Introduction

Good intention and poor implementation has been the story of GST, take for example Circular No. 212/6/2024-GST, dated June 26, 2024, which has sparked widespread concern among businesses due to its stringent compliance requirements, particularly regarding credit notes and Input Tax Credit (ITC) reversals.

The circular mandates suppliers to obtain Chartered Accountant (CA) / Cost Accountant (CMA) certificates confirming ITC reversals for credit notes exceeding ₹5 lakh and self-certifications from recipients for smaller amounts. While the stated intent is to prevent revenue leakages, this compliance burden has raised significant legal and operational issues, exacerbated by its retrospective effect.

The recent Delhi High Court ruling in JSW Steel Ltd. v. Directorate General of GST Intelligence has acknowledged these concerns, particularly in relation to the disproportionate burden on businesses.

Key Observations from the Delhi High Court Judgment

The Delhi High Court, in its order dated October 1, 2024, JSW Steel Ltd. vs. Directorate General of GST Intelligence [2024] 168 taxmann.com 16 (Delhi)/[2025] 92 GSTL 530 (Delhi)[01-10-2024] examined the validity of Circular 212/6/2024 and the corresponding Show Cause Notice (SCN) dated August 2, 2024, which sought to enforce these compliance requirements retrospectively for transactions from 2017-18 onwards. The court took note of several critical concerns raised by the petitioner. It observed that requiring businesses to procure CA/CMA certificates for every credit note and supply transaction from 2017-18 onwards is impractical and excessively burdensome.

Acknowledging that no real-time verification mechanism exists on the GST portal, the court recognized that enforcing compliance without adequate digital infrastructure would lead to litigation and uncertainty. The court questioned the retrospective applicability of the circular, noting that businesses had legitimately relied on past tax provisions and cannot now be penalized for non-compliance with requirements introduced in 2024.

The court specifically stayed proceedings on the issues of ITC reversals related to discounts under Section 15(3)(b) and guarantee commissions and the applicability of service tax liabilities. While allowing the tax authorities to continue proceedings on other aspects of the SCN, the court emphasized the need for further judicial scrutiny on these issues.

Recent Proposed Amendment to Section 34(2) and Its Implications

While the nature of the circular is clarificatory, implying that it would have retrospective effect, the proposed amendment in law would only be prospective in nature. This distinction is critical as it highlights the inconsistency in the government’s approach. The Union Budget 2025 has introduced a significant amendment to Section 34(2) of the CGST Act, further tightening compliance requirements related to credit notes.

Previously, suppliers could issue credit notes to adjust their outward tax liability without ensuring that the recipient reversed the corresponding Input Tax Credit (ITC). However, under the proposed amendment, suppliers are now obligated to verify ITC reversal by the recipient before claiming any reduction in their tax liability. This provision adds another layer of compliance, forcing suppliers to coordinate with recipients to obtain necessary confirmations.

Additionally, the government is now rolling out the Invoice Management System, which aims to ensure the compliance envisioned in the proposed amendment. While this system may facilitate smoother compliance in future transactions, it does not address the issue for previous years where no such mechanism was available.

The retrospective enforcement of Circular 212/6/2024, without any supporting infrastructure, is therefore exceedingly harsh and nearly impossible to implement. The burden it places on businesses amounts to nothing short of tax terrorism, forcing them to comply with procedural requirements that were practically unfeasible at the time of the transactions in question.

Operational Challenges Under Circular 212/6/2024

Beyond legal concerns, the circular imposes substantial operational challenges for businesses, particularly small and medium enterprises (SMEs). Suppliers must now rely on recipients to confirm ITC reversal, making them vulnerable to delays or non-cooperation.

If a recipient disputes or refuses to issue the confirmation, the supplier is left without recourse, risking additional tax liability. The requirement to obtain CA/CMA certificates for transactions above ₹5 lakh significantly increases compliance costs. Businesses will need to maintain exhaustive records, leading to administrative burdens. The circular itself acknowledges that there is no automated mechanism to track ITC reversal.

Without a real-time tracking system, businesses are forced into manual compliance, increasing the risk of errors and disputes. Applying this requirement to past transactions (2017-18 onwards) creates legal uncertainty and invites litigation. Tax authorities may reopen old assessments, leading to unnecessary harassment of businesses.

Recommendations for Policy Reform

To address these challenges and prevent unnecessary litigation, the government should consider introducing a GST Portal Enhancement. Implementing an automated ITC tracking system would eliminate the need for CA/CMA certificates and enable real-time linking of credit notes with ITC reversals. The scope of retrospective enforcement should be limited. Applying the circular prospectively would avoid unfair penalization of past transactions. Providing a relief mechanism for businesses struggling to comply with past period requirements would also be beneficial.

Allowing alternative compliance mechanisms could streamline the process. Instead of requiring CA/CMA certification, a self-declaration module on the GST portal should be introduced. An annual reconciliation mechanism rather than transaction-wise documentation would ease compliance burdens.

Conclusion

The Delhi High Court’s intervention in JSW Steel Ltd. v. Directorate General of GST Intelligence has provided much-needed judicial scrutiny over Circular 212/6/2024. While preventing tax evasion is a legitimate goal, the current compliance mechanism places an undue burden on suppliers, making them dependent on recipient cooperation. Without real-time ITC verification, the retrospective application of this circular will only lead to more disputes and litigation.

A balanced approach—integrating technological upgrades, prospective enforcement, and streamlined compliance mechanisms—is essential to prevent unnecessary harassment of taxpayers while ensuring genuine tax compliance. The government must take urgent steps to reform this compliance framework to foster a fairer and more efficient tax administration system.