What is a Credit Note in GST – Example, Format and Steps
A GST Credit Note is mandatory for any GST-registered supplier of goods or services. As a supplier, when you file your returns for the month, you should also mention details of any credit notes in GST issued during the month. The tax liability will be adjusted accordingly. The issuance of the credit note can allow you as a supplier to decrease your tax liability in the returns without requiring you to undertake any tedious process of refunds.
This blog will give you an overview of what is credit note in GST with examples. Let’s dive in!
What is a Credit Note in GST?
A GST Credit Note is a document issued by a registered taxpayer to adjust or reduce the tax liability due to errors or omissions in the original tax invoice. It includes information about the original invoice, the amount credited, and the reason for issuing the credit note.
Let’s Understand this with a Credit Note Example
Assume a supplier issued a tax invoice to a buyer for Rs. 10,000, but later discovered that they had overcharged by Rs. 500 as GST. To correct the error, the supplier issued the buyer a Rs. 500 Credit Note, which was deducted from the buyer’s tax liability.
When is a Credit Note in GST Issued?
Under Section 34(1) of the CGST act 2017, a credit note is defined as a document that is issued by the supplier of goods/services to the recipient when:
- The issued tax invoice has charged a tax amount that is more than the amount that should be payable due to such supply.
- The receiver returns the supplied goods
- The supplied goods/services turn out to be deficient
In any of the cases mentioned above, the recipient may receive a credit note under GST issued by the registered supplier of goods or services.
Credit Note Format
While there is no prescribed format for a credit note under GST, there are certain items that must be included in one, which is as follows:
- The name, address, and GSTIN (Goods and Services Tax Identification Number) of the supplier
- Nature and type of document
- A unique consecutive serial number having
- At most, 16 characters
- One or multiple series
- Numerals and/or alphabets and/or special characters such as hyphens or dashes.
- The date of issue
- Personal Information
- Name, address, and GSTIN or Unique Identification Number (in case of foreign embassies and special persons who aren’t issued GSTIN) in case of a registered recipient.
- The name, address of the recipient, and delivery address, along with the name of the State and its code, need to be given if the recipient is unregistered.
- Date of the corresponding tax invoice, its serial number, or the bill of supply
- The value of taxable supply of goods/services, the tax rate, and amount credited to the recipient
- The supplier’s signature or digital signature or their authorized representative must be there.
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Steps to Create a Credit Note
Step 1: Determine why the Credit Note was issued, such as an error in the original invoice, damaged or returned goods, or a change in the order.
Step 2: Verify that you are eligible to issue a Credit Note under GST law, including the time limit and the required conditions.
Step 3: Make a new document called “Credit Note” and give it a unique identification number.
Step 4: Include the original invoice’s details in the Credit Note, such as the invoice number, date, and value.
Step 5: Mention the description, quantity, and value of the goods or services for which the Credit Note is being issued.
Step 6: Deduct the value of the goods or services being credited from the original invoice amount to calculate the amount of the Credit Note.
Step 7: In the document, clearly state the reason for issuing the Credit Note.
Step 8: Give the recipient a copy of the Credit Note and keep a copy for your records.
Step 9: Make the necessary changes to your GST returns and pay the adjusted tax amount, if applicable.
Procedure for Issuing a Credit Note in GST
Word, Excel, or any other program that the organization uses to make invoices can be utilized to create a credit note. The steps for this are as follows:
- Step 1
Select the credit note template that you wish to use
- Step 2
Insert the company’s logo
- Step 3
Enter the credit note’s unique credit note number and the date of issue.
- Step 4
Enter the details of the invoice and the reference number to which the credit note is issued.
- Step 5
Put the GSTIN of the supplier and customer in addition to the supply location
- Step 6
Save the credit note
Details of any credit notes in GST issued during the month should be included in the supplier’s monthly returns. Their tax obligation will be adjusted as necessary. It should be noted that if the tax and interest from a transaction are transferred to another registered person, the supplier will not be permitted to reduce the output tax liability for that transaction.
