GST Compliance: Rectifying Mistaken GST Charges on Sponsorship Services for Charitable Organizations

Introduction: The Hidden Pitfalls of GST Compliance for Charitable Organizations

Navigating GST compliance is a critical aspect for charitable organizations, especially when dealing with sponsorship services. A recurring issue arises when GST is mistakenly charged and deposited by the charitable organization, despite sponsorship services being taxable under the Reverse Charge Mechanism (RCM).

This blog provides a step-by-step guide, legal interpretations, and best practices to help organizations rectify such errors, recover excess GST paid, and maintain compliance integrity.

Legal Framework Governing Sponsorship Services under GST

1. Section 9(3) of the CGST Act, 2017:

   • Interpretation: Specifies services where the tax liability is shifted to the recipient under RCM. Sponsorship services fall within this category, meaning that the sponsor (recipient) is responsible for paying GST. The supplier (charitable organization) should not charge GST.
   • Practical Impact: Misapplication of this provision leads to double taxation when the charitable organization charges GST erroneously, and the sponsor pays GST under RCM.

2. Notification No. 13/2017-Central Tax (Rate), dated June 28, 2017:

   • Interpretation: Identifies sponsorship services as taxable under RCM. The sponsor must pay GST at the applicable rate (currently 18%).

3. Section 34(1) of the CGST Act, 2017:

   • Interpretation: Allows the supplier to issue a credit note in cases where excess tax has been charged.
   • Practical Impact: The organization can cancel the erroneous invoice and issue a revised one without GST.

4. Section 54 of the CGST Act, 2017:

   • Interpretation: Provides the legal basis for claiming a refund of any excess GST paid to the government.
   • Practical Impact: Enables organizations to recover the excess GST paid due to the mistaken charge.

5. Rule 89 of the CGST Rules, 2017:

   • Interpretation: Prescribes the procedural steps to file a refund application.

6. Section 56 of the CGST Act, 2017:

   • Interpretation: Mandates interest payment by the GST department if the refund is not processed within 60 days of filing the application.

Case Study: Understanding the Practical Implications

• Scenario:

  • A charitable organization invoices sponsorship services worth INR 10,00,000.
  • GST @ 18% (INR 1,80,000) is mistakenly charged and deposited by the organization.
  • The sponsor discharges INR 1,80,000 under RCM as required by law.

• Issue:

  • Double taxation occurs, blocking INR 1,80,000 each for the organization and the sponsor with the GST department.

• Solution:

  • Step 1: Issue a revised invoice without GST under Section 34(1).
  • Step 2: File a refund application under Section 54 using Form GST RFD-01.
  • Step 3: Provide supporting documents, including a Chartered Accountant's certified statement of excess tax paid.

Step-by-Step Guide to Rectification and Recovery

Step 1: Rectify the Sponsorship Invoice

• Legal Basis: Section 34(1) of the CGST Act, 2017.

• Actions:

  1. Cancel the Original Invoice:
     • Issue a credit note for the original invoice where GST was incorrectly charged.
  2. Create a Revised Invoice:
     • Reissue the invoice without GST, as sponsorship services fall under RCM.
  3. Amend GST Returns:
     • File corrections in Form GSTR-1A to update details in previously submitted returns.

Step 2: File for Refund of Excess GST Paid

• Legal Basis: Section 54 of the CGST Act, 2017 and Rule 89 of the CGST Rules, 2017.

• Procedure:

  1. Access GST Portal:
     • Log in and select Form GST RFD-01 for a refund application.
  2. Provide Reason for Refund:
     • Choose "Excess Tax Paid" as the reason for filing.
  3. Attach Supporting Documents:
     • Copies of original and revised invoices.
     • GST payment proofs by both the organization and the sponsor.
     • Chartered Accountant-certified statement explaining the excess tax paid.
  4. Submit and Monitor:
     • Submit the form and retain acknowledgment (Form GST RFD-02).
     • Respond to notices (Form GST RFD-03) if additional clarification is required.
  5. Receive Refund:
     • Approved refunds are credited to the registered bank account (Form GST RFD-04).

Step 3: Utilize Excess GST Paid as Credit

• Legal Basis: Section 49 of the CGST Act, 2017.

• Procedure:

  1. Report in GSTR-3B:
     • Reflect the excess GST paid in the "ITC Available" section.
  2. Adjust in Future Periods:
     • Use the credit to offset GST liabilities on taxable supplies in subsequent tax periods.

Key Compliance and Best Practices

1. File Refunds Timely:

   • Refund applications must be filed within two years from the end of the financial year in which the excess GST was paid.

2. Reconciliation of Records:

   • Reconcile invoices and GST payments monthly to detect and address errors promptly.

3. Maintain Robust Documentation:

   • Maintain an audit-ready file with:
     • Copies of invoices (original and revised).
     • Refund application details and correspondence with authorities.
     • Chartered Accountant’s certificates.

Conclusion: Turning Compliance into Opportunity

GST compliance for charitable organizations can seem challenging, but proactive measures can prevent errors and ensure smooth rectification when mistakes occur. By leveraging legal provisions, organizations can:

• Recover excess GST paid,
• Avoid cash flow disruptions, and
• Maintain financial and operational stability.

"Compliance is a journey, not a destination. Every step taken toward rectification strengthens the foundation of trust and financial discipline."