms agreed to in the agreement as on the date of supply. In a recent advance ruling by the AAR for a similar case, it was held that since there was no specific criteria mentioned in the agreement based on which the quantum of discount would be calculated, the taxpayer paying the amount to the supplier towards rate difference and special discount was considered as discount eligible for a tax adjustment. That will mean if there are no pre-fixed criteria for arriving at the quantum of discounts mentioned in an agreement on the date of supply, then no tax adjustment would be permitted proving to be costly to businesses who are issuing credit notes during the pandemic.

Additionally, in a bid to lower the value of services, a number of companies from the service sector have been offering credit notes to their customers on supply. As per GST law, credit notes can be issued only if the supplier agrees that there was a deficiency in services. This increases tax risk specifically for certain sectors offering private services

In a bid to protect companies from the impact of the pandemic, the Centre suspended the initiation of fresh insolvency proceedings for six months. Unfortunately, there is a possibility that business liabilities will continue to increase during this time and businesses might be unable to make payments to vendors. Once the six-month deadline for GST payment has lapsed, the vendors will want to take a refund/adjustment of GST paid on the value of supply.

Taxpayers need to keep all GST laws in mind and ensure making the right moves to reduce tax risk and thereby avoid heavy penalties.