Details of Credit Note to be Filed in GST Returns
All taxpayers must provide information about all credit notes they issued during the preceding month in GSTR 1 filing, following the procedure mentioned above.
Along with the data of the original invoice number, invoice date, and customer’s GSTIN, the details of credit notes that were issued and amended over the previous month must be provided. Credit note in GST issued over one financial year must all be filed no later than September of the year after it ends or on the day the GST annual return is due, whichever is earlier.
How to Adjust Tax Liability in case of Credit Note in GST?
The credit note in GST that has been issued by the supplier must contain all the details relating to the transaction. The return for the month in which this credit note has been issued should not be done later than September following the end of the financial year in which the supply was made or the date of furnishing the corresponding annual return, whichever is earlier.
Hence, it is not possible to reduce the output tax liability when the credit note in GST is issued after September. Once the credit note is issued and matched, the output tax liability of the supplier is reduced. The credit note needs to match with the following to reduce the tax liability of the supplier:
- The buyer’s tax return has the same input tax credit claim reduction for the same or following tax period.
- Claim duplication to reduce the output tax liability
When the claim for output tax liability reduction matches the reduction in the relevant input tax credit claim by the buyer, it shall be finalized and communicated to the supplier. It should be noted that if the incidence of tax and interest from a transaction is shifted to another registered person, the supplier will not be permitted to reduce the output tax liability for that transaction.
Suppose the reduction of output tax liability exceeds the claim amount for an input tax credit, or the recipient has not declared the credit note in their returns. In that case, the disparity must be conveyed to both parties. On the other hand, if the claim for reduction in output tax liability is duplicated, then the supplier must be communicated to.
If the discrepancy is communicated to the buyer and if they don’t rectify it for the return of that month in which the discrepancy was communicated, then, it will be added to the supplier’s output tax liability in the return for the succeeding month. In case of duplication or reduction in output tax liability, the amount shall be added to the supplier’s output tax liability in the return for the month in which the duplication was communicated.
Final Word
Credit note in GST is a practical and convenient way for the supplier to change or update the value of the products or services listed on the original tax invoice if the goods are returned by the recipient, the shipment of products is inaccurate or damaged, or an invoicing problem in terms of the tax paid occurs. The supplier will not have to go through the hassle of tedious refund procedures thanks to the issuance of the credit note, which will readily enable him to lower his tax liability in their returns.
It must be noted that the records of the credit note must be retained for 72 months after the annual return filing deadline for the year that the accounts and records belong. If such accounts and documents are maintained manually, they must be preserved at each associated location listed in the certificate of registration, and if they are maintained digitally, they must be accessible at each related location.
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FAQs
A credit note, also known as a credit memo is a document that is issued by the supplier, signifying a full or partial return of funds. If goods are returned by the recipient, the shipment of products is inaccurate or damaged, or an invoicing problem occurs, a credit note is sent.
In any of the cases mentioned below, the recipient may receive a credit note issued by the registered supplier of goods or services.
– The issued tax invoice has charged a tax amount that is more than the amount that should be payable in due of such supply.
– The receiver returns the supplied goods
– The supplied goods/services turn out to be deficient
Word, Excel, or any other program that the organization uses to make invoices can be utilized to create a credit note.
If the incidence of tax and interest from a transaction is shifted to another registered person, the supplier will not be permitted to reduce the output tax liability for that transaction.
It must be noted that the records of the credit note must be retained for 72 months after the annual return filing deadline for the year that the accounts and records belong. If such accounts and documents are maintained manually, they must be preserved at each associated location listed in the certificate of registration, and if they are maintained digitally, they must be accessible at each related location.
Credit notes issued over the span of one financial year must all be filed no later than September of the year after it ends, or on the day the GST annual return is due, whichever is earlier.
Yes, depending on the terms and conditions of the sale as well as the applicable laws and regulations, there may be limitations to issuing a credit note. It is critical to confirm any restrictions or timeframes with the appropriate parties.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
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