GST-Credit Note For penalty/Liquidated Damages

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This discussion concerns a vendor who failed to provide a credit note for a Price Reduction Schedule (PRS) penalty due to delayed supply. The company paid the full invoice GST and claimed Input Tax Credit (ITC), subsequently withholding the penalty amount. Now, two years later, the company wants to credit the penalty to an expense GL. The key issue is whether this action requires reversing the proportionate ITC previously claimed and how to account for it in current GST returns, potentially using DRC-03, and if interest or penalties will apply.

A K SARMA

A K SARMA (Querist)

19 March 2022 We are issuing the Work orders and PO' s to our Vendors by mentioning PRS Clause(Price Reduction Schedule) which is applicable to impose a penalty if any for the delay in execution of the awarded Job or supply. In one of the cases, Our vendor has supplied the material in which there is a delay has occurred and we asked him to provide the Credit note towards the delay amount but he has not agreed and did not provide the CRN. we have processed the bill and made the payment by holding the PRS amount. Even after several reminders also he has not served the CRN. Now we want to close the issue by crediting our Expense GL. This issue is 2 years old and we have taken the ITC for the full amount of GST paid against the Actual Invoice in the year of payment made.
it is requested to kindly suggest if we credit the amount to our expenses GL, what will be the GST issue arise? Can we make the GST payment against the Credit amount in this year?
Pl. advise.

CA Altamush Zafar

CA Altamush Zafar (Expert)

19 March 2022 Since you have not paid the full consideration you were not eligible for the full ITC therefore you will need to reverse the proportionate ITC. Has to be charged to P&L

A K SARMA

A K SARMA (Querist)

19 March 2022 We have filed all the GST returns of previous years. if we make the reverse entry in current month, the GST GL(ITC) will effect. how to show in GSTR of March 2022. pl. advise

CA Altamush Zafar

CA Altamush Zafar (Expert)

19 March 2022 You can reverse it through DRC-03

A K SARMA

A K SARMA (Querist)

19 March 2022 any penalty and interest etc., will arise?

CA Altamush Zafar

CA Altamush Zafar (Expert)

19 March 2022 Interest will get applicable

A K SARMA

A K SARMA (Querist)

19 March 2022 Thank you Very much Sir.